4.1 - Trading blocs and world trade organisation Flashcards
international economics
What is a regional trading bloc?
- A group of countries within a geographical region that protect
themselves from imports from non-members. - They sign an agreement to reduce or eliminate
tariffs, quotas and other protectionist barriers among themselves. - They are a form of
integration
Give some examples of regional trading blocs…
- NAFTA (North America)
- EU (European union)
- ASEAN (Asia)
- MERCOSUR (South America)
What is economic integration?
A process in which countries form an agreement decreasing barriers to trade and increase common fiscal and/or monetary policies
What is a bilateral trading agreement?
An trading agreement between two countries to promote trade between them.
Multilateral or plurilateral agreements are between at least how many countries?
3
What is a free trading area?
Occur when two or more countries agree to reduce/remove trade barriers/restrictions on goods between its members but are able to maintain/impose its own restrictions on goods it imports outside the trading bloc
What is a customs union?
- An agreement between countries in which all goods/services produced by members are traded tariff free. Additionally, countries agree on common tariff rates on imports from all external (third party) countries
- members may negotiate as a single bloc with third parties such as other
trading blocs or countries.
What is a common market?
- goods/services are traded tariff free in common markets. Additionally, the four factors of production (labour, land, capital, enterprise) flow freely between member countries (no barriers)
- The goal is to improve the allocation of resources between the common market members and lower costs of production and establish a single market
The European union is an example of both…
- customs union
- common market
What is a preferential trading area?
where tariff and other trade barriers
are reduced on some but not all goods traded between member countries.
What is a monetary union?
Two or more countries with a single currency, with an
exchange rate that is monitored and controlled by one central bank or several central
banks with closely coordinated monetary policy.
What are essential conditions for the success of a monetary union?
- free movement of labour
- similar trade cycles
- mobility of finance
- fiscal transfers
With reference to the eurozone explain similar trading cycles as a successful feature of a monetary union
- The trade cycles of member countries should be similar
- to avoid tensions with the union
> e.g. after the 2008 Financial Crisis, Southern European countries were in a depression compared to the temporary recession in Northern European countries. This created extreme pressure on the survival of the Eurozone
With reference to the eurozone explain why there should be automatic fiscal transfers to other members of the monetary union that are performing badly?
- Important as these members have lost the use of monetary policy to deal with a crisis in their nation
- e.g. fiscal transfers to Spain, Portugal and Greece post 2008 Financial Crisis were very weak.
- Political tensions emerged in which citizens of wealthier countries (Germany) did not want their tax revenue used to bail out countries with perceived poor fiscal history (Greece)
With reference to the eurozone explain mobility of finance as a successful feature within a monetary union…
-There should be complete mobility of finance with prices and wages free to adjust based on market conditions.
- This is a strength of the Eurozone and labour markets fluctuate based on members market conditions
With reference to the eurozone explain movement of labour as a successful feature of a monetary union
- Labour should be able to move freely without any major barriers e.g. language.
- The main languages of the Eurozone are English, French and German but language is still a limiting factor
What are the benefits of a regional trading agreement?
- Trade creation improves efficiency and generates higher output > income
- Tariffs between member states are eliminated
- Common tariffs to third party countries simplify trading conditions
- A monetary union simplifies trading costs and provides pricing transparency
- Some member countries gain from improved monetary policy conditions e.g. European interest rates may well be lower than an individual country’s rates would have been
- There is less uncertainty surrounding exchange rates as members all use the same currency
What are some costs of a regional trade agreement?
- Trade diversion occurs as countries reallocate trade to partners in their agreement. This may worsen global efficiency
- Some domestic industries experience structural unemployment (not protected by restrictions)
- Increased negative externalities of production, resource depletion and environmental damage
- Transitioning to a monetary union can be expensive and firms may find it hard to adjust/change their menu prices
- In a monetary union, member countries lose their ability to set interest rates and control the supply of money (monetary policy)
- Loss of sovereignty
What is trade creation?
- Occurs when a trade agreement shifts consumption of certain goods and services from a high-cost producer to a low-cost producer in another country
What is trade diversification?
- Occurs when the formation of a trading bloc results in the consumption of a good/service transferring from a country with lower cost production to a country with higher cost production
What is trade liberalisation?
the process of reducing the barriers/protectionism policies to free trade e.g. removing tariffs
What are the two main roles of the world trade organisation (WTO)?
1) It brings countries together at conferences and encourages them to reduce or eliminate protectionist trade barriers between themselves
> e.g. The Doha Round conferences in 2001 which aimed to cut protectionism on agricultural goods, reduce tariffs on manufacturing goods, increase access to markets in services, tighten intellectual
property rights and give the WTO more power to settle disputes
2) It acts as an adjudicating body in trade disputes. Member countries can file a complaint if they believe a trading partner has violated a trade agreement. The WTO will then run a hearing and make a judgement
What are some possible conflicts with the WTO?
- Regional trade agreements contradict WTO’s principles as a common external
tariff on trade outside the trading bloc introduces protectionism. Customs unions and
free trade areas can be seen as violating the WTO’s principle since not all trading
partners are treated equally. - However, they can complement the trading system and the WTO strives to ensure
non-members can trade freely and easily with members of a trade bloc.
> Some might argue the WTO is too powerful or that it ignores the developing
countries, as developed countries do not trade freely with developing countries. - The protectionist approach of the USA and China currently provides a threat to the
WTO system.
