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Trading Blocs
4.1 Globalisation
What you need to know
• a) Expansion of trading blocs:
– EU and the single market
– ASEAN
– NAFTA
• b) Impact on businesses of trading
blocs
What are Trading Blocs?
Trade blocs are usually
_____________________________________
_____________________________________
____________________________________.
Trade blocs lead to trade liberalisation (the
freeing of trade from protectionist measures)
and trade creation between members, since
they are treated favourably in comparison to
non-members.
Main Benefits of Trading Blocs
• ________________________: an increase in foreign direct
investment results from trade blocs and benefits the economies of
participating nations
• _____________________: larger markets created via trading blocs
permit economies of scale
• _______________________: trading blocs bring businesses in
numerous countries closer together, resulting in greater
competition
• ____________________: trading blocs seek to reduce protectionist
measures such as tariffs and quota tariffs, which should stimulate
greater demand within the trading bloc
• _____________________the combination of greater competition,
FDI, economies of scale and greater trade should result in a more
efficient market
Trading Blocs and Regional Trading
Agreements (RTAs)
The WTO permits the existence of trade blocs, provided that they result in lower
protection against outside countries than existed before the creation of the trade bloc
• European Union (EU) – a customs union, a single market and now with a
single currency
• European Free Trade Area (EFTA)
• North American Free Trade Agreement (NAFTA) between the USA,
Canada and Mexico
• Mercosur - a customs union between Brazil, Argentina, Uruguay,
Paraguay and Venezuela
• Association of Southeast Asian Nations (ASEAN) Free Trade Area (AFTA)
• Common Market of Eastern and Southern Africa (COMESA)
• South Asian Free Trade Area (SAFTA) created in 2006 with countries such
as India and Pakistan
• Pacific Alliance – 2013 – a regional trade agreement between Chile,
Colombia, Mexico and Peru
The European Union Single Market
• As of July 2016, there are 28 member nations of the EU –
collectively known as EU28.
• The EU28 comprises Belgium (BE), Bulgaria (BG), Croatia, Czech
Republic (CZ), Denmark (DK), Germany (DE), Estonia (EE),
Ireland (IE), Greece (EL), Spain (ES), France (FR), Italy (IT),
Cyprus (CY), Latvia (LV), Lithuania (LT), Luxembourg (LU),
Hungary (HU), Malta (MT), the Netherlands (NL), Austria (AT),
Poland (PL), Portugal (PT), Romania (RO), Slovenia (SI), Slovakia
(SK), Finland (FI), Sweden (SE) and the United Kingdom (UK).
• In June 2016, the UK voted in a binary referendum to leave the
European Union. This process is known as Brexit and the UK is
expected to leave between 2019-2020.
Key Statistics on the European Union (EU)
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These figures are prior to the Brexit vote (June 2016)
EU accounts for around 30% of the total value of global GDP
Total population 506m; live births each year 5.23m
Largest population - Germany 81 million, Smallest – Malta 0.4
million
The EU, with 503 million inhabitants, accounts for 7% of the world
population
Gross domestic product of the EU €13.08tn
Per capita GDP in the EU €25,500
Average unemployment rate in the Euro area 12%
Youth unemployment rate in the Euro area 23.9%
The Four Freedoms of the EU
The EU single market is built upon four key freedoms:
1. ___________________________: Businesses can sell their
products anywhere in the EU’s member states and consumers can
buy where they want with no penalty
2. ________________________Citizens of EU member states can live
study and work in any other country. The aim is to improve the
mobility of labour.
3. ________________________: Currencies and capital can flow
freely between member states and EU citizens can use financial
services in any member state.
4. ________________________: Professional services such as
pensions, architecture, telecoms and advertising can be offered in
any member state
Main Export Partners for the UK Economy
Share of total exports
12.0%
10.8%
10.4%
10.0%
8.0%
8.1%
7.2%
6.5%
6.4%
6.0%
4.5%
4.0%
2.0%
0.0%
Source: ONS; data for 2014
Main Import Partners for the UK Economy
16.0%
14.9%
Share of total imports
14.0%
12.0%
10.0%
9%
7.8%
8.0%
6.5%
6.0%
6.1%
5.2%
4.1%
4.0%
2.0%
0.0%
Germany
China
Source: ONS; data for 2014
Netherlands
United
States
France
Belgium
Italy
UK Decides to Leave the EU
• On June 23rd 2016 the UK voted in a referendum to leave the
European Union.
• Prime Minister David Cameron resigned the morning after the
vote and a few weeks later, Theresa May was elected leader of
the Conservative Party and new Prime Minister
• The process of Brexit has begun although the timing of the
decision to invoke Article 50 of the EU treaty remains uncertain
• Once Article 50 is invoked, there is a maximum period of two
years before the UK finally leaves the EU
• The terms of the UK’s new economic relationship with the EU
also remain uncertain
Possible Short-term Impact for UK
Economy & Business from Brexit
Impact
Comment
Weaker
exchange rate
(depreciation)
Sterling fell sharply against US dollar and Euro following vote
Higher prices for imports
Over 50% of UK imports come from EU
Lower economic Expected to take possibly two years to negotiate EU exit terms
growth?
Initial fall in business and consumer confidence
Weak demand in supply chains suggest businesses are being cautious
Housing market
Fall in confidence may dent mortgage demand
Possibility of decline in overseas demand although weaker pound
increases real purchasing power of US dollars in UK property market
Unemployment
Unemployment tends to be a lagging indicator of the economic cycle
– a month after Brexit, the UK unemployment rate fell below 5%
The Trans-Pacific Partnership (TPP)
• The TPP is the latest, and one of the most controversial
trading blocs
• It involves 12 countries: the US, Japan, Malaysia,
Vietnam, Singapore, Brunei, Australia, New Zealand,
Canada, Mexico, Chile and Peru
• The TPP aims to deepen economic ties between these
nations, slashing tariffs and fostering trade to boost
growth
• Member countries are also hoping to develop a closer
relationship on economic policies and regulation
• The agreement could create a new single market
something like that of the EU
ASEAN Trading Bloc
• ASEAN is a trade bloc of 10 nations with an aggregate
economic size of $2.3 trillion.
• The aim is to establish an economic community (AEC)
• The trading bloc’s diversity – ranging from advanced
economies like Singapore to developing countries like
Myanmar is an interesting feature
• ASEAN’s member countries (in 2015) are Brunei
Darussalam, Cambodia, Indonesia, Lao People’s
Democratic Republic, Malaysia, Myanmar,
Philippines, Singapore, Thailand and Vietnam