What effect do trading blocs have on non-member countries?

Trading blocs affect non-member countries primarily through the mechanism of trade diversion. When countries form a trading bloc, they often establish preferential trade agreements among themselves, which can lead to a shift in trade patterns. Non-member countries may find that their goods are less competitive in terms of price and availability compared to those produced within the bloc.

As member countries prioritize trade with one another due to reduced tariffs and other trade barriers, non-member countries might lose market share and see a reduction in trade opportunities. This diversion occurs because trade that might have previously gone to non-member countries could be redirected to more competitive (and often subsidized) products from within the bloc. Therefore, while member countries benefit from improved market access and reduced competition among themselves, non-member countries may suffer economically due to this reallocation of trade flows, leading to the phenomenon known as trade diversion.

This situation highlights how trading blocs can unintentionally disadvantage those outside the agreement, as their goods become less appealing compared to those of members who enjoy preferential treatment.