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

This guide covers 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. It is assessed on the A Level multiple choice paper and on the A Level data response and essays paper, where evaluation (AO3) carries marks. All countries, firms and figures below are invented, and money is in currency units (cu).

Use the revision notes for quick recall and the practice set to test yourself. The course hub and checklist show the rest of the syllabus, and the free diagnostics help you decide what to revise next. The ideas of comparative advantage and protection from the absolute and comparative advantage guide are assumed here.

What the syllabus asks for

Outcome	What you must be able to do
11.6.1	Explain the meaning of globalisation, its causes and its consequences
11.6.2	Distinguish a free trade area, a customs union, a monetary union and a full economic union
11.6.3	Explain trade creation and trade diversion

11.6.1 Globalisation: meaning, causes, consequences

Globalisation is the growing integration and interdependence of national economies through increasing flows of goods, services, capital, labour, technology and information across borders. The test of whether you understand it is whether you can say what has increased: trade as a share of output, cross-border investment, migration, and the spread of production across several countries.

Causes

Each cause works by cutting the cost or risk of operating across borders.

• Lower transport costs. Containerisation, bigger ships and cheaper air freight reduce the cost of moving goods, so a firm can make parts far from where they are sold.
• Information and communication technology. Instant, cheap communication lets a firm manage suppliers and customers in many countries and trade services such as customer support and design work.
• Trade liberalisation. Falling tariffs and quotas, and trade agreements, widen the market a firm can serve.
• Capital mobility. Removing controls on capital lets savings and foreign direct investment flow to where returns are highest.
• Multinational companies. They organise production across borders to exploit lower costs and larger markets, which spreads technology and trade in components.
• Economic growth and rising incomes in emerging economies. These create new markets and new low-cost producers.
• Trading blocs. Section 11.6.2 shows how regional agreements deepen integration among members.

Consequences

Analyse a consequence by naming who is affected and how, then judge whether the effect is large and lasting.

Group	Possible gains	Possible losses
Consumers	Lower prices, wider choice	Dependence on distant supply chains
Firms	Bigger markets, economies of scale, cheaper inputs	Stronger foreign competition
Workers	New jobs in export industries	Job losses and structural unemployment in declining industries; downward pressure on low-skilled wages
Countries	Specialisation, growth, technology transfer, inward investment	Exposure to external shocks; loss of policy independence; uneven gains
Environment	Spread of cleaner technology	More transport emissions; pollution moved to countries with weaker rules

Evaluation chain. Globalisation raises efficiency, but the gains are shared unevenly. Whether a country gains depends on its comparative advantage, the flexibility of its labour market, its education and skills, and whether it can retrain displaced workers. Short-run costs (job losses) arrive fast and are concentrated, while long-run gains (lower prices, growth) are spread thinly. That is why governments face pressure to protect declining industries even when the economy as a whole gains. Evaluate by judging the time period, the country’s stage of development and the size of each effect.

11.6.2 Forms of economic integration

A trading bloc is a group of countries that agree to reduce trade barriers among themselves. The four forms are cumulative: each adds to the one before.

Form	Tariffs between members	Common external tariff	Common currency and monetary policy	Harmonised wider policies
Free trade area	Removed	No: each member sets its own	No	No
Customs union	Removed	Yes	No	No
Monetary union	Removed	Yes	Yes	No
Full economic union	Removed	Yes	Yes	Yes

• Free trade area. Members trade freely with each other but keep their own tariffs on non-members. Because those tariffs differ, an outside good can enter through the member with the lowest tariff and then move freely to the others. This is trade deflection, so free trade areas need rules of origin to check where a good was really made.
• Customs union. Members add a common external tariff (CET) on goods from non-members. Goods that enter any member face the same tariff, so no deflection arises. The cost is that members give up control of their own tariffs and must negotiate trade policy jointly.
• Monetary union. Members use a single currency and a common central bank and monetary policy. Gains: no currency conversion costs, no exchange rate risk among members, and easier price comparison. Losses: a single interest rate may not suit every member, and a country hit by a shock cannot devalue or set its own interest rate. The country must adjust through wages, prices or labour mobility, which is slower and often painful.
• Full economic union. All of the above plus harmonised fiscal, social and economic policies, with common rules and shared institutions. Gains: fewer policy conflicts and stronger coordination. Loss: a large surrender of national sovereignty over taxation and spending.

Integration deepens as you move down the table, and so do both the gains and the loss of national control. A bloc also tends to discriminate: members trade freely among themselves while non-members face barriers.

