What is a trade bloc in international trade?

And what types of trade bloc are there?

Trade blocs are something that we have heard a lot about since 2016 when the UK voted to leave the largest trade bloc in the world: the EU. So, what is a trade bloc and how will leaving one affect the UK?

A trade bloc is a multilateral agreement between several nations. It means that all the nations within it can trade freely with each other and any nation within it can trade with third parties who have a Free Trade Agreement (FTA) with the trade bloc.

What does a trade bloc mean for members?

A trade bloc like the EU means that members can trade with each other without incurring tariffs on their goods. It also reduces or removes restrictions on the movement of factors of production such as people and finance.

To allow for smooth trade, many common standards are adopted across all nations in the trade bloc such as food and safety standards.

The trade bloc negotiates FTAs as a single entity. The advantage of this is that the trade bloc will be attractive to third parties as a trade partner and this can help it secure favourable FTAs that benefit all members. The disadvantage is that no single nation within the trade bloc is permitted to seek its own FTAs with third parties.

What types of trade bloc are there?

There are different forms that a trade bloc can take, as follows:

• Free Trade Area
  This arrangement enables members to trade without tariffs (or with reduced tariffs) but allows individual members to negotiate trade deals with third parties. Examples include the North American Free Trade Agreement (NAFTA) and the Comprehensive Agreement for Trans-Pacific Partnership (CPTPP).
   
• Customs Union
  The EU is a Customs Union. This form of trade bloc removes tariff barriers for members but requires them to adopt common tariffs, quotas, and standards for third parties.
   
• Common Market
  The EU is also a Common Market. Common Markets include the reduction of restrictions on the movement of factors of production such as people and finance, as well as tariffs and quotas.
   
• Economic Union
  This goes even further than a Common Market and includes common economic policies. This can include things like taxation, interest rates, and currency. The Eurozone within the EU is an example of an Economic Union but is not compulsory for all members. (The UK is not in the Eurozone).

Once the UK leaves the EU it will be free to negotiate new arrangements with new partners. These could be FTAs or it could even be joining new trade blocs, though it’s unlikely we would enter a similar arrangement to that we had with the EU.