Cambridge A Level Economics: Globalisation, trading blocs, trade creation and diversion (9708) – Revision Notes

These notes condense section 11.6 (outcomes 11.6.1 to 11.6.3) of the Cambridge International AS & A Level Economics 9708 syllabus for examination in 2026, 2027 and 2028. The syllabus treats topics 1 to 6 as AS Level and topics 7 to 11 as A Level; section 11.6 is A Level content only and is not examined at AS. The study guide has the full explanations and worked examples. Test yourself with the practice set. The course hub, checklist and free diagnostics help you plan the rest of your revision. Countries, firms and figures here are invented and money is in currency units (cu).

11.6.1 Globalisation

Definition. The growing integration and interdependence of economies through rising cross-border flows of goods, services, capital, labour, technology and information.

Causes (learn as a list of cost-cutters)

Cause	How it speeds globalisation
Transport improvements	Cheaper movement of goods, so production can be split across countries
ICT	Cheap, instant communication; services can be traded
Trade liberalisation	Lower tariffs and quotas widen markets
Capital mobility	Investment flows to the highest return
Multinational companies	Cross-border production networks, technology transfer
Growth in emerging economies	New markets and new low-cost producers
Trading blocs	Deeper integration among members

Consequences

	Gains	Losses
Consumers	Lower prices, more choice	Reliance on long supply chains
Firms	Scale economies, cheaper inputs	Foreign competition
Workers	Export jobs	Structural unemployment, pressure on low-skilled wages
Countries	Growth, specialisation, investment	Exposure to shocks, less policy control, uneven gains
Environment	Cleaner technology spreads	Transport emissions; pollution moved abroad

Evaluate with: who gains and who loses; short run against long run; the country’s stage of development; labour market flexibility and skills; whether the state can retrain and support displaced workers; the size of each effect.

11.6.2 Forms of integration

Each form builds on the one before it.

Form	No tariffs between members	Common external tariff	Single currency and monetary policy	Harmonised wider policies
Free trade area	Yes	No	No	No
Customs union	Yes	Yes	No	No
Monetary union	Yes	Yes	Yes	No
Full economic union	Yes	Yes	Yes	Yes

Must-know distinctions

• Free trade area against customs union. Own tariffs on outsiders against a common external tariff. Different tariffs allow trade deflection (goods enter through the lowest-tariff member), so a free trade area needs rules of origin.
• Customs union against monetary union. A customs union fixes trade policy; a monetary union fixes the currency and interest rate.
• Monetary union against full economic union. Full economic union adds common fiscal and other policies.

Monetary union: gains and losses

• Gains: no conversion costs, no exchange rate risk among members, price transparency, more trade and investment.
• Losses: one interest rate for all; no devaluation to absorb a shock; the adjustment falls on wages, prices and labour mobility; loss of an independent central bank.

Full economic union: gains and losses

• Gains: coordinated policy, fewer policy clashes, a single large market.
• Losses: large loss of sovereignty over tax and spending, and a one-size policy that may not fit every member.

11.6.3 Trade creation and trade diversion

• Trade creation: domestic output replaced by cheaper imports from a partner. A gain in efficiency.
• Trade diversion: imports from a cheaper outside producer replaced by dearer imports from a partner. A loss in efficiency.

Method in steps

1. Work out landed prices: landed price = supplier price × (1 + tariff rate).
2. Before the union, find the lowest of domestic cost and landed prices. That is the source.
3. After the union, remove the tariff on the partner only and find the new lowest.
4. If the source changes from domestic to partner, it is trade creation. If it changes from outsider to partner, it is trade diversion.
5. Measure the effect with the cost and price differences, using the relevant units.

Reminder: trade diversion

Domestic cost 80 cu. Outsider 60 cu, partner 70 cu, tariff 25%.

• Before: outsider landed = 60 × 1.25 = 75 cu, below domestic 80 cu, so imports come from the outsider at 75 cu.
• After: partner = 70 cu, so the source switches to the partner.
• Per unit: consumer price falls 75 − 70 = 5 cu. Government loses 75 − 60 = 15 cu of tariff revenue. The resource cost rises by 70 − 60 = 10 cu. Net on the quantity previously imported = 5 − 15 = −10 cu, before any gain from the extra units bought.

Reminder: trade creation

Domestic cost 80 cu. Partner 70 cu, outsider 90 cu, tariff 25%.

