4.1.5 Trading blocs and the World Trade Organisation Flashcards
What are trade blocs
they result in lower import protection against outside countries than existed before the creation of trade blocs
Examples of regional trade blocs include
USMCA - United States - Mexico - Canada Agreement
Mercosur – Brazil, Argentina, Uruguay, Paraguay and Venezuela
ASEAN - Association of Southeast Asian Nations Free Trade Area
Common Market of Eastern and Southern Africa - includes Zambia, Rwanda, Swaziland, Ethiopia and Kenya
Trans-Pacific Partnership (TPP) – an agreement negotiated between Australia, Brunei, Chile, Canada, Malaysia, Mexico, New Zealand, Peru, Singapore and Vietnam
What are Free Trade Areas
are where there are no import tariffs or quotas on products from one country entering another
What are Bi-lateral Trade Agreements
is the exchange of goods between two economies/groups of economies promoting trade in goods and services and flows of foreign investment
The two countries will reduce/eliminate import tariffs, import quotas, export restraints, to encourage trade and investment
Using a chain of reasoning
Explain how a free trade area might stimulate economic growth in Sub-Saharan Africa
- Encourages nations to specialise and trade on basis of comparative advantage
- Absence of trade barriers reduces costs of trade goods/services, increasing intra-regional trade
- Prices of traded goods/services are likely to fall, through increase competition/labour productivity and internal economies of scale
- Increase in real income of consumers, and possible increased demand in consumption. Lower prices may lead to a welfare gain for consumers.
- increased demand may lead to increased demand for labour (derived demand) and capital investment too
- Could lead to a rise in capital spending causing LRAS to shift outward and increase potential growth rate
What could be the welfare gains through free trade
- Lower prices for consumers
- Economies of scale for suppliers
- increased competition in markets
- Improved allocative efficiency
What is a customs union
Comprise a group of countries that agree to
- Abolish tariffs and quotas between nations to encourage movement of goods/services
- Adopt a common external tariff on imports from non-member coun
- Preferential tariff rates to trade agreements that a Union has entered into with third-party countries
An example is the EU
How does a free trade area differ from a customs union
A trading bloc, in a free trade area, is essentially an agreement between countries to lower their import tariffs/possibly no trading barriers. However, each country continue to be able to set their own distinct external tariff on goods imported from the rest of the world
A customs union has no tariffs charged on goods/services moving within the area. It adds on a common external tariff on all products flowing from countries outside the customs union unless specified trade deals have been established. Revenue from import tariffs are combined for all member states
What is a common (single market)
A market that extends beyond free trade in goods and services to include free movement of labour across borders and the relaxation of capital controls
They use a common external tariff and additionally cut back on the use of non-tariff barriers such as different rules on product safety and environmental standards - replacing them with a common set of rules
The European Union is a single market built, in theory, upon four freedoms
What are they
- Free Trade in Goods: businesses can sell their products anywhere in EU member states and consumers can buy where they want with no penalty
- Mobility of Labour: Citizens of EU states can live, study and work in any other EU country
- Free Movement of Capital: Financial capital can flow freely between member states and EU citizens can use financial services in any state
- Free trade in Service: services like pensions, architectural services, telecoms, and adverting can be offered in any EU member state
What would be the benefits of joining the EU specifically and other single markets
- Import-tariff free access to a single market (500 million people)
- Easier to access FDI from (inside/outside EU)
- Access to EU structural funds
- Better access to EU capital markets
- Discipline of intense competition from being inside the EU single market
What is a Monetary Union
Is a form of economic integration beyond single market
An example of this would be the Euro-zone
What could be possible advantages from joining the single currency
- Currency risk - more stable than smaller currencies + enable smaller countries to borrow money
- Trade - enhances trade by encouraging more cross border trade in goods/services
- Investment - like to stimulate inward investment
- Competition - increases price transparency + market competition, allowing consumers to find best price
- Transactions - removes costly conversions of money and labour mobility
List some drawbacks from committing to join a single currency
- A countries central bank loses freedom to set monetary policy interest rates to meet macro-objectives
- loss of option of a managed depreciation of exchange rate to help improve price-competitiveness. To do this a government may have to maintain deflationary fiscal policies to achieve internal deflation
- There are adjustment costs to switching currencies including menu costs and risks some retailers will increase prices when currency is switched to make extra profit
What are the conditions necessary for the success of a monetary union
- Countries are highly integrated - trade with themselves
- Each economy has a flexible labour market to cope with external shocks
- When the effects of interest rates changes/movement in exchange rate have broadly similar effects across states
- When nations are willing to make fiscal transfers between each other + provided financial support
