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Trading Blocs


Free Trade Area

Sovereign countries belonging to the free trade area trade freely amongst them but have individual trade barriers with countries outside the free trade area. All members have most favoured nation status, which means that they are all treated equally.


Examples include North American Free Trade Area (NAFTA) between the USA, Canada and Mexico; Asia Pacific Economic Cooperation (APEC) and COMESA (Common Market for Eastern and Southern Europe).


Customs Unions

The countries are no longer fully sovereign over trade policy. There will be some degree of unification of custom or trade policies. They will have a common external tariff (CET) which is applied to all countries outside the customs union. The countries will be represented at trade negotiations with organisations such as the World Trade Organisation by organisations.


A Customs Union differs from a Free Trade Area through the existence of a common tariff against outsiders.  Members of a free trade area are free to set their own tariffs and quotas against non-member countries.


Common Market

This trading bloc is a customs union, which has in addition the free movement of factors of production such as labour and capital between the member countries without restriction. Mercosur is an example of a common market comprising of a number of South American nations.


Economic Union

This is a common market where the level of integration is more developed. The member states may adopt common economic policies e.g. the Common Agricultural Policy (CAP) of the European Union. They may have a fixed exchange rate regime such as the ERM of the EMU. Indeed, they may have integrated further and have a single common currency. This will involve common monetary policy. The ultimate act of integration is likely to be some form of political integration where the national sovereignty is replaced by some form of over-arching political authority.


For example the EU, which is working towards:

  • No customs posts between countries.
  • Identical product standards between countries, e.g., safety standards.
  • Harmonisation of taxes, e.g., income taxes and VAT.
  • A common currency.






E-mail Steve Margetts