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Trading blocs are usually groups of countries in specific regions that manage and promote trade activities. Trading blocs lead to trade liberalisation (the freeing of trade from protectionist measures) and trade creation between members, since they are treated favourably in comparison to non-members.

The World Trade Organisation (WTO) permits the existence of trading blocs, provided that they result in lower protection against outside countries than existed before the creation of the trading bloc .

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Trade creation is the movement from a higher cost source of output to a lower cost source of supply as a result of joining a trade agreement.

Trade creation occurs when a country enters a free trade area / agreement or becomes involved in a customs union in which there is free trade between members but also a common external tariff.

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Gravity theory of trade suggests that trade with countries in close proximity is the most important due to lower transport and similar cultural and economic ties.

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The Association of Southeast Asian Nations (ASEAN): ASEAN is a regional trade bloc that has helped to increase trade and economic growth among its member countries in Southeast Asia. For example, ASEAN has helped to reduce trade barriers and increase trade volumes between member countries, leading to increased economic growth and development.

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The North American Free Trade Agreement (NAFTA): NAFTA is a trade bloc between the United States, Canada, and Mexico that has helped to increase trade and economic growth in North America. For example, NAFTA has eliminated tariffs on many goods traded between the three countries, making it easier and cheaper for businesses to import and export goods.

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The European Union (EU): The EU is a regional trade bloc that has helped to increase trade and economic growth among its member countries, and it has led to greater political stability in Europe. For example, the EU has helped to reduce trade barriers and tariffs between member countries, leading to increased trade and investment. Together, the European Union's members account for 16% of world imports and exports. 27 countries are in the bloc, 19 using the euro.

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In recent news, the European Union and New Zealand have concluded a free trade deal after four years of negotiations, which is expected to increase trade and economic growth between the two regions. This comes at a time when the EU is facing economic challenges such as high inflation and slowing growth, but the new trade deal is seen as a positive development. The EU has also recently lowered its forecast for economic growth this year and next due to the impact of high prices and inflation. It's a complex and constantly evolving situation, but the EU is continuing to work towards improving its economic outlook through various measures, including trade agreements.

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Increased bargaining power: Trade blocs can give member countries more bargaining power in international negotiations.

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Improved standards of living: Trade blocs can lead to increased job opportunities, higher wages, and improved living standards for citizens of member countries.

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Greater political and economic stability: Trade blocs promote political and economic cooperation among member countries, leading to greater stability and security.

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Increased trade: Trade blocs allow member countries to trade with each other more easily and often at lower costs, increasing trade volumes between members.

Economic growth: Increased trade leads to economic growth, as countries can focus on producing goods and services in which they have a competitive advantage.

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One of the main disadvantages of trading blocs in international business is that they can lead to trade diversion. Trade diversion occurs when member countries shift their trade from non-member countries to member countries, even if the non-member countries are more efficient producers. This can lead to inefficiencies and lost opportunities for non-member countries, which can harm their economies.

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Trading Blocs and Trade Diversion

Trade diversion is a switch from a lower-cost foreign source/supplier outside of a customs union towards a higher-cost supplier located inside the customs union.

Trade diversion is a feature of a country deciding to join a customs union i.e. an area where there is free trade within the customs union but also a common external tariff.

When a country joins a customs union it might initially be trading freely with a low cost supplier in a 3rd party nation.

Once inside a customs union, the country must now adopt a common external tariff which will then increase the cost of importing from the 3rd party nation.

These higher prices might affect consumers directly e.g. higher prices for food.

Or they might affect consumers indirectly because producers now have to pay more for their imports from the 3rd party.