A trading bloc is a group of countries bound by a specific agreement which determines some or all of their international trade practices and which usually provides for common import tariffs on certain, if not all, goods.

An alternative to liberalising trade through out the world generally by removing tariffs and other barriers between countries, is for a group of countries to develop closer links by reducing trade restrictions amongst themselves, but at the same time leaving restrictions in place against the rest of the world. These groups of countries which pursue closer links with one another are referred to as trading blocs.

There are different forms of economic links or integration, depending on the closeness of the ties adopted by the countries concerned:

  • A free trade area is the simplest kind of trading bloc. Tariffs and other barriers to trade are eliminated between member countries, but individually each country retains its own tariffs on imports from countries not included in the agreement. An example of a free trade area is the North American Free Trade Area (NAFTA) comprising the United States, Canada and Mexico.
  • A customs union goes one stage further. Besides abolishing tariffs amongst themselves, the countries concerned establish a common external tariff on goods imported from outside the union, and divide the customs revenue amongst the members according to a specific formula. South Africa has had a customs union, the Southern African Customs Union (SACU) agreement, in place with Botswana, Lesotho and Swaziland since 1910. Namibia joined this union in 1990.
  • In a common market, a common tariff is placed on imports from other countries. Within the common market, there is freedom of movement of labour and capital. In other words, restrictions on immigration, emigration and cross-border investment are abolished. The Common Market for Eastern and Southern Africa (COMESA), for example, has replaced the Preferential Trade Area (PTA).
  • In a monetary union, the countries concerned use the same currency or the rate of exchange for their currencies is fixed, and there is a common monetary policy. South Africa has a monetary union with Lesotho and Swaziland, and most of the countries of the European Union (except for Britain) have also formed a monetary union and use a common currency, namely the euro.
  • The creation of an economic union requires – in addition to the free movement of goods, services and factors of production across borders – integration of economic policies, such as the harmonisation of monetary policies and taxation, and the introduction of a common currency for all members. The European Union (EU) has made significant progress towards becoming an economic union. The EU comprises the following countries : Austria, Belgium, Denmark, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, Portugal, Spain, Sweden, The Netherlands and the United Kingdom.

Economic integration has the effect of stimulating efficient utilisation of capital, manpower and resources in the particular region because the capital tends to move to labour-rich or resource-rich locations. This arguably results in a more even development of the economy and a better distribution of income in the region. In addition, a manufacturer in a member country has access to a larger market. Increased production and competition result in more competitive markets both inside and outside the trading bloc.

On the other hand, it can be said that the creation of artificial barriers around a trading bloc constitutes an obstacle to the efficient growth of international trade in general.