4.1.5: Trading Blocs & The World Trade Organisation (WTO)

Question 1

What are trading blocs?

Answer 1

Groups that have formed to reduce/eliminate trading barriers between participating countries.

Question 2

What is trade liberalisation?

Answer 2

The freeing of trade from protectionist measures.

Question 3

What is trade creation?

Answer 3

The movement to a lower-cost supplier as a result of joining a trade agreement.

Question 4

What is trade diversion?

Answer 4

A switch from a lower-cost supplier outside of a customs union to a higher-cost supplier located inside of the customs union.

Question 5

What are the 4 types of trading blocs?

Answer 5

-Free trade area.
-Customs union.
-Common market.
-Monetary union.

Question 6

What is a free trade area?
-Example:

Answer 6

A trading bloc where trade barriers between member nations are removed, but members retain independent policies to non-members.
-Example: NAFTA (USA, Canada, Mexico).

Question 7

What is a customs union?
-Example:

Answer 7

A trading bloc that abolishes trade barriers between member nations and establishes a common trade policy with the rest of the world.
-Example: EU (1957-1992).

Question 8

What is a common market?
-Example:

Answer 8

A trading bloc where there is also free movement of factors of production - labour & capital included.
-Example: European Economic Area (EEA).

Question 9

What is a monetary union?
-Example:

Answer 9

A trading bloc with a single currency, with an exchange rate that is monitored and controlled by one central bank with closely co-ordinated monetary policy.
-Example: EU’s Eurozone.

Question 10

What is the criteria required to join the Euro?

Answer 10

• Budget deficits cannot exceed 3% of GDP.
• Gross National Debt has to be below 60% of GDP.
• Inflation has to be below 1.5% of the three lowest inflation countries.
• The average government bond yield has to be below 2% of the yield of the countries with the lowest interest rates. This ensures there can be exchange rate stability.

Question 11

What are advantages of trading blocs?

Answer 11

-Comparative advantage.
-Removal of barriers, so domestic industries face greater competition.
-Firms inside the bloc are protected from cheaper imports from outside (e.g. EU are protected from Chinese imports).

Question 12

What are disadvantages of trading blocs?

Answer 12

-Countries are no longer able to benefit from trade with countries in other blocs, and the blocs are likely to distort world trade, reducing the benefits of specialisation.
-Reduction in competition, as inefficient firms are driven out of the market.
-Trade diversion.

Question 13

What is the World Trade Organisation (WTO)?

Answer 13

An organisation that promotes world trade through reducing trade barriers and policing existing agreements.

Question 14

What is the role of the WTO?

Answer 14

-Covering trade in goods, services & intellectual property rights.
-Sanctioning countries that break their rules.

Question 15

How does the WTO aid in trade agreements?

Answer 15

They hold a series of talks called rounds, where they attempt to come to agreements.

Question 16

What is the problem with the WTO’s role in trade agreements?

Answer 16

All countries must agree to any new rules, so every country has the power to veto an agreement.

Question 17

What are conflicts between trading blocs & WTO?

Answer 17

-Trading blocs affect those who don’t belong to them. A common external tariff contradicts the WTO’s principles.
-Conflicts between blocs could lead to a rise in protectionism.
-WTO is too powerful, and it ignores the problems of developing countries (e.g. developed countries don’t trade completely freely with developing countries, which limits their ability to grow).