4.7 - Trade Agreements & Trade Blocs
Globalisation and trade liberalisation
Globalisation refers to the increasing interconnectedness between countries worldwide, particularly through greater international trade. This process leads to economies becoming more open, with exports and imports making up a larger share of a country's gross domestic product (GDP).
Trade liberalisation involves reducing or removing barriers to trade, such as tariffs or quotas, to encourage freer movement of goods and services between nations. This can be achieved through agreements between specific countries or on a global scale via organisations like the World Trade Organization (WTO).
Preferential trade agreements and their types
Preferential trade agreements are arrangements where two or more countries agree to lower or eliminate trade barriers for certain goods and services among themselves, while potentially keeping barriers for others. These agreements promote trade by making it easier and cheaper to exchange products within the group.
Types of preferential trade agreements
| Agreement type | Description |
|---|---|
| Bilateral agreements | Involve just two countries, focusing on mutual reductions in trade barriers to boost direct trade between them. |
| Regional agreements | Include multiple countries, often neighbours, to create larger integrated markets within a specific geographic area. |
| Plurilateral agreements | Involve several countries that may not be in the same region, allowing for broader but selective trade liberalisation. |
| Multilateral agreements | Encompass all member countries of the WTO, aiming for widespread trade barrier reductions on a global level. |
Regional trading blocs are a key form of these agreements. According to the WTO, there were 320 such agreements in force in 2020, an increase from 294 the previous year, highlighting the growing trend towards regional integration.
Types of regional trading blocs with examples
Regional trading blocs vary in their level of integration, starting from basic free trade arrangements and progressing to more unified economic systems. Each type builds on the previous one, adding layers of cooperation.
Main types of regional trading blocs
| Type | Description | Example |
|---|---|---|
| Free trade area (FTA) | Countries remove trade barriers among themselves but keep their own tariffs on non-members. Includes "rules of origin" to stop goods entering via the lowest-tariff member. | United States-Mexico-Canada Agreement (USMCA), where 75% of car parts must be made within the bloc. |
| Customs union | An FTA with a shared external tariff and trade policy towards non-members, creating uniform barriers for outsiders. | Southern African Customs Union (SACU), established in 1910 and recognised as the oldest of its kind. |
| Common market | A customs union that also allows free movement of capital and labour across borders, enhancing resource mobility. | Southern Common Market (Mercosur) in South America, with founding and associate members promoting integrated trade. |
| Economic union | A common market with harmonised economic policies, including aligned regulations and macroeconomic strategies. | European Union (EU), whose 27 members share a single market with harmonised regulations and coordinated economic policy. |
| Monetary union | An economic union that introduces a single currency and a central bank to manage monetary policy. | The eurozone, the group of EU members that have adopted the euro and share a single central bank. |
These blocs represent increasing levels of economic integration, from simple barrier removal to full policy harmonisation.
Advantages and disadvantages of trading blocs
Trading blocs offer dynamic benefits that go beyond immediate trade gains, fostering long-term economic growth. However, they also come with potential drawbacks that can affect global trade dynamics and national autonomy.
Advantages of trading blocs
| Advantage | Explanation |
|---|---|
| Larger market access | Expands the overall market size, encouraging higher levels of investment and production. |
| Heightened competition | Drives down prices and improves efficiency as firms compete more intensely within the bloc. |
| Wider product choice | Provides consumers with greater variety of goods and services from member countries. |
| Employment growth | Enhances job opportunities through easier movement of labour across borders. |
| Technology sharing | Accelerates the transfer of innovations and best practices among members. |
| Stronger negotiation power | Gives the bloc greater influence in global talks, as it acts as a unified entity. |
| Political benefits | Promotes stability and cooperation, reducing conflicts between members. |
| Easier agreements | Simplifies negotiations by involving fewer parties compared to global deals. |
| Deeper integration | Allows for more comprehensive cooperation than what is typically achievable through the WTO. |
Disadvantages of trading blocs
| Disadvantage | Explanation |
|---|---|
| Challenge to global trade | Can weaken efforts towards worldwide trade liberalisation by prioritising regional deals. |
| Risk of division | May lead to the world fragmenting into rival blocs that compete rather than cooperate. |
| Unequal power dynamics | Larger economies might dominate negotiations, disadvantaging smaller members. |
| Complexity issues | Creates a "spaghetti bowl" of overlapping rules and tariffs, raising costs for businesses. |
| Loss of sovereignty | Reduces a country's ability to set independent trade or economic policies. |
The World Trade Organization in multilateral trade
The World Trade Organization (WTO) is an international body that oversees global trade rules, with 166 member countries accounting for about 98% of world trade. It promotes fair and predictable trade practices.
Multilateral agreements, which reduce barriers for all countries, are generally seen as better than regional ones because they benefit the global economy more broadly. However, achieving these has become harder due to the complexity of negotiating with many nations. Regional agreements can serve as stepping stones but may sometimes divert trade away from non-members.