This chapter examines two types of trade barriers that are intended to discriminate between foreign countries. A trade bloc has lower or no barriers for trade between its members, while they maintain higher barriers for trade with outside countries. A trade embargo or trade block places extra barriers against trade with a specific foreign country, usually because of a broader policy disagreement.
There are four major types of trade or economic blocs: free-trade area, customs union, common market, and economic union. WTO rules generally call for equal trade barriers against all other countries (at least those that are also members of the WTO)—the most-favored-nation principle. But the WTO rules also have a few exceptions, including an exception for a trade bloc that achieves substantially free trade among its members.
A trade bloc can have several effects on the well-being of its member countries and the world overall. We usually analyze trade blocs by comparing them to countries maintaining barriers against all other countries. To the extent that forming or joining the trade bloc results in lower prices in an importing member country, the country and the world gain as additional trade is created. To the extent that forming or joining the trade bloc results in shifting the source of a member country’s imports from low-priced suppliers in countries outside the trade bloc to higher-priced partner suppliers, the country and the world lose as trade is diverted from low-cost to higher-cost producers. The net effect depends on whether the gains from trade creation are larger than the losses from trade diversion. There are also possible dynamic gains from forming or joining a trade bloc, including gains if extra competition within the larger, bloc-wide market area leads to lower prices, lower costs, or greater innovation, gains if scale economies are achieved within the larger area, and gains if consumers obtain access to product varieties produced in partner countries.
For the European Union, most estimates are that the EU gains from its internal free trade in manufactures, because trade creation has been larger than trade diversion, and because there are probably also dynamic gains, although these are harder to measure. Additional gains came as the move toward a true common market in 1992 removed nontariff barriers and freed resource movements. However, the EU also incurs substantial losses from its protectionist common agricultural policy. In 2004, 10 additional countries joined the EU, in 2007 two more, and in 2013 one more (Croatia), bringing the total number of members to 28. Integration of the new members has been relatively smooth, though some features of EU policies have been phased in slowly for them.