4.1.5 Trading blocs and the WTO Flashcards
Trading bloc
A group of countries who have signed an agreement to reduce or eliminate tariffs, quotas, and other protectionist barriers between themselves.
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 only two countries or trading blocs.
- Multilateral trade agreements are between more than two countries or trading blocs.
Preferential trading area
Where Tarif and other trade barriers are reduced on some but not all goods traded between member countries.
Free Trade Area
A bloc which countries agree to abolish tariffs and trade barriers between themselves (e.g quotas), but maintain their own trade restrictions with other countries.
For example:
USMCA 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 there is free trade within a trading bloc so no tariffs and quotas. Countries agree on common tariff rates on imports from all external countries outside trading bloc.
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, so labour , capital, enterprise, land(economic agents can buy land).
The goal is to improve the allocation of resources between the common market members and lower costs of production.
Additionally product standards and laws concerning free movement of goods and services are common between countries.
- 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, rules, some degree of fiscal union, with a cameral body having power off monetary activities, taxation and spending.
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.
When did monetary union fail
Eurozone crisis: High inflation in Southern Europe particularly Greece but due to same monetary policy and currency shared amongst many countries couldn’t change interest rate to reflect change in inflation rate.
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.
The Association of Southeast Asian Nations (ASEAN)
- Formed in 1992 between Brunei, Indonesia, Malaysia, Philippines, Singapore and Thailand. It now includes Laos, Cambodia, Myanmar and Vietnam.
- Economic agreement creating a “free trade area”.
Union of South American Nations (UNASUR)
- A union of two South American trading blocs. The aim is to create a single market between member countries but little progress has been made to date on this issue.
Mercosur
- A Southern American customs union between Argentina, Brazil, Paraguay and Uruguay.
Asia-Pacific Trade Agreement (APTA)
- The oldest preferential trade agreement between countries in the Asia-Pacific region. Signed in 1975 and was formally known as the Bangkok agreement.
- Members include Bangladesh, China, India, South Korea, Laos, Mongolia and Sri Lanka.
Trade liberalisation
The process of rolling back the barriers to free trade e.g. removing tariffs.
WTO’s roles in liberalising trade
1) It brings countries together at conferences & encourages them to reduce or eliminate protectionist trade barriers between themselves e.g. The Doha Round conferences
2) It acts as an adjudicating body in trade disputes. Member countries can file a complaint if they believe a trading partner has violated a trade agreement. The WTO will then run a hearing & make a judgement.
How might trade agreements/blocs create conflict?
- Regional agreements often shift trade from a non-member who has comparative advantage, to a member who does not.
- Regional trade members then often institute common trade barriers on non-members which is the opposite of trade liberalisation (protectionism).
Biggest issue with the WTO
The WTO judgements are not legally binding.
describe the stages of economic integration
- Preferential trading area: where countries agree to reduce or abolish tariffs, quotas and other protectionist barriers on some goods been traded.
- Free trade area : where quotas and tariffs have been abolished between member countries but countries may impose quotas on trade with countries outside the area.
- Customs union: there is free trade between member states an a common external tariff.
- Single market (common market) : this is a customs union but with the free movement of factors of production.
- Monetary or economic union: where member states share a common currency, which means there is a single central bank for unions which controls monetary and exchange rate policy.
Final stage is political union .
What is trade creation
Trade creation is said to take place when a country moves from buying goods from a high cost country to buying them from a lower-cost country.
Trade creation refers to the increase in economic welfare from joining a free trade area, such as a customs union.
Trade creation will occur when there is a reduction in tariff barriers, leading to lower prices. This switch to lower cost producers will lead to an increase in consumer surplus and economic welfare.
What is the trade creation diagram (important )
What is trade diversion
When a country moves from buying goods from a low-cost producer to buying them from a higher cost producer.
Trade diversion occurs when tariff agreements cause imports to shift from low-cost countries to higher-cost countries. Trade diversion is considered undesirable because it concentrates production in countries with a higher opportunity cost and lower comparative advantage.
Trade diversion may occur when a country joins a free trade area with a common external tariff.
what is the normal trade diversion diagram
Summing up trade creation/diversion
In general the higher the tariffs imposed by a country before entry to a common market, the more likely it is that trade creation rather than trade diversion will take place. It is also true that the net gains will tend to be larger, the greater the volume of trade between the countries in the common market.
