4- Trading Blocs Flashcards
Key factors affecting patterns of trade between countries?
- Comparative advantage
- The growth in exports of manufactured goods, especially from low wage countries to developed economies
- The growth of global supply chains
- The increased importance of emerging economies as trading partners
- The growth of trading blocs and bilateral trading agreements
- Change in relative exchange rates
Trading bloc
A trading bloc is a group of countries usually within a geographical region designed to significantly reduce or remove trade barriers between member countries.
Examples of trade blocs?
- The East African Community (EAC)
- The Common Market for Eastern and Southern Africa (COMESA)
- The Southern African Development Community (SADC)
- European Union (EU)
Types of trading blocs
- Free trade areas
- Customs Unions
- Common markets
- Monetary unions
Free trade area
In these trading blocs trade barriers are removed between member countries but each member can impose trade restrictions on non-member countries.
Customs Union
There is free trade between member countries combined with a common external tariff on goods from countries outside the customs union.
Common market
These have the same characteristics as a customs union but include the free movement of factors of production (e.g. labour) between member countries.
Monetary union
These are customs unions which adapt a common currency.
E.g. the euro zone
Benefits of trading blocs
- Trade creation (removal of barriers=more trade)
- Increase in FDI- TNCs would have full access in selling goods in the blocs
- Increase in economic power- a large trading bloc may be in a better position to negotiate trade agreements with other countries and trading blocs.
Costs of trading blocs
- Trade diversion- in most trade blocs there are tariffs/restrictions on imports outside the bloc so trade may be diverted from low-cost producers outside the bloc to high-cost producers within the bloc
- Distortion of comparative advantage- trade barriers against non-members likely to cause a fall in specialisation and therefore world output.
Trade diversion definition
Movement from a low cost foreign producer to a high cost domestic producer when a country enters a customs union.
Trade creation definition
Movement from a high cost domestic producer to a low cost producer within a customs union.
Further benefits of monetary unions?
- Elimination of transaction costs- costs involved in changing currencies when goods are imported or exported.
- Price transparency- consumers have the ability to compare prices more easily across borders.
- Elimination of currency fluctuations between member countries- could encourage increase investment by businesses.
Further costs of monetary unions?
- Transition costs- these are one off costs associated with changing menus or price lists or slot machines when a new currency is introduced
- Loss of independent monetary policy- countries no longer have control of their own interest rates. In the Eurozone there is the European Central Bank.
- Loss of exchange rate flexibility- individual members of the Eurozone no longer have their own currencies.
Role of the World Trade Organisation (WTO)?
- To promote free trade- this is achieved through various rounds of talks
- To settle trade disputes between member countries
