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The WTO and types of trading bloc

Edexcel IAL Economics · WEC14 Developments in the Global Economy

Trade liberalisation happens globally through the World Trade Organization and regionally through trading blocs. You need to know what the WTO does and the four types of bloc, from the loosest to the most integrated.

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The World Trade Organization

The WTO was set up in 1995, replacing the General Agreement on Tariffs and Trade (GATT, 1947). It has 166 members, accounting for about 98% of world trade (Congressional Research Service, 2026).

Role in trade liberalisation:

Negotiating rounds to cut tariffs and other barriers.
Rules based on non-discrimination: the most-favoured-nation principle (a concession given to one member must be given to all) and national treatment (imported goods treated the same as domestic goods once inside the market).
Dispute settlement: members bring cases against each other. Since 2019 its Appellate Body has not functioned because new judges were not appointed, which weakens enforcement.
Monitoring trade policies and publishing data.

Four types of trading bloc

From least to most integrated:

1. Free trade area (FTA): no tariffs or quotas between members; each member keeps its own external tariffs. Needs rules of origin to stop imports entering through the lowest-tariff member.

2. Customs union: an FTA plus a common external tariff (CET) on imports from non-members.

3. Common (single) market: a customs union plus free movement of factors (labour and capital) and common rules (standards) for goods and services.

4. Economic and monetary union: a common market plus a single currency, a common central bank and monetary policy, and some coordination of fiscal policy.

Type	Free trade between members	Common external tariff	Free movement of labour and capital	Single currency
Free trade area	Yes	No	No	No
Customs union	Yes	Yes	No	No
Common market	Yes	Yes	Yes	No
Economic and monetary union	Yes	Yes	Yes	Yes

Bilateral and regional agreements

Besides blocs, many countries sign bilateral (two-country) trade agreements. These have multiplied as WTO rounds stalled, because consensus among so many members is hard to reach.

Worked example

Country A in a free trade area has a 5% tariff on shoes from outside; Country B, also a member, has a 20% tariff. Explain why rules of origin are needed.

Without rules, shoes from outside could enter through A at 5% and then move tariff-free to B.
B's 20% tariff would be bypassed (trade deflection).
Rules of origin allow tariff-free movement only for goods mainly made inside the area.

Answer: To stop non-member goods avoiding B's higher tariff by entering through A.

Key idea: WTO (1995, replacing GATT): negotiates liberalisation, applies non-discrimination rules (MFN, national treatment) and settles disputes. Blocs: FTA < customs union (CET) < common market (factor mobility) < economic and monetary union (single currency).

Check yourself

What does a customs union have that a free trade area does not?
- Free trade between members
- A common external tariff
- A single currency
- Free movement of labour
Show answer
A common external tariff. A CET is the defining addition.
Which type of trading bloc first adds free movement of labour and capital?
- Free trade area
- Customs union
- Bilateral agreement
- Common market
Show answer
Common market. Factor mobility is what turns a customs union into a common market.
The most-favoured-nation principle means that
- the largest economy sets world tariffs
- a trade concession given to one WTO member must be given to all members
- imported goods must be taxed more than domestic goods
- developing countries cannot use tariffs
Show answer
a trade concession given to one WTO member must be given to all members. MFN is non-discrimination between trading partners.
The WTO has 166 members, accounting for about 98% of world trade. If world trade is $30 trillion, estimate the trade of WTO members in $ trillion.
Show answer
$29.4 trillion. 30 x 0.98 = $29.4 trillion.
Explain why a free trade area needs rules of origin.
Show answer
Members keep different external tariffs, so without rules of origin goods from outside would enter through the member with the lowest tariff and then move tariff-free to other members.. Rules of origin prevent trade deflection.
Which feature is unique to an economic and monetary union?
- A common external tariff
- No tariffs between members
- A single currency and common monetary policy
- Free movement of capital
Show answer
A single currency and common monetary policy. Only an EMU shares a currency and central bank.
Explain why the Appellate Body not functioning since 2019 weakens the WTO.
Show answer
Disputes cannot be finally resolved on appeal, so a losing country can appeal into a void and avoid complying, which weakens enforcement of the rules.. Without a working appeal stage, rulings can be blocked.

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