4.1.5 Flashcards
what is a trade bloc?
A trading bloc is a group of countries that form an economic union and agree to remove trade barriers between member countries, while also imposing a common external tariff on non-member countries. Trading blocs aim to increase trade among member countries and promote economic cooperation.
what is a good examaple of a trade bloc?
European Union (EU), which is a political and economic union of 27 member states located primarily in Europe. The EU has created a single market with the free movement of goods, services, capital, and people among member countries, and has a common external tariff on non-member countries. The EU has also established common policies in several areas, such as agriculture, trade, and environment.
what is a bilateral trade agreement?
economic agreement between two countries that aims to reduce trade barriers between them, such as tariffs and quotas. Bilateral trading agreements can lead to increased trade between the two countries, and can also promote economic cooperation and investment.
what’s a good example of a bilateral trade agreement?
United States-Mexico-Canada Agreement (USMCA), which replaced the North American Free Trade Agreement (NAFTA) in 2020. The USMCA is a free trade agreement between the United States, Mexico, and Canada, and aims to reduce trade barriers between the three countries in several areas, such as agriculture, manufacturing, and intellectual property. The USMCA has provisions that aim to increase regional content requirements in the production of automobiles, which is expected to promote economic cooperation among the member countries.
what are free trade areas?
example
- FTAs involve the elimination or reduction of import tariffs and quotas on trade between member countries.
- Goods and services can move freely within the bloc without customs duties.
- Examples include NAFTA (North American Free Trade Agreement) and ASEAN Free Trade Area (AFTA)
what are custom unions?
example
- Customs unions go beyond FTAs by not only removing trade barriers but also establishing a common external tariff on imports from non-member countries.
- Member countries coordinate their trade policies with respect to non-members.
- The European Union (EU) is an example of a customs union
what is a commons market?
+ example
- Common markets not only remove trade barriers but also allow for the free movement of factors of production (capital, labor, and sometimes, technology).
- It results in a higher degree of economic integration.
- The EU, before the establishment of the Eurozone, was an example of a common market.
what is a monetary union?
examples and conditions
- A monetary union involves a common currency shared by member countries. The Eurozone is an example.
Conditions for success include: - Fiscal discipline: Member countries need to maintain responsible fiscal policies to prevent economic imbalances.
- Convergence criteria: Ensuring member countries have similar inflation rates, interest rates, and budget deficits.
- A common monetary policy: Implemented by a central bank, like the European Central Bank (ECB) in the Eurozone.
- Political commitment to the union: Member states must be willing to cede some economic sovereignty.
what is the role of the world trade organisation (WTO)?
Key functions include:
* Negotiation: Facilitating trade negotiations among member countries to reduce trade barriers.
* Dispute Settlement: Resolving trade disputes through a rules-based system.
* Monitoring: Monitoring trade policies and practices of member countries to ensure they comply with WTO rules.
* Technical Assistance: Providing technical assistance to developing countries to help them participate in global trade.
WTO aims to promote trade liberisation
what is trade creation?
movement from a higher cost source of output towards a lower cost source of supply as a result of joining a trade agreement
* eg: producers now get access to cheaper imported raw materials or technologies because of the redutcion/ scrapping of import tarrifs
being in free trade agreement or customs union
show trade creation diagram +analysis
what are possible conflicts between regional trade agreements and the WTO?
- Trade Discrimination: RTAs may discriminate against non-members, potentially violating WTO’s most-favored-nation principle.
- Trade Diversion: If RTAs lead to trade diversion, they can be seen as contrary to the WTO’s goal of reducing trade barriers globally.
Inconsistent Rules: Conflicting rules between RTAs and WTO agreements can create legal and practical challenges. - Preferential Treatment: WTO rules generally favor non-discrimination, while RTAs provide preferential treatment to member countries.
- Dispute Resolution: Disputes can arise when WTO and RTA rules conflict, requiring resolution mechanisms to reconcile differences.
what is trade diversion?
movement from a lower cost supply (outside union) towards a higher cost producer (inside union) as a result of joining a trade agreement, leading to consumers paying higher prices
eg: common external tarrif inside EU
analysis and diagram of trade diversion
As a result of joining a customs union, the country must adopt the common external tariff, which increases the price of imports from P1 to P3. This makes imports from Thailand, previously the most competitive supplier, less attractive due to the higher price. Consequently, the next best supplier becomes China, offering the good at P2. This shift represents trade diversion, as the country now sources imports from a less efficient producer within the customs union or at a higher cost compared to the previous global supplier.
The economic welfare loss from trade diversion can be illustrated by the loss in consumer surplus of areas ABC + DEF. Consumers now face higher prices for imports, which, ceteris paribus, reduces their disposable real income. With less purchasing power, consumers can afford fewer goods and services, leading to a decline in their overall living standards.
what are some advatantages of joining the Eurozone?
stable exhcnage rate paragraph
- One advantage of being in the Eurozone is the elimination of exchange rate fluctuations between member countries. By adopting the euro, businesses no longer face the uncertainty associated with currency volatility, which is particularly beneficial for exporters and importers who trade extensively within the Eurozone. For example, a German car manufacturer importing components from Italy can accurately predict the cost of raw materials in euros, as there is no risk of exchange rate changes between the two countries. This stability provides businesses with greater confidence and reduces the need for hedging against currency risk, which can be costly and complex. As a result, businesses are more likely to engage in long-term planning and capital investment. For instance, a French pharmaceutical company might invest in new production facilities in Spain, knowing that the absence of exchange rate risk ensures predictable costs and revenues. This increase in investment can lead to economies of scale, higher productivity, and economic growth across the Eurozone.
- The benefits of stable exchange rates depend on whether a country’s economy is export-oriented or domestically focused. A stable exchange rate can make a country’s exports less competitive if the currency becomes overvalued. For example, if the euro is strong relative to other currencies (e.g., the US dollar or Chinese yuan), Eurozone exports become more expensive for foreign buyers. This can harm export-oriented industries
what are some advatantages of joining the Eurozone?
FDI paragraph with evaluation
Being part of the Eurozone makes a country more attractive to foreign direct investment. This is because the Eurozone provides access to a large and integrated market of over 340 million consumers. Foreign investors can establish operations in one Eurozone country and easily export goods and services to others without facing tariffs or currency conversion costs. For instance, a Japanese car manufacturer setting up a factory in Spain can export vehicles to Germany, Italy, and other Eurozone countries without additional trade barriers.
However, the extent to which FDI increases depends on other factors, such as the business environment, labor market flexibility, and infrastructure quality of the host country. For example, while Germany and the Netherlands have attracted significant FDI due to their strong institutions and skilled workforce, countries like Greece and Portugal have struggled to attract similar levels of investment due to structural weaknesses and higher perceived risks.”
what are some disadvanatges of joining the eurozone?
Joining the Eurozone means a loss of monetary policy autonomy, as the country would have to rely on the European Central Bank (ECB) for decisions regarding interest rates and quantitative easing. This can be disadvantageous because the ECB’s policies are designed to meet the needs of the Eurozone as a whole, rather than addressing the specific economic conditions of individual member countries. For example, during the Eurozone crisis, the ECB maintained relatively high interest rates to control inflation in stronger economies like Germany, while countries like Greece and Spain were experiencing deep recessions and needed lower interest rates to stimulate growth. This one-size-fits-all approach can exacerbate economic problems in countries facing asymmetric shocks.
