4.1.5: Trading Blocs & The World Trade Organisation (WTO) Flashcards
What are trading blocs?
Groups that have formed to reduce/eliminate trading barriers between participating countries.
What is trade liberalisation?
The freeing of trade from protectionist measures.
What is trade creation?
The movement to a lower-cost supplier as a result of joining a trade agreement.
What is trade diversion?
A switch from a lower-cost supplier outside of a customs union to a higher-cost supplier located inside of the customs union.
What are the 4 types of trading blocs?
-Free trade area.
-Customs union.
-Common market.
-Monetary union.
What is a free trade area?
-Example:
A trading bloc where trade barriers between member nations are removed, but members retain independent policies to non-members.
-Example: NAFTA (USA, Canada, Mexico).
What is a customs union?
-Example:
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).
What is a common market?
-Example:
A trading bloc where there is also free movement of factors of production - labour & capital included.
-Example: European Economic Area (EEA).
What is a monetary union?
-Example:
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.
What is the criteria required to join the Euro?
- 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.
What are advantages of trading blocs?
-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).
What are disadvantages of trading blocs?
-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.
What is the World Trade Organisation (WTO)?
An organisation that promotes world trade through reducing trade barriers and policing existing agreements.
What is the role of the WTO?
-Covering trade in goods, services & intellectual property rights.
-Sanctioning countries that break their rules.
How does the WTO aid in trade agreements?
They hold a series of talks called rounds, where they attempt to come to agreements.
What is the problem with the WTO’s role in trade agreements?
All countries must agree to any new rules, so every country has the power to veto an agreement.
What are conflicts between trading blocs & WTO?
-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).
