4.1.5 Trading Blocs and the WTO

Question 1

what is a trading bloc?

Answer 1

group of countries that have signed an agreement to reduce/eliminate tariffs, quotas + other protectionist barriers between themselves

Question 2

types of trading blocs

Answer 2

preferential trading areas, free trade areas, customs union, common market, monetary union, economic union

Question 3

define free trading areas

Answer 3

when 2 or more countries in a region agree to reduce trade barriers on all goods

Question 4

characteristics of FTAs and examples

Answer 4

• each member can impose its own tariffs + quotas on goods it imports from outside the trading bloc
• e.g. NAFTA (North Atlantic Free Trade Agreement), AFTA (ASEAN Free Trade Agreement)

Question 5

define customs union

Answer 5

• involves removing tariff barriers between members + accepting a common/external tariff against non-members

Question 6

define common market (or single market)

Answer 6

when members trade freely in all economic resources so barriers to trade in goods, services, capital + labour are removed

Question 7

characteristics and examples of common markets

Answer 7

• imposes a common external tariff on imported goods from outside the markets
• e.g. EU, EAC (East African Community)

Question 8

define monetary union

Answer 8

2 or more countries with a SINGLE CURRENCY; exchange rate is monitored + controlled by one central bank OR several w/ closely coordinated monetary union

Question 9

examples of monetary union

Answer 9

Eurozone, African Economic + Monetary Union

Question 10

define economic union

Answer 10

agreement between 2 or more countries to remove barriers to trade; allow free flow of labour, capital + economic policies

Question 11

characteristics of economic union

Answer 11

• integration is more intense in an economic union, as member countries are required to harmonise their tax, monetary + fiscal policies and to create a common currency

Question 12

define trade creation

Answer 12

where trading blocs result in high cost domestic products being replaced by low cost + more efficient imports

Question 13

define trade diversion

Answer 13

when trade is diverted from a more efficient NON-MEMBER exporter to a less efficient MEMBER exporter rather than creating new trade

Question 14

what are the advantages of a free trade area?

Answer 14

ADV:
- increased trade creation - reduced/eliminated barriers -> easier to import/export -> boosts economic activity + growth -> more employment -> job creation
- increased specialisation - according to comparative advantage (specialise in goods with the lowest OC) -> firms benefit from EoS -> lower prices + costs -> more price competitive
- increased competition - removed barriers -> domestic firms face greater competition -> lower prices -> greater variety for consumers -> encourages innovation -> increased quality of services
- access to larger markets - expand consumer base -> increased revenue

Question 15

what are the disadvantages of a free trade area?

Answer 15

• trade diversion - trade is diverted from a more efficienct non-member exporter to a less efficient member exporter rather than creating new trade -> trade imbalances -> consumers may face higher prices (cheaper goods from outside the bloc are replaced)
• limitations of comparative advantage - assumes there’s no transport costs -> hard to find which good to specialise in -> risk of overspecialisation (dependent on producing a few goods + services) -> primary product dependency -> vulnerable to demand/supply shocks -> job losses
• cheaper imported goods -> overreliance on imports -> vulnerable to supply chain disruptions -> harms domestic producers (infant industries) -> may struggle to compete -> job losses

Question 16

pros and cons of a ‘common external tariff’ (seen in a customs union)

Answer 16

ADV:
- prevents trade deflection -> common external tariff on non-member countries -> dtops redirecting imports through a member country of a trade bloc with lower external tariffs to avoid paying higher tariffs in another member country -> prevents unfair cost advantages -> protects domestic industries
DISADV:
- high administrative costs - requires high regulatory oversight

Question 17

pros + cons of ‘factors & asset mobility’ (seen in a common/single market)

Answer 17

ADV:
- employment opportunities - people move to areas with a higher demand for labour -> more geographically mobile -> reduced unemployment + underemployment -> improved standard of living
- knowledge + technology transfer - innovation + productivity -> increased quality of the workforce -> increased LRAS -> price level down -> real GDP up -> potential eco. growth

DISADV:
- brain drain - more skilled workers seek better jobs/living standards in other countries -> limited quality of the workforce in host country
- workforce = occupationally immobile - lack of adequate skills/education -> unable to swtich jobs -> structural unemployment up

Question 18

what are the pros and cons of a ‘common currency’? (monetary union)

Answer 18

ADV:
- increased business confidence -> eliminates exchange rate fluctuations -> more predictable price changes -> firms are more likely to invest -> investment up -> AD up -> real GDP up -> actual eco. growth
- reduced transaction costs - lower prices -> increase profitability
- price transparency -> easier to compare prices across member countries
DISADV:
- loss of economic sovereignty
- lose tool of adjusting to economic shocks (countries cannot set their own interest rates
-