Preferential trade agreements cut barriers for their members only.
Three kinds of agreement
Bilateral
Two countries: the EU and Japan agreement of 2019.
Regional
Countries in one region: the members of Mercosur in South America.
Multilateral
Many countries at once, through the World Trade Organization.
The points to remember
- Write it like this: "A trading bloc is a group of countries that reduce or remove trade barriers between themselves."
- Each step adds something: free trade, then one outside tariff, then free movement.
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Trading blocs go deeper, one step at a time.
Trading blocs, step by step
Free trade area
No tariffs between members; each keeps its own tariffs on outsiders. USMCA: the United States, Mexico and Canada.
Customs union
A free trade area plus a common external tariff on outsiders. Mercosur.
Common market
A customs union plus free movement of labour and capital. The EU single market.
What each bloc adds
| Trading bloc | No tariffs inside | Common external tariff | Labour and capital move freely |
|---|---|---|---|
| Free trade area | Yes | No | No |
| Customs union | Yes | Yes | No |
| Common market | Yes | Yes | Yes |
Practice with exam-style questions
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Higher Level Paper 1 asked this in November 2022, as part (a) for 10 marks.
Explain how a free trade area differs from a common market.
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How the 10 marks are given
| Marks | What your answer needs |
|---|---|
| 9–10 | Theory fully explained, terms used correctly all the way through, the diagram included and fully explained |
| 7–8 | Theory explained, terms mostly right, the diagram included and explained |
| 5–6 | Theory partly explained, some terms, the diagram included |
| 1–4 | Theory only described or stated; few relevant terms |