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

Question 1

What Is A Regional Trading Bloc?

Answer 1

Group of countries who come together and agree to reduce or eliminate any barriers of trade that exist between them.

Question 2

What Is A Regional Trading Bloc A Form Of?

Answer 2

Economic integration.

Question 3

What Is Economic Integration?

Answer 3

Process by which countries form an agreement decreasing barriers to trade and increasing common monetary and fiscal policies.

Question 4

What Is An Example Of Low Integration?

Answer 4

A bilateral agreement.

Question 5

What Is A Bilateral Agreement?

Answer 5

Between one country and another.

Question 6

What Is An Example Of High Integration?

Answer 6

A monetary union.

Question 7

What Do Trading Blocs Increase?

Answer 7

The level of economic integration.

Question 8

What Are The Types Of Trading Blocs?
(4 Points)

Answer 8

~ Free trade areas.

~ Customs union.

~ Common markets.

~ Monetary unions.

Question 9

Describe Free Trade Areas
(2 Points)

Answer 9

~ Bloc in which countries agree to abolish trade restrictions between themselves but maintain their own restrictions with other countries.

~ Each member is allowed to impose its own tariffs and quotas on goods it imports from outside the trading bloc.

Question 10

Describe Customs Union
(3 Points)

Answer 10

~ An agreement between countries in which all goods and services produced by members are traded tariff free.

~ Countries agree on common tariff rates on imports from all external countries.

~ Members may negotiate as a single bloc with third parties such as other trading blocs or countries.

Question 11

Describe Common Markets
(4 Points)

Answer 11

~ Goods and services are traded tariff free.

~ They impose a common external tariff on imported goods from outside markets.

~ The 4 FOPS flow freely between member countries.

~ Goal is to improve the allocation of resources between the common market members and lower the costs of production.

Question 12

Describe Monetary Unions
(4 Points)

Answer 12

~ Members enjoy all of the benefits of a customs union and common market.

~ Also establishes a common central bank which issues a common currency and controls the monetary policy of member countries.

~ Exchange rates are monitored and controlled by one central bank or several central banks with closely coordinated monetary policy.

~ The Eurozone is an example.

Question 13

What Are The Benefits Of A Monetary Union?
(4 Points)

Answer 13

~ Mean prices are fixed as all currencies are the same.

~ Reduced exchange rate costs.

~ Easier for prices to be compared across the union.

~ MNCs are less able to price discriminate.

Question 14

What Are The Drawbacks Of A Monetary Union?
(4 Points)

Answer 14

~ High costs if the union broke up.

~ A loss of policy independence.

~ What is good in one country might not be good for another.

~ Loss of sovereignty.

Question 15

What Is Sovereignty?

Answer 15

Decision making processes and authority of the state.

Question 16

Describe The Eurozone

Answer 16

European Central Bank distributes notes and coins, sets interest rates, maintains a stable financial position and manages the foreign currency reserves.

Question 17

What Are The Conditions Needed For A Monetary Union To Be Successful?
(5 Points)

Answer 17

~ Free movement of labour.

~ Capital mobility.

~ Wage and price flexibility.

~ Fiscal transfers from one country to another, when a country is performing poorly.

~ Countries should share the same business cycle.

Question 18

What Is Trade Creation?

Answer 18

When a trade agreement shifts production of certain goods or services from a high-cost country to a low-cost country.

Question 19

What Is Trade Diversion?

Answer 19

When the formation of trading blocs results in the production of a good or service transferring from one country with a lower opportunity cost to one with a higher opportunity cost.

Question 20

What Are The Benefits Of Regional Trade Agreements?
(9 Points)

Answer 20

~ Trade creation, improves efficiency and generate higher income.

~ Tariffs between member states are eliminated.

~ A common tariff to third party countries simplifies trading conditions.

~ Increased choice for consumers.

~ Creates more jobs.

~ Creates more competition.

~ Protected from cheaper imports from the outside.

~ Creates a larger customer market.

~ Encourages specialisation.

Question 21

What Are The Costs Of Regional Trade Agreements?
(6 Points)

Answer 21

~ Trade diversion, may worsen global efficiency.

~ Some domestic industries experience structural unemployment.

~ Increased negative externalities of production, like resource depletion and environmental damage.

~ Distorts world trade.

~ Reduction in competition.

~ Retaliation.

Question 22

Describe The World Trade Organisation (WTO)
(2 Points)

Answer 22

~ Established in 1995 to promote free trade.

~ They believe free trade is the best way to raise living standards, create jobs and improve peoples lives.

Question 23

What Is Trade Liberalisation?
(2 Points)

Answer 23

~ Process of rolling back the barriers to free trade.

~ E.g. Removing tariffs.

Question 24

What Are The 2 Main Roles of The WTO In Liberalising Trade?

Answer 24

~ It brings countries together at conferences and encourages them to reduce or eliminate trade barriers between themselves.

~ Acts as an adjudicating body in trade disputes.

Question 25

What Are Some Conflicts Between Regional Trade Agreements & The WTO?

Answer 25

~ Regional trade agreements can be beneficial for member countries but may result in global inefficiency in the allocation of resources.

~ Some might argue that the WTO is too powerful or that it ignores the developing countries.