4.1.5 Trading blocs and the WTO Flashcards
LS4
Problems with international trade in first half of 1900s?
- High degree of protectionism
- No trade disputes settlement mechanism
Problems with GATT? (General Agreement on Tariffs and Trade)
- Only a treaty (not permanent)
- Flawed trade dispute settlement mechanism
WTO?
- Permanent institution
- Formed in 1995
- Provided formal mechanism to resolve trade disputes
Trade bloc?
A group of countries that mutually agree to remove/reduce trade barriers
FTA?
- Free Trade Agreement
- Type of trade bloc (bilateral or multilateral)
- Reduce trade barriers below WTO levels
- Members still have their own independent trade policies with non-members
e.g. NAFTA, ASEAN
Advantages of FTAs?
- Competitive sectors benefit e.g. Mexican car industry, textiles, meat
- Improved choice for consumers and firms
- Reduced admin costs
- Increase in FDI
- Trade creation (more efficient allocation of resources if TC > TD)
Disadvantages of FTAs?
- Decline of uncompetitive sectors
- Risk of structural unemployment
- Trade diversion (less efficient allocation of resources if TD > TC)
- Individuals countries lack bargaining power
- Other countries may set trade policy in a way that improves competitiveness of rival firms/industries
Trade diversion?
- When trade moves from a low cost to producer to a high cost producer due to the formation of a trade bloc
(due to changes in tariffs)
Trade creation?
- When trade moves from a high cost to producer to a low cost producer due to the formation of a trade bloc
Customs union?
- Free trade areas that impose uniform trade restrictions on non-members
Common external tariff?
- A trade policy agreed by the members of a customs union that sets identical restrictions on trade to non-members
Advantages of a customs union?
- Increased bargaining power when negotiating trade deals
- Ability to set common external tariffs to protect industries
Disadvantage of customs union?
- Loss of independent trade policy
Remaining trade restrictions in FTAs and CUs?
And how do Single Markets/Common Markets solve these problems?
- Firms have to modify products based on diff countries standards
- Checks of goods and paperwork still required at borders
- Workers still need visas to work throughout the bloc
- Countries set diff standards on qualifications (e.g. doctors, lawyers etc)
- Common standards agreed through collective decision making
- Freedom of movement for labour
Downside to a Single Market?
- Loss of sovereignty over decision making
Monetary union?
- Agreement between a group of countries to share the same currency
Has a common central bank responsible for monetary policy e.g. EU Central Bank
Advantages of a monetary/currency union?
- Exchange rate risk is eliminated
- Greater price transparency
Disadvantages of currency unions?
- Loss of independent monetary policy
- Difficult to gain competitiveness through devaluations
Optimal conditions for a currency union?
- Similar business cycles
- Automatic fiscal transfers from central bank
- Highly mobile labour
Last 2 = countries have other ways of recovering from economic shocks other than relying on flexibile exchange rates + independent monetary policy
