How do trade blocs and emerging markets such as the EU, ASEAN and China affect the trading environment for an organisation?
Trade blocs and emerging markets: how regional trade blocs (the EU, ASEAN) and the rise of major economies such as China affect the opportunities, costs and trading conditions an organisation faces.
How trade blocs and emerging markets shape Advanced Higher Business Management strategy: the way the EU and ASEAN create free trade inside and barriers outside, and how the rise of economies such as China opens markets and intensifies competition.
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What this key area is asking
The world does not trade as one flat market; it is shaped by trade blocs, groups of countries that agree to trade freely with each other, and by the rise of emerging markets such as China. Advanced Higher expects you to explain how membership of a bloc such as the EU or ASEAN changes the trading conditions for a firm inside and outside it, and how the growth of major emerging economies creates both opportunity and threat.
Defining trade blocs
The two ideas to hold are free trade inside the bloc and a barrier outside it. That single distinction drives almost every effect a bloc has on a firm.
Effects of a trade bloc on the firm
- For a firm inside the bloc. Tariff- and quota-free access to a much larger market raises sales; inputs move freely, cutting costs; common standards simplify cross-border selling; but rivals from other members can now sell freely into the home market, and the firm must meet bloc-wide regulation.
- For a firm outside the bloc. The common external tariff makes its exports into the bloc dearer and less competitive, which is a key reason outside firms set up production inside a bloc through foreign direct investment to get behind the tariff wall.
Emerging markets
Emerging markets are rapidly industrialising economies, China the leading example, that are reshaping world trade.
- Opportunities. A vast and fast-growing consumer market with a rising middle class; a low-cost production and sourcing base; and a platform to serve a wider region.
- Threats. Intense competition from increasingly capable local firms at home and as exporters; unfamiliar regulation and culture; intellectual-property and political risk; the frequent need for a local partner; and exposure to any slowdown in that economy.
Examples in context
Why blocs and emerging markets matter
Trade blocs and emerging markets are where globalisation becomes concrete strategy: they explain patterns of FDI, the choice of entry method, and where multinationals locate. They are a live contemporary issue, especially given the UK's changed relationship with the EU and the continuing rise of Asian economies.
Try this
Q1. Define a trade bloc and give one example. [2 marks]
- Cue. A group of countries that agree to remove trade barriers between themselves, for example the EU or ASEAN.
Q2. Explain one benefit and one drawback for a firm of operating inside a trade bloc. [4 marks]
- Cue. Benefit: tariff-free access to a large market raises sales and economies of scale. Drawback: fiercer competition from other members' firms selling freely into the home market.
Exam-style practice questions
Practice questions written in the style of SQA exam questions on this dot point, with worked answer explainers. The year tag is the paper they imitate, not the source.
SQA AH style6 marksExplain the effects on a business of operating within a trade bloc.Show worked answer →
Explain means reasons with development. A trade bloc is a group of countries that agree to trade freely with each other. For a firm inside the bloc the effects are largely positive: tariff-free and quota-free access to a much larger market, so higher potential sales and economies of scale; lower costs as inputs move freely; common standards that simplify selling across members; and stronger bargaining power in world trade.
But there are costs and risks: fiercer competition from other members' firms now able to sell freely into the home market; the obligation to meet common rules and regulations; and a common external tariff that raises the cost of inputs sourced from outside the bloc. For a firm outside the bloc, the same external tariff is a barrier to selling in, which is one reason firms set up production inside a bloc through FDI. The best answers split inside and outside effects rather than listing.
SQA AH style8 marksDiscuss the opportunities and threats that the growth of emerging economies such as China presents to a UK organisation.Show worked answer →
Discuss means weigh and judge. Opportunities: a vast and fast-growing consumer market with a rising middle class, so huge sales potential; a low-cost production and sourcing location; and a base for serving the wider region. Threats: intense competition from increasingly capable Chinese firms, both in their home market and as exporters into the UK; the need for a local partner and to navigate unfamiliar regulation and culture; intellectual-property and political risk; and exposure to any slowdown in that economy.
A strong answer develops two or three points each way, links them to the specific firm and sector, and judges that emerging markets offer the biggest growth prize of the era but demand careful entry, often via joint venture, and active management of competitive and political risk, rather than listing.
Related dot points
- Globalisation: the integration of national economies into a single world market, its drivers (technology, transport, trade liberalisation, deregulation), and the opportunities and threats it creates for organisations.
What globalisation means for an Advanced Higher Business Management organisation: the integration of world markets, the drivers behind it (technology, cheaper transport, trade liberalisation and deregulation), and the strategic opportunities and threats it creates.
- Multinational corporations (MNCs): their features and reasons for becoming multinational, and the costs and benefits they bring to host countries and to their home country.
What multinational corporations are in Advanced Higher Business Management: why firms go multinational, and a balanced analysis of the benefits and costs MNCs bring to the host countries they invest in and to their home country.
- Methods of international expansion: foreign direct investment (greenfield and acquisition), joint ventures and strategic alliances, and the advantages and risks of each entry method.
How organisations expand internationally in Advanced Higher Business Management: foreign direct investment by greenfield build or acquisition, joint ventures and strategic alliances, and the advantages and risks that make each entry method suit different situations.
- Transfer pricing: the prices set for goods, services and intellectual property moved between divisions of the same multinational, how it is used to shift profit to low-tax countries, and the ethical and regulatory issues this creates.
What transfer pricing means in Advanced Higher Business Management: the prices a multinational sets for internal transfers between its divisions, how it can be used to shift profit to low-tax countries, and the ethical, reputational and regulatory issues this raises.
- Government policy and the economic environment as contemporary external influences: fiscal and monetary policy, legislation and regulation, and economic conditions such as growth, inflation, interest rates and unemployment, and how they affect organisations.
How government policy and economic conditions shape Advanced Higher Business Management decisions: fiscal and monetary policy, legislation and regulation, and the effect of growth, inflation, interest rates and unemployment on organisations.