11.6.3 Trade creation and trade diversion

When a country joins a customs union it removes tariffs on imports from partners but keeps them (in the form of the CET) on outsiders. This changes which supplier is cheapest.

• Trade creation occurs when a member replaces higher-cost domestic production with lower-cost imports from a partner. Resources move to more efficient producers, so there is a gain in allocative and productive efficiency. Consumers pay less and buy more.
• Trade diversion occurs when a member replaces lower-cost imports from a non-member with higher-cost imports from a partner, because the partner now faces no tariff. Trade moves from the most efficient world producer to a less efficient one, which is a loss of efficiency.

The price a consumer pays for an import is the supplier’s price plus the tariff. Both effects follow from comparing these landed prices before and after the union.

Worked example 1: trade creation

Country A makes tractors at a cost of 20 cu each. Partner B can supply them for 15 cu and outside Country W for 16 cu. A charges a 40% tariff on all imports. Demand in A is Q = 300 − 10P, and domestic firms supply at a constant cost.

Before the union. Landed price from B = 15 × 1.40 = 21 cu. Landed price from W = 16 × 1.40 = 22.4 cu. Domestic cost is 20 cu, which is lowest, so A buys 100 units at P = 20 (Q = 300 − 200).

After the union. Tariffs on B’s goods go. B’s price is 15 cu. W’s landed price is still 22.4 cu. The cheapest source is now B at 15 cu, so A buys 150 units (Q = 300 − 150), all imported from B.

Gains.

• Production effect: 100 units now cost 15 cu instead of 20 cu, a saving of 100 × 5 = 500 cu.
• Consumption effect: price falls by 5 cu and quantity rises by 50 units, a gain of ½ × 5 × 50 = 125 cu.
• Total welfare gain = 500 + 125 = 625 cu.

This is trade creation because domestic production was replaced by cheaper partner imports. The imports displace home output; they do not displace trade with W.

Worked example 2: trade diversion

Country A makes machine parts at 30 cu. Outside Country W can supply them for 18 cu and partner B for 22 cu. A’s tariff on all imports is 50%. Demand is Q = 500 − 10P.

Before the union. Landed price from W = 18 × 1.5 = 27 cu. From B = 22 × 1.5 = 33 cu. Domestic = 30 cu. Cheapest is W at 27 cu, so A buys 230 units (Q = 500 − 270) from W.

After the union. B’s price is 22 cu. W’s landed price is still 27 cu. A switches to B, and buys 280 units (Q = 500 − 220).

Effects on A.

• Consumer surplus gain: (27 − 22) × (230 + 280) ÷ 2 = 1,275 cu.
• Tariff revenue lost: 230 × (27 − 18) = 2,070 cu.
• Net effect on A = 1,275 − 2,070 = −795 cu.

To see why, split the figures. Of the 1,275 cu gain, 1,150 cu (5 × 230) is a transfer from government revenue to consumers and 125 cu (½ × 5 × 50) is a genuine consumption gain. Of the 2,070 cu lost revenue, 1,150 cu is that same transfer and 920 cu is the extra resource cost of buying 230 units from B at 22 cu rather than from W at 18 cu (230 × 4). Net = 125 − 920 = −795 cu. A is worse off because it now pays a less efficient producer.

Judging the net effect

Trade creation is a clear gain and trade diversion a clear loss, so a union is a net gain only if creation outweighs diversion. Evaluate using these factors.

1. Cost gap between partners and outsiders. The larger the gap in favour of outsiders, the bigger the diversion loss per unit.
2. Height of the old tariffs. High prior tariffs mean large gaps between landed prices, so more trade is redirected. If the CET is lower than members’ old tariffs, diversion is smaller and some outsiders may become cheaper still.
3. Price elasticity of demand. More elastic demand means a larger quantity response to the price fall, so a bigger consumption gain.
4. Dynamic gains. Larger markets bring economies of scale, more competition and more investment. These do not appear in the static comparison above but may outweigh a modest diversion loss.
5. Time period and member structure. Countries with similar costs to the world (so partners are close to the cheapest source) lose little from diversion.
6. Non-members. Exports from outside suffer, which may prompt retaliation.

Common errors

• Describing a free trade area as having a common external tariff. That belongs to a customs union.
• Treating trade diversion as a fall in total trade. It is a switch of supplier, and total trade may even rise.
• Calling any increase in trade within a bloc trade creation. Creation requires that the new imports replace domestic output; diversion replaces imports from outside.
• Forgetting that a customs union is a form of discrimination, so it is a departure from free trade with the whole world.
• Making one-sided globalisation answers. Name winners and losers and weigh them.

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.