4.1.5 Trading blocs and WTO Flashcards
Types of trade agreements
Regional trade agreements (RTAs): involve trade agreements between countries within a geographic area
Bi-lateral trade agreements: between countries or two trading blocs
Free trade areas
-A group of countries with no barriers to trade in most goods and services
-Each member can impose its own restrictions on goods exported from outside the trading bloc
-Exploit comparitive advantage increasing efficiency
(NAFTA, ASEAN)
(most common)
Customs union
-Free trade area with common external tariff
-All members adopt a common trade policy towards all non-member countries
-Stronger bargaining power
Common market and its benefits
-Customs union with completely free movement of goods, services, labour, capital
-Must be a significant level of harmonisation of micro-economic policies - monopoly power, anti-competitive policies
Benefits:
-Deal with labour shortages
-Lower unemployment
-Freedom of movement results in higher productivity and rising GDP
-Diverse and skilled workforce
Monetary union and its benefits
-A common market with a common currency and a common monetary policy (e.g. eurozone)
-Exchange rate monitored and controlled by one central bank
-Economies should share same business cycle
-In EU govs agreed to not exceed a fiscal deficit of more than 3%
Benefits:
-prices are fixed
-MNCs less able to price discriminate as it is easier for prices to be compared across the union
Eval:
-financial costs involved in starting new currency - costs if the union breaks up
-Loss of policy independence
-Countries unable to change value of currency - what is good for one may be bad for another
-Euro created in 1999 by eurozone
-Same interest rate, currency, monetary policy
-Countries must respond similarly to external shocks or policy changes
Economic union
Monetary union + common fiscal policy/transfers
-Final step of economic integration
Benefits of regional trade agreements
Benefits: static benefits from specialisation, dynamic benefits from increased competition and resources transfer
-Encourages specialisation and comparative advantage, economies of scale, lower prices and costs
-Create a larger consumer market
-Firms inside the bloc are protected from cheaper imports from outside
-Competition due to removal of barriers within the bloc - encourages innovation and lower prices leading to productive and allocative efficiency
-More jobs - derived demand from g+s
-Increased consumer choice
Costs of regional trade agreements
-Countries cannot benefit from trade with countries in other blocs - reducing benefits of specialisation - inefficient producers within bloc are protected from efficient producers outside of bloc - trade diversion
-Regional inequalities as richest countries will attract capital and labour - gains distributed unequally
-Brain drain as richer countries may request more skilled labour - more job opportunities there
-Retaliation - trade disputes
-Economic efficiency would be maximised if there were no barriers to trade completely
Role of WTO
- Promotes world trade through reducing trade barriers and policing existing agreements
- Settles trade disputes
- Those who break rules face trade sactions
- 166 members as of 2024 august
Possible conflicts between regional trade agreements and the WTO
-Inefficient allocation of resources - eg. EU cap
-Conflicts between blocs could lead to a rise in protectionism - common external tariffs contradict WTO principles
-Argument that WTO is too powerful and ignores the problems of developed countries as they do not trade completely freely with developing countries limiting their ability to grow
