4.1.5 - trading blocs and the WTO Flashcards
What is a trading bloc?
A group of countries that have signed an agreement to reduce or eliminate tariffs, quotas and any other protectionist policies between them.
What are the four types of trading blocs?
- Free trade areas (FTAs)
-Customs Unions
-Common Market
-Monetary Union
What is a free trade area?
A trading bloc where participating countries agree to abolish trade restrictions between themselves but maintain tariffs and quotas with other countries. The countries are able to retain/adopt independent external trade policies. eg. NAFTA -North American Free Trade Agreement
What is a customs union?
Free trade between member countries and a common set of protectionist measures on countries outside the block eg. EU
What is a common market?
Same characteristic as a customs union but FOPs, such as labour and capital, have free movement within the block eg. AEC - Asian Economic Community
What is a monetary union?
Group of countries that adopt a single currency, central bank and interest rates, eg. Europe/EU
What are the advantages of monetary unions/regional trade agreements?
-Elimination of transaction costs: single currency = no exchange rate costs in making transactions, as usually there are costs that arise from the risk factor of currencies changing daily in the floating exchange system
-Price transparency: many national markets and different currencies, economic agents are likely to have imperfect information about prices. A single currency allows for easier comparisons, leads to lower prices overall.
-Reduced exchange rate uncertainty: single currency means fixed prices an elimination of risks from exchange rate fluctuations between member countries
-Increased attractiveness for FDI: companies avoid tariffs and quotas on goods from outside EU, UK experiences high amounts of FDI due to close proximity to the EU market, but there are exchange rate risks and uncertainty
What are the disadvantages of monetary unions/regional trade agreements?
-Transition costs: creation of a single currency creates transition costs eg. bank employees may lose their jobs as foreign exchange departments are cut down, customers have to get used to using a new currency
-Loss of independent monetary policy: a single currency means countries have common monetary policy eg. the European Central Bank sets monetary and fiscal policy for the EU, some countries may be disadvantaged by policy changes
-Loss of exchange rate flexibility: countries can’t devalue their currency against other countries in the union, so they are unable o respond to some economic problems.
What does the World Trade Organisation (WTO) do?
The WTO promotes free trade between member countries through trade negotiations. It is responsible for resolving trade disputes between countries. Aims to bring about trade liberalisation.
What are the conditions necessary for the success of monetary unions? (reference to the EU)
-Fiscal discipline = fiscal deficit should be less than 3% of GDP and national debt should be worth less than 60% of GDP
-convergence criteria = synchronised business cycle eg. similar inflation, growth rate, unemployment levels, comparative advantage
-Common monetary policy = central bank sets interest rates, loss of monetary policy autonomy/sovereignty
What is trade creation?
Trade creation occurs when a trade agreement increases trade to a country through free trade policies
What is trade diversion?
Trade diversion occurs when a non member nation experiences structural unemployment and a loss of economic growth due to not being a part of a certain trading bloc. This conflicts the primary aims of the WTO.
