4.1.5 Trading blocs and the WTO Flashcards
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 the types of trading agreements/blocs?
- Bilateral trade agreements
- Free trade areas
- Customs unions
- Common markets
- Monetary unions
- Economic unions
Trade agreement
An agreement between governments that aims to increase international trade: to take advantage of comparative advantages, increase choice and stimulate growth.
Two types of trade agreement
- Bilateral trade agreements are between two countries or trading blocs.
- Multilateral trade agreements are between more than two countries or trading blocs.
Free Trade Area
A bloc which countries agree to abolish trade restrictions between themselves, but maintain their own restrictions with other countries.
For example:
NAFTA between the USA, Mexico and Canada.
* The USA refuses to trade with Cuba and has placed a complete ban on all exports/imports to Cuba.
* Canada trades with Cuba but imposes tariffs on all imports
* Mexico trades freely with Cuba.
Customs Unions
An agreement between countries in which all goods/services produced by members are traded tariff free. Countries agree on common tariff rates on imports from all external countries.
Example:
- Countries in the EU have eliminated all tariff barriers between themselves but impose common tariff barriers on third party countries, such as the UK or China.
Common Markets
Common markets are similar to a customs union, but the four factors of production flow freely between member countries.
The goal is to improve the allocation of resources between the common market members and lower costs of production.
- Example: The European Union is a customs union and a common market.
Economic Unions
Under an economic union, countries in the bloc become closely integrated.
Member states adopt the same or similar economic policies, regulations and rules.
Monetary Unions
Under a monetary union, a common central bank is established which issues a** common currency** and controls monetary policy of member countries.
Example of a monetary union: Eurozone. – The Euro is the common currency and the European Central Bank controls elements of monetary policy.
- A monetary union will usually also be an economic union, so it might be referred to as an economic and monetary union.
What is free movement of Labour?
Where labour is able to move freely without any major barriers.
Benefits of Trade Agreements
- Trade creation improves efficiency & generates higher income.
- Tariffs between member states are eliminated.
- Common tariffs to third party countries simplify trading conditions.
- A monetary union simplifies trading costs & provides pricing transparency
- Some member countries gain from improved monetary policy conditions e.g. European interest rates may well be lower than an individual country’s rates would have been
- There is less uncertainty surrounding exchange rates as members all use the same currency
Costs of Trade Agreements
- Trade diversion occurs as countries reallocate trade to partners in their agreement. This may worsen global efficiency.
- Some domestic industries experience structural unemployment
- Increased negative externalities of production, resource depletion & environmental damage
- Transitioning to a monetary union can be expensive & firms may find it hard to adjust/change their menu prices
- Member countries lose their ability to set interest rates & control the supply of money (monetary policy)
- Loss of sovereignty
World Trade Organisation (WTO)
The WTO is an arm’s length body of the UN. – UN fund WTO but it is an independent body.
The WTO acts as a global broker for countries to reduce any tariffs/quotas and any regulatory barriers between countries or trading blocs.
The World Trade Organisation (WTO) was** established in 1995** to promote free trade.
They believe free trade is the best way to raise living standards, create jobs & improve people’s lives
The European Union (EU)
- The EU is arguably the most important trading bloc in the world. In 2015, it had 28 member countries and is in the process of transforming itself from being a customs union to a full economic union.
North American Free Trade Agreement (NAFTA)
- NAFTA is the world’s largest trading bloc measured by the GDP of its three member countries – the USA, Canada and Mexico. Formed in 1994. It is a free trade area which covers trade in goods across the countries. At this stage there are no serious negotiations to move NAFTA from being a free trade area to a customs union.
Biggest issue with the WTO
The WTO judgements are not legally binding.
