4.1.5. Trading Blocs and the World Trade Organisation Flashcards
What is a trading bloc?
A group of countries who come together and agree to reduce or eliminate any barriers to trade that exist between them
What are some examples of trading blocs?
-NAFTA (North America)
-EU
-ASEAN (Asia)
-MERCOSUR (South America)
What are preferential trading areas? (PTA’s)
These are where tariffs and other trade barriers are reduced on some but not all goods traded between member countries
What is a free trade area?
Is a bloc in which countries agree to abolish trade restrictions between themselves but maintain their own restrictions with other countries
What does a free trade area look like?
Slide 6
What is a customs union?
Is an agreement between countries in which all goods/services produced by members are traded tariff free. Additional countries agree on common tariff rates on imports from all external (third party) countries
What does a customs union look like?
Slide 7
What are common markets?
Similar to a customs union, goods/ services are traded tariff free in common markets. The goal is to improve the allocation of resources between the common market members and lower costs of production. European union is customs union and common market
What are monetary unions?
Takes integration a step further. Members enjoy all of the benefits of a customs union and common market, but then also establish a common central bank which issues a common currency and controls the monetary policy of member countries.
What is an example of a monetary union?
The eurozone is a monetary union where many European countries use the euro and the European central bank manages interest rates and money supply for all of them
What are the essential conditions for a successful monetary union?
-Movement of labour should be able to move freely without any major barriers
-Trade cycles of member countries should be similar to avoid tensions within the union
-Should be complete mobility of finance within prices and wages to adjust based on market conditions
-Should be automatic fiscal transfers to countries that are performing poorly
What does trade cycles mean?
The stages of economic growth that an economy moves through including boom, slowdown, recession and recovery
What is mobility of finance?
How easily you can send or invest your money in a different country, business or market
What are fiscal transfers?
When money is moved from one part of a government to another usually to help balance out differences in income, wealth or needs between regions or groups. Its like when richer area or group helps pay to support a poorer area or group through government money. It helps to reduce inequality
What are the benefits of Regional Trade agreements?
-Trade creation improves efficiency and generates higher incomes
-Tariffs eliminated
-Members all use same currency so less uncertainty surrounding exchange rates
What are the costs of Regional Trade agreements?
-domestic industries experience structural unemployment
-increased negative externalities of production, resource depletion and environmental damage
-Monetary union transition can be expensive
What is the role of the WTO? Why?
Established in 1995 to promote free trade. They believe free trade is the best way to raise living standards, create jobs and improve people’s lives
What is trade liberlisation? +e.g.
The process of rolling back the barriers to free trade e.g. removing tariffs
What are the two ways in which the WTO liberalises trade?
- Brings countries together at conferences and encourages them to reduce or eliminate protectionist trade barriers between themselves
- Acts as an adjudicating body in trade disputes as member countries can file a complaint if they believe a trading partner has violated a trade agreement. WTO then run a hearing and make a judgement
What do the costs and benefits of trading blocs depend on?
Whether they lead to trade creation or trade diversion
What is trade creation?
When a country moves from buying goods from a high cost to a lower cost country. Happens when joining a trade union
What is trade diversion?
When a country moves from buying goods in a low cost country to a higher cost country
What are possible conflicts with the WTO?
-Regional Trade agreements contradict WTO’s principles as not all trading partners are treated equally
-Some argue the WTO is too powerful or that it ignores the developing countries as developed don’t trade freely with developing