• Before: outsider landed = 90 × 1.25 = 112.5 cu. The domestic good at 80 cu is cheapest.
• After: partner at 70 cu is cheapest. Saving of 80 − 70 = 10 cu per unit replaced.

Net effect of a union depends on trade creation against trade diversion. Judge using:

• how far partner costs are above world costs;
• the height of old tariffs and of the common external tariff;
• price elasticity of demand;
• dynamic gains: scale economies, competition, investment;
• effects on non-members and the risk of retaliation.

Intra-bloc share. Intra-bloc trade share = intra-bloc trade ÷ total trade × 100. If it is 36 out of 90, the share is 40%. A rising share does not by itself prove diversion or creation; check whether imports from outside fell (diversion) or total imports rose with outside imports steady (consistent with creation).

Evaluation chains to rehearse

• Globalisation helps a country. More trade and investment raise efficiency and growth, but only where workers and firms can move into industries with a comparative advantage. Where retraining is weak, job losses persist, so the verdict depends on skills, labour flexibility and time period.
• A customs union helps its members. Trade creation and dynamic gains raise welfare; trade diversion and lost tariff revenue reduce it. The result depends on how close partner costs are to world costs and on the level of the common external tariff.
• A monetary union helps its members. Lower transaction costs and exchange rate certainty favour trade, but one interest rate and no devaluation make shocks harder to absorb. Similar economies and flexible labour markets reduce the cost.
• Deeper integration is better. Each step adds gains from coordination and costs in lost sovereignty. The balance depends on how similar the members’ economies and priorities are.

Command words and what they ask for

• Define: a precise meaning, ideally with the features that make it distinct.
• Distinguish: both sides of the contrast, stated side by side.
• Explain: a cause-and-effect chain, not a list.
• Calculate: show the working and the unit.
• Assess, evaluate, discuss: analysis of both sides followed by a reasoned judgement with conditions.

Quick self-test

1. Define globalisation.
2. State two causes of globalisation.
3. What distinguishes a customs union from a free trade area?
4. What is trade deflection?
5. Name two costs of joining a monetary union.
6. Outside supplier cost 40 cu, tariff 30%. What is the landed price?
7. Domestic cost 55 cu, partner cost 48 cu, outsider landed 62 cu before the union. Is moving to the partner trade creation or trade diversion?
8. Total imports of a bloc are 90 units, of which 36 come from members. What is the intra-bloc share?
9. Give one reason why a customs union might be a net loss for a member.
10. Give one dynamic gain from membership of a bloc.

Answers

1. Growing integration and interdependence of economies through rising cross-border flows of goods, services, capital, labour, technology and information.
2. Any two of: lower transport costs, ICT, trade liberalisation, capital mobility, multinational companies, trading blocs.
3. A customs union has a common external tariff; a free trade area does not.
4. Outside goods entering the free trade area through the member with the lowest external tariff, then moving freely to the others.
5. Any two of: no independent interest rate, no exchange rate adjustment to a shock, adjustment through wages, prices and labour mobility, loss of a national central bank.
6. 40 × 1.30 = 52 cu.
7. Trade creation: the domestic good (55 cu) is replaced by the cheaper partner good (48 cu). The saving is 7 cu per unit.
8. 36 ÷ 90 × 100 = 40%.
9. Trade diversion dominates, so imports shift to higher-cost partners and tariff revenue is lost.
10. Any one of: economies of scale from a larger market, more competition, more investment.

Where marks are usually lost

• Writing that a free trade area has a common external tariff.
• Defining globalisation as “trade between countries” and leaving out capital, labour, technology or production.
• Listing causes without explaining how each lowers cost or risk.
• Giving only gains from globalisation, or only losses, with no weighing.
• Treating any rise in trade within a bloc as trade creation.
• Comparing supplier prices without adding the tariff before judging the cheapest source.
• Saying trade diversion is a loss without saying whose loss and why (higher resource cost and lost tariff revenue).
• Making a final judgement without conditions such as elasticity, cost gaps or time period.
• Leaving out discrimination against non-members as a feature of every bloc.

Official syllabus

Cambridge International AS & A Level Economics 9708 syllabus for examination in 2026, 2027 and 2028, published by Cambridge University Press & Assessment (Cambridge Assessment International Education), section 11.6.