4.1.5 - Trading blocs and the World Trade Organisation (WTO)

Question 1

state types of trading blocs (regional trade agreements and bilateral trade agreements)

Answer 1

o free trade areas
o customs unions
o common markets
o monetary unions: conditions necessary for their success with particular reference to the Eurozone

Question 2

define free trade areas

Answer 2

A free trade area (FTA) is one where there are no tariffs or taxes or quotas on goods and/or services from one member country entering another. but countries may choose to individual impose restricitons on non member countries -nafta

Question 3

define customs unions

Answer 3

A group of countries that abolish tariffs and quotas between member nations to encourage free movement of goods and services. Adopt a common external tariff on imports from non-members countries. The European Union/mercosur (sout america) is a customs union, ASEAN

Question 4

define commons market

Answer 4

• A single market providing for participating countries free trade in goods and
  services and free movement of labour and capital. The European Union is
  a single market, so is caricom
• customs union but with free movement of FOP

Question 5

define monetary unions

Answer 5

An intergovernmental agreement that involves two or more states sharing
the same currency, same central bank and same monetary policy. e,g eurozone

Question 6

define eurozone

Answer 6

The consists of those member states of the EU that use the Euro as their currency.

Question 7

define common external tariff

Answer 7

A CET is an import tariff applied equally by each country participating in a customs union, e.g. the EU might impose a common tariff on imported whisky from Japan

Question 8

define bilateral trade agreement

Answer 8

An agreement to lower import tariffs and other trade barriers between two countries – for example between South Korea and Australia.

Question 9

what is the role of the ECB

Answer 9

o ECB distributes notes and coins, sets interest rates, maintains a stable financial situation and manages the foreign currency
reserves.

Question 10

what was agreed in eu relating to eurozone

Answer 10

In the EU, the governments agreed not to exceed a fiscal deficit of more than
3% and not to have a National Debt of more than 60%.

Question 11

why did eurozone not work well

Answer 11

• there should be free movement of
  labour, capital mobility and wage and price flexibility, fiscal transfers from one
  country to another when a country is performing poorly, and countries should
  share the same business cycle.
• The main problem for the EU is the lack of automatic fiscal transfers, for example these would have helped Greece,
  Spain and Portugal following the financial crisis of 2007-08.

Question 12

benefits of a regional trade agreement

Answer 12

• Free trade encourages increased specialisation, and this increases output, according to comparative advantage. This specialisation also helps firms to benefit from economies of scale, causing lower prices and costs, a dynamic advantage.
• Firms may be able to grow much larger by creating a larger customer market ,
• Firms inside the bloc are protected from cheaper imports from outside, for example
  those in the EU are protected from Chinese imports
• competiton - this encourages innovation and lower prices, leading to improvements in productive and allocative efficiency.
  ● The increased trade may create more jobs if it leads to an increase in output
  ● There will be increased choice for consumers.
• more fdi

Question 13

cons of regional trade agreement

Answer 13

• decline of uncompetitive sectors
• risk of structural unemployment
• trade diversion
• potentially less efficient of allocation or resources (trade diversion > trade creation)
• inequalities heighten as most successful countries in a bloc will attract capital and labour
• retaliation in trade blocs - new blocs created to rebel, trade disuputes start
• lessen national sovereignity

Question 14

difference between trade creation and trade diversion

Answer 14

Trade creation is when a country
moves from buying goods from a high cost to a lower cost country, whilst trade diversion is when they go from low cost to a higher cost.

Question 15

importance of trade creation and diversion

Answer 15

The costs and benefits of trading blocs will depend on whether they lead to trade creation or trade diversion

Question 16

define trade bloc

Answer 16

A group of countries co-operating to liberalize and increade trade between each other.

Question 17

define wto

Answer 17

• the WTO polices free trade agreements and decides on trade disputes
  between countries. It arranges trade negotiations to liberalize trade for
  member countries by mutually agreed reductions in tariffs & quotas and
  opening domestic markets up to foreign competition.

Question 18

evaluate monetary unions

Answer 18

• prices are fixed as all currencies are the
  same and there are reduced exchange rate costs.
• It becomes easier for prices to be
  compared across the union and so MNCs are less able to price discriminate.
• However, there are financial costs involved with starting the new currency and there
  would be costs if the union broke up. There is a loss of policy independence, countries are
  unable to change the value of their currency and what is good for one country may not be
  good for another

Question 19

state 7 features of the eu

Answer 19

• tariff and quota free trade between members
• common external taruiffs and quotas on imports from non-member countries
• common policies - agriculutre, fishing, comp, regional and environmental
• free movement of labour and capital
• coordination of economic policies
• 17/28 members adopt the euro - monetary union

Question 20

pros of eu membership

Answer 20

• free trade = jobs, higher GDP/capita, growth
• increase FDi
• HUGE MARKET size
• contributions to eu budget can be a very small %of gdp
• single market

Question 21

Cons of eu membership

Answer 21

• forced to follow eu laws
• costs of contribution to eu budget, discourages eu, ESP FOR POORER COUNTRIEs
• trade benefits could accrue from FTAs instead (including w nations outside eu)
• high level of immigration

Question 22

pros of a monetary union e.g eurozone

Answer 22

• non fluctuating exchange rate (more stability esp for small countries)#
• decreased cost from currency conversion
• increased biz confidence (plan for future and more imports/investment)
• currency more stable against speculation
• easier to compare country prices

Question 23

Cons of monetary union

Answer 23

• loss of monetary polciy autonomy whihc is bad bc economic circumstances vary between each countries (e.g prior to 2008, uk experienced boom and ecb set low interest rates so if they were part of euro, could’ve caused a bubble)
• no potential to alter exchnage rates
• cost of currency conversion is v high
• lack of fiscal union (countires reckless w fiscal policy can destabilise union shown by greece and portugal)

Question 24

examples of customs unions

Answer 24

• sacu: south african customs union :bostwana, lesotho, namibia, south africa and swaziland