ECONOMIC INTEGRATION

(TRADE BLOCS)
I, Pencil or I Smartphone - YouTube
1. What would be the cost of producing a cell phone if it was to be
made by one person?
2. Would the cell phone have had all the features if it was just made
by few people in one country?
3. Would we be able to consume even a pencil for the price that we
buy, forget a cellphone?
 ECONOMIC INTEGRATION
• Economic interdependence between countries,
usually achieved by agreement to eliminate trade
and other barriers between them.

• The elimination of tariff and nontariff barriers to

the flow of goods, services, and factors of
production between a group of nations, or
different parts of the same nation.
Complete economic integration has never been reached.

Here are the the different levels of economic integration, in increasing order of their
level of integration.

• Preferential trade agreements

• Free trade areas
• Customs unions
• Common markets
• Monetary unions
• Complete economic integration
 Preferential trade agreements
• Preferential trade agreements (PTAs) reduce or remove trade barriers,
such as tariffs, for specific goods or services between participating
countries.
• This is considered to be the first stage of economic integration.

Use this map to discover the integration of the world through PTAs. Try
to figure out which regions of the world are regular receivers of
unilateral PTAs according to the WTO.
WTO | Preferential Trade Arrangements
For the World Trade Organization (WTO), PTAs are considered to be unilateral or non-reciprocal preferential
schemes. That means that one country provides preferential tariff reductions for another country without receiving the
same treatment in return.
 Trade Agreements
• The simplest PTA is called a bilateral trade agreement, in which two
countries agree to engage in freer trade.
• When more than two countries form such an agreement, it is known
as a multilateral trade agreement.
• When trade agreements are made between countries that are
geographically close to each other we call them regional trade
agreements (RTAs).
Trade Blocs
A trading bloc is a closer level of economic integration than the PTAs.

There are four types of trading blocs:

• Free trade areas

• Customs unions
• Common markets
• Monetary unions
Free Trade Areas/Agreement
Free trade areas (FTAs) are formed by a trading bloc of countries signing trade
agreements to remove most or all barriers to trade with the other countries
involved in the agreement. Countries are free to set their own external policy
towards non-member countries.
Customs Union
A customs union is very similar to an FTA, but has one important
difference. The countries participating in the agreement set a common
external policy towards non-members, while still engaging in free trade
among themselves.
All Customs Union around the world: WTO | Regional trade agreements
Common Markets
In a common market there must also be a customs union that allows
the free movement of factors of production such as land, labour,
entrepreneurial talent and capital resources.
The most famous example of a common market is the European Union.

Another example is the Southern Common Market or Mercosur, which

was formed in 1991 in South America. Just like EU citizens in Europe,
within the borders of the Mercosur countries, the citizens of Argentina,
Brazil, Paraguay and Uruguay can travel across borders with only a
driving license.
 Examples of
Common market
Union
 Examples of
Common markets
Monetary Union
Monetary union (also called a
currency union) is created
when countries form a trading
bloc in which there is free
trade, a common external
policy, free movement of
factors of production and
a shared currency.

Countries using the euro in Europe

Interesting Read: Is Africa the Next EU?

Visualizing Africa's Free Trade Ambitions -

Visual Capitalist
RESEARCH: WHY DID THE UK LEAVE THE EU?
• Follow the link to find related information and discussion questions.

https://uwccsc.sharepoint.com/:w:/s/IBDPEconomicsHLoff1IBDPYear2/
EdBqhg3O-9BEguCz1qRXCGcBNxDXS9WKWTpULZOS7OYt4Q?e=h91d4B

Read before you Research: irishtimes.com-Irish Times view on

Brexit a year on and all for what.pdf
TRADE CREATION
• If the trade bloc is a customs union, then there may be a trade
creation.
• Trade creation occurs when the entry of a country into a trade bloc
leads to the production of a good or service transferring from a high
cost producer to a low cost producer. This is an advantage of
economic integration.
TRADE DIVERSION
• If the trade bloc is a customs union, then there may be a trade
diversion.
• Trade diversion occurs when the entry of a country into a trade bloc
leads to the production of a good or service transferring from a low
cost producer to a high cost producer. This is a disadvantage of
economic integration.
 Trade Creation
Lithuania's GDP per capita (PPP) was 82% of the EU average in 2018, a
large increase from 52% in 2004 (the year of Lithuania's accession to
the European Union). Arguably, this is the result of the new
opportunities for trade that Lithuania now has as part of the EU.
When countries join trade blocs, there is the possibility of trade
creation.

When Lithuania acceded to the EU in 2004, trade barriers were lifted.

The removal of tariffs offered the opportunity to replace higher-cost
goods (domestically produced or imported) with lower-cost imports
from members of the trade bloc.
 Trade Diversion
• A reduction in trade barriers would increase the allocation of resources and
global efficiency.
• However, this may not always be the case, as making agreements with
certain countries may just result in new barriers being erected between
other countries. This is known as trade diversion, and if this takes place
there will not be any overall improvement in the allocation of resources.
• Trade diversion occurs when a lower-cost import must be substituted with
a higher-cost import due to a country joining a trading bloc such as a
customs union.
• That occurs because all countries within a customs union must impose the
same trade restrictions on non-members. If a trade diversion happens,
there will be a decrease in welfare.
• This could occur when Lithuania joined the European Union, which has a
common external tariff on New Zealand.
USE DIAGRAMS TO EXPLAIN TRADE CREATION
AND TRADE DIVERSION

IMPORT TARIFF DIAGRAMS

See past exam paper: Latvia to join the Eurozone monetary union M15/3/ECONO/HP2/ENG/TZ0/XX

What are the advantages and

disadvantages of using a single
currency?

READ: cnbc.com-Latvia to join euro zone what you should know.pdf

READ FROM THE COURSE COMPANION READING MATERIAL

How the euro caused the Greek crisis - YouTube

DISCUSS WHETHETHER FORMATION OF TRADE BLOCS
WOULD POSITIVELY AFFECT TRADE AND GOBALISATION [15]
• DEFINE AND EXPLAIN ECONOMIC INTEGRATION, TRADE BLOCS AND GLOBALISATION
• MORE FREE TRADE WITHOUT BARRIERS ENABLE COMPARATIVE COST ADVANTAGE AND
IMPROVEMENTS IN TERMS OF TRADE
• EXPLAIN THE BENEFITS OF MORE FREE TRADE WITHIN THE REGION LIKE ECONOMIES OF
SCALE, LOW PRICE, INCREASE IN CONSUMER SURPLUS, JOBS ETC.
• POSSIBILITIES OF TRADE CREATION
• HOWEVER, POSSIBILITIES OF TRADE DIVERSION
• SOME TRADEBLOCS WILL TEND TO ERRECT STRONG BARRIERS AND LIMIT
INTERDEPENDENCE WITH OTHER COUNTRIES / TRADE BLOCS
• HOWEVER, DOMINANCE OF BIG COUNTRIES
• DEPENDS ON THE TYPE OF INTEGRATION AND THE TRADE POLICIES WITHIN THE TRADE
BLOC AND BETWEEN OTHER COUNTRIES OUTSIDE THE TRADE BLOC
• NO MATTER HOW SMALL THE TRADE BLOC IS, IT COULD BE THE BEGINNING OF A WIDER
INTEGRATION.
Question
POSSIBLE PAPER 1 and 2 DISCUSS QUESTION

To what extent does trade-blocs promote globalization?

Or
To what extent does trade-blocs promote the WTOs objective of free
trade?