Trading Blocs, Common Markets, and Economic Unions

A regional trading bloc is a group of countries that have signed an agreement to reduce and progressively eliminate barriers to trade and movement of factors of production among the members of the bloc.

Free trade areas (FTA): all barriers to the flow of goods and services among members have been eliminated. However, each country maintains its own polices against non-members. （NAFTA)

A customs union extends the FTA by not only allowing free movement of goods and services among members but also creating a common trade policy against non-members. (“Benelux”)

The common market incorporates all aspects of the customs union and extends it by allowing free movement of factors of production among members. (The Southern Cone Common Market, MERCOSUR)

An economic union incorporates all aspects of a common market and in addition requires common economic institutions and coordination of economic policies among members. (The European Union, EU)

If the members of the economic union decide to adopt a common currency, then it is also a monetary union. (EU)

Two static effects that are direct results of the formation of the customs union: trade creation and trade diversion.

Trade creation occurs when regional integration results in the replacement of higher-cost domestic production by lower-cost imports from other members.

Trade diversion occurs when lower-cost imports from nonmember countries are replaced with higher-cost imports from members.

The World Trade Organization (WTO) is a negotiating forum that deals with the rules of global trade between nations and where member countries can go to sort out trade disputes.