Trading Blocs (Edexcel A Level Business): Revision Note

Expansion of trading blocs

• A trading bloc is a group of countries that form an agreement to reduce or eliminate protectionist measures between each other

• Joining a trading bloc is a key method of increasing trade liberalisation (opens in a new tab) and leads to trade creation

  • Trade creation means that businesses are able to enter new markets, which can lead to an increase in sales volume and sales revenue

Global trade blocs

The European Union (EU)

• The EU is an economic union, originally formed in 1993

• Countries in Europe can apply to join the union, and, as of 2026, there are 27 countries in the union

• Being a member of the EU includes the free movement of goods and people between countries

  • Countries within the union have no trade restrictions between themselves

  • Countries within the union have common external barriers (e.g. tariffs) to countries outside of the union

• The UK voted to leave the EU in 2016 and officially left in 2020

Association of Southeast Asian Nations (ASEAN)

• ASEAN is a free trade area,originally formed in 1967

  • As of 2026, ASEAN has 11 member countries, following the admission of Timor-Leste in October 2025 - the bloc's first expansion in over two decades

• A free trade area aims to achieve the free flow of goods in the region (eliminating trade barriers)

  • Free trade areas lower business costs, increase market size and help businesses generate economies of scale

• The ASEAN free trade area is less integrated than the EU

  • It does not allow for the free movement of people between the countries, whereas the EU does

United States, Mexico and Canada (USMCA)

• USMCA is the trade bloc that superseded NAFTA, which was established in 1994 between Canada, Mexico and the USA

  • The aim was to promote free trade between these countries

• Many USA businesses relocated their manufacturing to Mexico

  • Goods could be produced there more cost-effectively due to the lower wages paid to Mexican workers

  • The products could then be imported back into the USA without any tariffs being incurred

• Mexico has benefitted from this agreement, as it has helped to create many new industries and jobs within the country

  • However, most of the benefits occurred in the north of the country, close to the USA border

• Since 2025, USMCA's future has become less certain

  • The USA formally declined to renew the agreement in July 2026, shifting to an annual review process

  • New US tariffs on cars and auto parts have applied even to Mexico and Canada despite USMCA's tariff-free terms

The impact of trading blocs on businesses

• The impact of trading blocs on a business is dependent on whether the business trades in or out of the trading bloc 

• Businesses outside the trading bloc will face higher costs from protectionist measures, such as tariffs, and trying to meet legal requirements inside the trading bloc

  • This will make these businesses less competitive when trying to sell goods to member countries within the bloc

  • Being outside the bloc is likely to decrease their sales volume to countries within the bloc

Benefits for businesses inside a trading bloc

Access to more markets 

• Businesses are able to sell to more customers due to the free movement of goods

External tariff walls 

• An external tariff wall is a tax applied to imported goods by a group of countries that have formed a trade agreement

• This protects businesses within the trading bloc from competition from businesses outside of the trading bloc

Infrastructure support 

• Businesses may gain additional support from the government to enable them to maintain their competitiveness against businesses in countries within the trading bloc 

Free movement of labour 

• Trading blocs may also have free movement of labour, allowing businesses to source workers from a wider pool

• A higher supply of labour may push wages lower, leading to reduced costs for businesses 

• E.g. citizens of EU countries have the right to work in any member state and to be treated equally as citizens of that state

Drawbacks for businesses inside a trading bloc

Increased competition 

• There is increased competition for businesses within the trade bloc, which may be more of an issue for small businesses, as they have fewer resources available with which to compete

• Businesses with monopoly power can increase their monopoly by eliminating competitors in other countries within the bloc

  • E.g. the UK supermarket industry faced increased competition from the German supermarkets Aldi and Lidl when the UK was part of the EU

Common rules and regulations 

• In order to operate as one market, new rules and regulations may be put in place that all businesses must adhere to

  • E.g. the EU working time directive states that employees can only work a maximum of 48 hours per week

Retaliation 

• External tariffs set against countries outside of the trading bloc may lead to retaliation from these countries

Inefficiency 

• Although there is increased competition between countries within the bloc, there is less competition from businesses in countries outside of the bloc

  • This may reduce the incentive of businesses to be more efficient

• Trading blocs also lead to trade diversion, which means trade is taken away from efficient producers that operate outside of the trade bloc and replaced by trade within the bloc