Globalisation, regional integration and trade effects
Globalisation, regional integration and trade effects: build the core model, apply it to evidence and qualify conclusions where outcomes depend on context.
9708 section 11.6; A Level. Checked against Cambridge's 2026–2028 Version 2 (latest version published December 2025) and 2029 Version 1 (published September 2026). Cambridge states that neither version has significant changes affecting teaching. Always follow the syllabus for the candidate's examination year.
Before you begin
Work on paper. Try each question before revealing help, and explain why your method works.
Quick readiness check
What is trade diversion?
What you will learn
- Explain globalisation, its causes and consequences
- Distinguish free-trade areas, customs unions, monetary unions and economic unions
- Calculate and explain trade creation and trade diversion
Core model and terms
Globalisation is increasing economic integration through trade, investment, finance, technology and movement of information or people. Lower transport and communication costs, liberalisation and multinational production can accelerate it. It can widen markets and diffusion while exposing workers and firms to competition, external shocks, unequal bargaining power and environmental pressures; outcomes depend on institutions, mobility and policy.
Apply and evaluate
A free-trade area removes internal trade barriers while members keep separate external tariffs. A customs union also uses a common external tariff; a monetary union shares a currency and monetary authority; a full economic union coordinates a wider set of policies and institutions. Trade creation replaces higher-cost domestic production with lower-cost partner supply after integration. Trade diversion replaces a lower-cost non-member with a higher-cost member because the common external tariff changes relative prices.
Pause and explain
Which statement best applies globalisation, regional integration and trade effects?
Worked example
Before a customs union, a domestic supplier costs $16, a partner $12 and an outside supplier $10. A common external tariff raises the outside supplier’s cost to $15. Identify the likely source change and whether it is trade creation or diversion.
Show the worked solution
- The partner at $12 is cheaper than domestic production at $16
- It is also cheaper than the tariff-inclusive outside price of $15
- Switching from the outside supplier to the partner is trade diversion, not trade creation
Answer The partner at $12 is cheaper than domestic production at $16 → It is also cheaper than the tariff-inclusive outside price of $15 → Switching from the outside supplier to the partner is trade diversion, not trade creation
Try a topic test
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Test this topic →From guided practice to a new situation
Write your answer and reasoning first. Use a hint only if you are stuck. The model solution is for self-checking; your written work is not automatically marked.
Before a customs union, a domestic supplier costs $16, a partner $12 and an outside supplier $10. A common external tariff raises the outside supplier’s cost to $15. Identify the likely source change and whether it is trade creation or diversion.
Give me a hint
Compare the partner’s cost with domestic cost and the tariff-inclusive outside cost.
Compare my reasoning
- The partner at $12 is cheaper than domestic production at $16
- It is also cheaper than the tariff-inclusive outside price of $15
- Switching from the outside supplier to the partner is trade diversion, not trade creation
The partner at $12 is cheaper than domestic production at $16 It is also cheaper than the tariff-inclusive outside price of $15 Switching from the outside supplier to the partner is trade diversion, not trade creation
Look for these in your work
- The partner at $12 is cheaper than domestic production at $16
- It is also cheaper than the tariff-inclusive outside price of $15
- Switching from the outside supplier to the partner is trade diversion, not trade creation
A free-trade area removes tariffs between members but each keeps its own tariffs on outsiders. Which feature distinguishes it from a customs union?
Give me a hint
Check whether members share an external tariff.
Compare my reasoning
- Internal barriers are removed
- Members still choose their own external tariffs
- There is no common external tariff as in a customs union
Internal barriers are removed Members still choose their own external tariffs There is no common external tariff as in a customs union
Look for these in your work
- Internal barriers are removed
- Members still choose their own external tariffs
- There is no common external tariff as in a customs union
A customs union replaces a high-cost domestic producer with a lower-cost partner. Explain the likely trade effect and one possible gain.
Give me a hint
Compare real production costs before and after the switch.
Compare my reasoning
- Partner production uses fewer resources than domestic production
- The switch is trade creation
- Consumers or firms may gain from lower-cost supply, subject to adjustment effects
Partner production uses fewer resources than domestic production The switch is trade creation Consumers or firms may gain from lower-cost supply, subject to adjustment effects
Look for these in your work
- Partner production uses fewer resources than domestic production
- The switch is trade creation
- Consumers or firms may gain from lower-cost supply, subject to adjustment effects
Why can monetary union involve more coordination than a free-trade area?
Give me a hint
Compare the trade rules with a shared currency and monetary authority.
Compare my reasoning
- A free-trade area removes internal tariffs
- A monetary union also shares a currency and monetary policy
- Members give up more national policy flexibility and need coordination
A free-trade area removes internal tariffs A monetary union also shares a currency and monetary policy Members give up more national policy flexibility and need coordination
Look for these in your work
- A free-trade area removes internal tariffs
- A monetary union also shares a currency and monetary policy
- Members give up more national policy flexibility and need coordination
Common mistakes
- Confusing trade creation with trade diversion or assuming globalisation and regional integration distribute gains evenly.
What can you explain now?
What is trade diversion?
Compare with the explanation
Replacing lower-cost non-member supply with higher-cost member supply because preferences change prices
The tariff preference changes the source of imports even though the partner is not the lowest-cost producer.
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Make it stick
Before moving on, explain the central idea in globalisation, regional integration and trade effects and state one condition that could change its effect.
If you needed the solution, close it and solve the problem again from a blank page. A correct answer is stronger when you can explain the reason for each step.