2. TRADE BLOCS
Regional groupings of countries that have preferential trade agreements between
member countries
1. Free trade Areas.
A trade bloc where member governments agree to remove trade restictions among
themselves E.g NAFTA
2. Customs Unions
A trade bloc where there is free trade between member countries and a common external
tariff on imports from non members. E.g SACU Southern Africa customs Union
The countries share tariff trading revenues and coordinate some trading policies
3. 3. Economics Unions
A trade bloc where there is free trade between member
countries, a common external tarrifs and some common
economic policies, which may include a common currency
e.g Mercosur is a south american trading blocs which has
argentina, brazil, paraguay, uruguay and venezuela as a full
members.
In effect the different economies become one economy
4. TRADE CREATION AND TRADE
DIVERSION
Trade Creation
Where high cost domestic production is replaced by more efficiently produced
imports from within the customs union
Trade creation takes place when domestic consumers in member countries
import more goods from other members as import prices fall due to a removal
of tariff and quotas; production will shift to lower cost producer.
5. In the diagram beside, when Thailand
and Malaysia form a trading bloc,
Thailand will remove tariffs from
Malaysian imports. Trade will go to more
efficient Malaysian producers. The blue
shaded regions shows that world
efficiency will be regained as now more
efficient producer is producing the good
and there are lower prices which lead to
regaining of consumer surplus.
Increased income resulting from
specialization & benefits of scale can
further this by creating increased
demand for imports from non-member
countries.
6. TRADE DIFERSION
• Where trade with a low cost country outside a
customs union is influenced by higher cost product
supplied from within.
• When a customs union is created and tariffs
differentials between members and non-member
result in trade flows being diverted toward higher
cost producers.
7. In the upper image, once the UK joined
the EU, it had to place tariffs on the
Palm Oil that it used to import from
Malaysia at lower prices. The trade now
is diverted to EU nations inspite of the
fact that they are inefficient in
producing palm oil.
The blue shaded regions show a loss in
efficiency due production by inefficienty
Europeon producers. Morever, the
prices for consumers have increased
from from Pm to Peu which results in
loss of consumer surplus.
In other words, lower cost imports from
outside the union have been replaced
by high cost imports from within the
union.
