Trading+blocs

Free Trade Area Sovereign countries belonging to the free trade area trade freely amongst them but have individual trade barriers with countries outside the free trade area. Examples include North American Free Trade Area (NAFTA) between the USA, Canada and Mexico; Asia Pacific Economic Cooperation (APEC) and COMESA (Common Market for Eastern and Southern Europe).



Customs Unions The countries are no longer fully sovereign over trade policy. There will be some degree of unification of custom or trade policies. They will have a common external tariff (CET) which is applied to all countries outside the customs union. A Customs Union differs from a Free Trade Area through the existence of a common tariff against outsiders. Members of a free trade area are free to set their own tariffs and quotas against non-member countries.



Common Market This trading bloc is a customs union, which has in addition the free movement of factors of production such as labour and capital between the member countries without restriction. Mercosur is an example of a common market comprising of a number of South American nations.

Economic Union This is a common market where the level of economic integration is more developed. The member states may adopt common economic policies e.g. the Common Agricultural Policy (CAP) of the European Union. They may have a fixed exchange rates between themselves. Indeed, they may have integrated further and have a single common currency. This will involve common monetary policy( monetary union). Political integration may also occur but doesn’t have to example the EU, which is working towards:
 * No customs posts between countries.
 * Identical product standards between countries, e.g., safety standards.
 * Harmonisation of taxes, e.g., income taxes and VAT.
 * <span style="font-family: 'Trebuchet MS',Helvetica,sans-serif; font-size: 16px;">A common currency.

<span style="font-family: 'Trebuchet MS',Helvetica,sans-serif; font-size: 16px;">Benefits

<span style="font-family: 'Trebuchet MS',Helvetica,sans-serif; font-size: 16px;">You would generally think that these FTAs would be beneficial and often they are. Static and dynamic efficiency gains can occur. However it is essential that yo understand the difference between trade creation (beneficial) and trade diveresion (harmful) as both can occur due to the formation of FTAs

<span style="font-family: 'Trebuchet MS',Helvetica,sans-serif; font-size: 16px;">Trade diversion Occurs when a customs union diverts consumption from goods produced at a lower cost outside the union to goods produced at a higher cost (but tariff-free) within the union. <span style="font-family: 'Trebuchet MS',Helvetica,sans-serif; font-size: 16px;">I always think of the way my Mum used to serve us cheap NZ lamb prior to entry into EU and then more expensive french lamb after entry. No welfare gain for the Oldfield family I can tell you! A more modern example is seen in the diagram below. Uk used to import textiles from Thailand at P(thai). Because of entry into EU tariffs were placed on (as Thailand is not in EU)these so they were more expensive. Uk consumers now buy the EU textiles which are cheaper than P(thai)+tariff, but more expensive than before. Consumers lose surplus and there is a gain to domestic producer surplus but the rest is a welfare loss.

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<span style="font-family: 'Trebuchet MS',Helvetica,sans-serif; font-size: 16px;">Trade creation Occurs when the existence of a customs union leads to greater international trade, and therefore a shift in production from higher-cost to lower-cost producers. It is beneficial as it frees up trade within the FTA and gets rid of tariffs. Thus society benefits. (it is the opposite of the negative effects of tariffs so now the triangles are welfare gains)

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