4.1.5 trading blocs and the world trade organisation Flashcards
what are free trade areas
These occur when two or more countries in a region agree to reduce or eliminate trade barriers on all goods coming from other members. Each member is able to impose its own tariffs and quotas on goods it imports from outside the trading bloc.
what are customs union
Customs unions: A customs union involves the removal of tariff barriers between members and the acceptance of a common external tariff against non-members. This means that members may negotiate as a single bloc with third parties such as other trading blocs or countries.
what are common markets
Common markets: This is the first step towards full economic integration and occurs when members trade freely in all economic resources so barriers to trade in goods, services, capital and labour are removed. They impose a common external tariff on imported goods from outside the markets. For a common market to be successful there must also be a significant level of harmonisation of micro-economic policies, common rules regarding monopoly power and anti-competitive practices and the removal of custom posts. There may also be common policies affecting key industries such as the Common Agricultural Policy (CAP). The main goal of a common market is to establish a single market, the same way in which there is a single market within an individual economy.
what are monetary unions
Monetary unions: These are 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. Some examples include the EU, the West African Economic and Monetary Union and the Economic and Monetary Community of Central Africa.
what are the conditions for a monetary union to operate efficiently
use of a common currency, central monetary authority setting interest rates and money supply, maintaining a fixed exchange rate with the common currency, and largely independent fiscal policies.
what are the advantages of a monetary union
Countries can gain from a monetary union through lower transaction costs and the elimination of exchange rate variability, spurring investment, intraregional trade, and economic growth.
what are the disadvantages of a monetary union
loss of monetary policy independence and vulnerability to asymmetric shocks.
can’t benefit from a depreciation of currency as all members have the same currency so can’t boost AD through that
what are the benefits of regional trade agreements
● 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, but this may be difficult given different customer markets in different countries. It will be easier for some products, such as basic chemicals and cars, than for other products and easier between some countries, such as France and the UK, than between others, such as Iran and UK. Economies of scale will be increased further over time as companies expand.
● Firms inside the bloc are protected from cheaper imports from outside, for example those in the EU are protected from Chinese imports.
● Another dynamic benefit may be competition, as the removal of barriers means domestic industries face greater competition. 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.
what are the costs of regional trade agreements
● Countries are no longer able to benefit from trade with countries in other blocs and the blocs are likely to distort world trade, reducing the benefits of specialisation. Inefficient producers within the bloc are protected from efficient producers outside the bloc, called trade diversion.
● There may be a reduction in competition as inefficient firms are driven out of the business and the market becomes oligopolistic.
● One dynamic loss may be the loss of resources, as the most successful countries will attract capital and labour (since both are free in a common market) and so this heightens regional inequalities as the richest countries experience faster rates of growth. Firms may set up factories etc. in the poorer countries, as labour is cheaper, and therefore this will help them to grow but will also mean that they lose the most skilled labourers to more successful countries as this is where the best jobs are based.
● There could also be retaliation as the creation of one regional trading bloc will lead to the creation of others and this can lead to trade disputes.
● Creating and maintain trading blocs can distract governments from the gains of signing full free trade agreements. Bilateral trade agreements can bring very little gain to the two countries making the agreement but can take up significant government resources.
● They distribute the gains from trade unequally, with developed countries often gaining most and developing countries being impacted little.
● They may be weak if they cover a very limited range of goods.
● They lessen national sovereignty.
● Trading blocs can be seen as ‘second best’ solutions in a world with protectionism.
Economic efficiency would be maximised if there were no barriers to trade
