Free trade

Since the Brexit vote on the twenty-third of June in 2016, we have heard thrown around various terms. So what is actually the European Union and what are the customs unions, single markets, et cetera?

When it comes to free trade, there are various ways it can happen. The most simple way is a bilateral or multilateral trade agreement. This way, they all agree between themselves they will trade freely in most or all goods. If one nation wants to protect one particular service because it sees it as vital to its national ‘infrastructure’, then other nations will possibly want to protect their industries worth a similar value and that’s where complications come in. So the easiest type of free trade deal is where both nations or all nations agree just to open their doors entirely.

Very similar to that, but a slightly different term used, is a free trade area. Now this is exactly the same really as a multilateral trade agreement, but it applies if all the constituent nations are in the same geographical area. A good example is the North American Free Trade Agreement (NAFTA) where Canada, the United States and Mexico are part of.

The next one up from a free-trade area is a customs union. This is just a free-trade area where they agree a common external tariff. The reason for this is quite simple: if different nations in a free-trade area have different tariffs, they can be exploited. For example, if you were a German manufacturer, you will export goods through Canada if there is a lower import rate (e.g. 5%) than in the United States (e.g. 20%). That’s why Mr. Trump is so angry and strives for local production.

The next one up from customs union is a single market. This is exactly the same as a customs union, except that they have common regulations of things like product regulations, and they allow freedom of movements of the four factors of production: land, labor, capital and entrepreneurship. Now advocates of this argue that it’s better than a customs union because it gives a more level playing field between two different constituent nations because they all have to abide by the same rules. Latvia can’t get away with making a substandard product for a cheaper price than the UK because they have to make it to a required standard.

There is one more level of regional trading, which is the only different between a single market and a single country, and that is an economic Union. Within the European Union there is another level, that is the eurozone. This is the largest economic Union in the world. The constituent nations have a monetary union with a single currency: the euro. Once you’ve got to that level, you’re basically a single country, but just shy because the political union is still on its way. There are pros and cons of these regional trading box. Supporters say they encourage trade because nations can trade freely within them. Opponents say they discourage trade because people outside the trading block are disproportionately affected by things like taxes, the tariffs, quotas and the embargoes.