Trading Blocs, Monetary Unions and Free Trade Agreements
Expert reviewed • 21 July 2024 • 11 minute read
Trading blocs, monetary unions, and free trade agreements are structures that facilitate trade and economic cooperation in the global economy. These groups or arrangements help streamline business operations, economic integration and economic cooperation between economies across the globe.
What are Trading Blocs?
A trading bloc is a type of international agreement, where members have agreed to eliminate or reduce trade barriers between them, while maintaining trade barriers with non-member countries. Some examples of trading blocs include the European Union (EU), the Association of Southeast Asian Nations (ASEAN), and the North American Free Trade Agreement (NAFTA).
Trading blocs can significantly boost trade volumes within the bloc due to reduced trade barriers. For example, the EU is the world's largest trading bloc with a single market of around 450 million consumers and a combined GDP of around $16 trillion USD as of 2023. This has grown exponentially since its inception in 1993, where the combined GDP of countries in the EU was estimated to be around $6.5 trillion USD. Thus, we can see that trading blocs can significantly boost trade volumes and economic growth among member states due to reduced trade barriers.
What are Monetary Unions?
A monetary union occurs when two or more member countries join together and share the same currency. This has the benefit of enhancing economic stability among member states, by reducing exchange rate volatility and transaction costs. As mentioned previously, the EU is a trading bloc. However, it is also considered a monetary union as 19 of the 27 member countries use the Euro as the main form of currency. This group among the EU is generally referred to as the Eurozone. As of 2023, the Eurozone had an approximate combined GDP value of $13.9 trillion USD, which makes up for the majority of the EU's GDP of $16 trillion.
What are Free Trade Agreements?
Free trade agreements (FTAs) are arrangements between two or more countries to reduce or eliminate trade barriers, such as tariffs and quotas, and to promote trade and investment. FTAs can be multilateral (involving many countries) or bilateral (between two countries).
Multilateral Agreements
Multilateral agreements are trade agreements that involve the participation of numerous countries. Generally, these agreements aim to promote global trade and economic integration among member states. Examples of some of the biggest multilateral agreements are:
- European Union (EU): The EU facilitates a single market allowing free movement of goods, services, capital, and labour.
- Asia-Pacific Economic Cooperation (APEC): APEC promotes free trade and economic cooperation throughout the Asia-Pacific region, enhancing economic growth and prosperity for its members.
- North American Free Trade Agreement (NAFTA), now USMCA: This agreement between the United States, Canada, and Mexico supports significant economic growth through reduced trade barriers.
- Association of Southeast Asian Nations (ASEAN): ASEAN fosters economic growth and regional stability among its members in Southeast Asia, promoting intergovernmental cooperation and facilitating economic integration.
To illustrate the impact of such agreements, a line graph showing the growth of trade volumes among NAFTA members pre and post-agreement is shown below.
The line graph illustrates the growth in trade volumes among NAFTA members from 1990 to 2023. The graph highlights a significant increase in trade volumes following the agreement's implementation, demonstrating the benefits of such free trade agreements in boosting economic activity among the member countries.
Bilateral Agreements
Conversely, bilateral trade agreements are agreements between two countries to provide each other with a mutual trade benefit. This includes implementing reduced tariffs and increased import quotas, to ensure more profitable trade between them.
Key characteristics of bilateral trade agreements include:
- Tariff reductions: One of the primary features of bilateral agreements is the reduction or elimination of tariffs on goods traded between the two countries. This makes exported goods cheaper in the import market and vice versa, stimulating trade volumes.
- Increased market access: This can encompass not only goods but also services, investment opportunities, and easing of regulatory barriers.
- Quotas and import licences: Bilateral agreements can increase or remove quotas, allowing more quantity of goods to be traded. It may also streamline the licensing processes, making it easier for businesses to operate in the foreign market.
Some examples of bilateral trade agreements include:
- Australia-United States Free Trade Agreement (AUSFTA): Enacted in 2005, this agreement has significantly increased trade volumes between the two nations by eliminating tariffs on a vast majority of goods and expanding trade in services.
- India-Japan Comprehensive Economic Partnership Agreement (CEPA): This agreement, effective from 2011, encompasses not just trade but also investment, intellectual property, and bilateral cooperation, fostering a broader economic relationship beyond mere goods exchange.
Although bilateral trade agreements can be beneficial, they, like any economic agreement, can have disadvantages. These types of agreements can divert trade from more cost-effective suppliers, to appease the agreements. This is generally known as trade diversion. Additionally, bilateral trade agreements often occur between two advanced or developed economies, due to an abundance of experienced labour and resources. This in turn, makes it more difficult for smaller, or less developed countries to enter the global trade market.