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Trading blocs: the EU, ASEAN and NAFTA

Edexcel IAL Business · WBS14 Global business

A trading bloc is a group of countries that agree to reduce or remove barriers to trade between themselves. The specification names the EU and its single market, ASEAN and NAFTA, and asks how blocs affect businesses inside and outside them.

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Types of trading bloc

The EU and the single market

Expansion: six countries founded the European Economic Community in 1957. Enlargements in 1973, 1981, 1986, 1995, 2004 (ten countries, the largest), 2007 and 2013 (Croatia) took it to 28 members; it became 27 when the UK left (no longer a member from 1 February 2020). Each enlargement made the tariff-free market bigger for businesses inside it.

The European Commission describes the single market as covering the EU's 27 member states plus Norway, Iceland and Liechtenstein (through the European Economic Area), about 450 million consumers and some 34 million firms, with combined GDP of about EUR 18 trillion. It is based on the four freedoms: free movement of goods, services, capital and people. The Commission estimates it has raised EU GDP by 3% to 4% and created about 3.6 million jobs since 1993.

For a business inside: tariff-free selling to the whole market, one set of product rules instead of 27, free movement of staff and capital. Outside firms face the CET, which encourages them to locate inside.

ASEAN and NAFTA/USMCA

ASEAN (Association of Southeast Asian Nations) began with five members in 1967. Timor-Leste became its 11th member on 26 October 2025, at a summit in Kuala Lumpur. Its members have cut most tariffs between themselves through the ASEAN Free Trade Area; it is a free trade area, not a customs union.

NAFTA (North American Free Trade Agreement) linked the USA, Canada and Mexico. It was replaced by the United States-Mexico-Canada Agreement (USMCA), which entered into force on 1 July 2020. It is a free trade area: each country keeps its own external tariffs. NAFTA encouraged car makers to build integrated supply chains across the three countries, with parts crossing borders several times.

Impact on businesses of trading blocs

Inside the bloc: a bigger home market without tariffs; economies of scale; cheaper inputs from other members; easier recruitment; harmonised standards. But more competition from firms in other member states, and the cost of meeting common regulations.

Outside the bloc: the CET makes exports to the bloc dearer; trade diversion means bloc members buy from each other instead; firms may respond with FDI inside the bloc, joint ventures with member firms, or by focusing on other markets.

The June 2024 series paper asked candidates to assess the benefits to a Finnish dairy business of being in the EU; good answers balanced market access against competition from EU rivals with lower costs.

Worked example

A Japanese firm exports goods to an EU customs union with a CET of 10%. Its goods cost EUR 400 before the tariff. A rival in Spain sells the same good at EUR 420. Who is cheaper in Germany?

  1. Japanese price in Germany = 400 x 1.10 = EUR 440
  2. The Spanish rival pays no tariff inside the EU: EUR 420

Answer: The Spanish rival is cheaper by EUR 20, because the Japanese firm pays the CET.

Key idea: Free trade area < customs union (CET) < single market (four freedoms) < monetary union. EU single market: 27 members plus the EEA. ASEAN: 11 members since October 2025. NAFTA replaced by USMCA in July 2020. Blocs help insiders and push outsiders towards FDI.

Check yourself

  1. What does a customs union have that a free trade area does not?
    • Free trade between members
    • A common external tariff on imports from non-members
    • A single currency
    • Membership of the WTO
    Show answer

    A common external tariff on imports from non-members. Customs unions set one external tariff for all members.

  2. Which is one of the four freedoms of the EU single market?
    • Free choice of currency
    • Freedom from all taxation
    • Free movement of goods from any country in the world
    • Free movement of capital
    Show answer

    Free movement of capital. The four freedoms are goods, services, capital and people moving freely between members.

  3. A US firm's product costs $300 before tariffs. The EU's tariff on it is 12%. What is its price after the tariff?
    Show answer

    $336. 300 x 1.12 = $336.

  4. The European Commission says the single market raised EU GDP by 3% to 4%, and puts single market GDP at about EUR 18 trillion. As a rough estimate of the gain, calculate 3.5% (the midpoint of the range) of EUR 18 trillion.
    Show answer

    0.63 EUR trillion. 0.035 x 18 = 0.63 trillion.

  5. How many member states did ASEAN have after Timor-Leste joined in October 2025?
    • 11
    • 10
    • 15
    • 27
    Show answer

    11. Timor-Leste became the 11th member on 26 October 2025.

  6. NAFTA was replaced by
    • the EU single market
    • ASEAN
    • the USMCA, which entered into force on 1 July 2020
    • the WTO
    Show answer

    the USMCA, which entered into force on 1 July 2020. USTR states that USMCA replaced NAFTA from 1 July 2020.

  7. Explain one way a business outside a trading bloc could respond to the common external tariff.
    Show answer

    It could set up a factory or buy a business inside the bloc (FDI), so its goods are made inside and avoid the tariff.. Locating inside the bloc removes the CET.

  8. Explain one drawback for a business of its country joining a trading bloc.
    Show answer

    Firms from other member countries can now sell into its home market tariff free, so competition increases, which may reduce its market share and force it to cut prices.. Free trade works both ways: rivals gain access too.

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Sources

Last updated 8 November 2026. Spotted a mistake? Tell us.