4.1.5 Trading Blocs + WTO Flashcards
1
Q
What is a trade bloc?
A
Agreements between countries on trade
2
Q
What is a RTA?
A
- regional trade agreement
- e.g. EU, West Africa
- often countries trade with neighbouring countries
3
Q
What is a free trade area?
A
- countries agree to engage in free trade
- e.g. NAFTA = North American free trade agreement
4
Q
What is a customs union?
A
- free trade between members, with a common external tariff (CET) imposed on non-members goods
- e.g. EU
5
Q
What is a common market?
A
- free trade between members, with CETs imposed on non-members + agreement of free movement of capital (FDI, multinationals etc.) + labour
6
Q
What is an economic union?
A
- free trade between members, CETs imposed on non-members, free movement of capital + labour, more integrated economic policies
- e.g. monetary union
7
Q
Why are the impacts of trade blocs not always positive?
A
- trade blocs e.g. customs union contains features of both free trade (internal free trade) + protection (CETs)
- therefore, it does not provide an unequivocal case for gain for all countries involved
8
Q
Impact of removal of tariffs within a trade bloc
A
- increase goods sold from the lowest cost producer within the trade bloc to the higher cost products
- lowest cost producer will sell more goods = trade creation
- trade creation allows resources to be allocated according to comparative advantage = improves the use/allocation of world resources as opportunity cost within the world economy is reduced
9
Q
What is trade creation?
A
- where a trade bloc leads to a greater specialisation according to comparative advantage
- this shifts production from higher cost to lower cost sources of production
- (could use removal of tariffs diagram)
10
Q
How could trade blocs lead to trade diversion?
A
- if the lowest cost producer is not in the trade bloc + the CET results in higher import price than the lowest-cost trade bloc producer = trade diverted
- trade is diverted from a low-cost external source of supply to a higher cost internal source of supply
11
Q
What is trade diversion
A
Where a trade bloc diverts consumption from goods produced at a lower cost outside the union to goods produced at a higher cost (but tariff free) within the trade bloc
12
Q
What does the impact of trade creation depend on?
A
A net gain will occur if trade creation exceeds trade diversion, which depends on:
- relative costs of production in countries concerned
- level of tariffs prior to the formation of the trade blocs, where the tariffs were high prior to formation of the bloc it is more likely to create trade
- level of CET = if high, more likely to divert trade to a higher cost producer away from lower cost producer
13
Q
Evaluation of trade creation/ free trade
A
- May be a need to protect infant industries
- tariffs can be used to counteract dumping (selling goods below AC)
- question assumptions that lie behind comparative advantage e.g. no transport costs = transport costs may make goods from the lower cost producer more expensive - outweighs comparative advantage?
- environmental issues of flying/shipping goods around the world - is it better for the environment to have more local production?
14
Q
What does the dynamic effects of trade blocs mean?
A
This is concerned with how regional integration induces changes in the quantity of quality of factors of production, improvements of tech + changes to competitive environment
15
Q
Dynamic effects of trade blocs
A
- reaping economies of scale
- reducing monopoly power
- incentive to increase investment + innovation
- increase in FDI
16
Q
Economies of scale (effect of trade blocs)
A
- production for a larger market could lead to lower LRATC - much will depend on the degree of integration of fragmented markets + significance of transport costs
- external economies = development of pool of skilled labour; creation of network of suppliers + support services etc.
- formation of custom unions may give even greater chance for development of clusters e.g. Milan for high fashion
- HOWEVER - diseconomies of scale
17
Q
Reducing monopoly power (effect of trade blocs)
A
- stimulus to price + non-price competition
- reducing levels of X-inefficiency = over meaning, excessive holdings of stocks + other slack management
- HOWEVER - growth of multinationals may restrict competition e.g. create barriers to entry for smaller firms e.g. advertising, economies of scale
18
Q
Investment + FDI (effects of trade blocs)
A
- incentive to increase investment + to introduce new technology to meet demands of the new larger markets
- increase in FDI ( as seen in common market) - e.g. EU has seen a big increase in multinationals —> inward FDI to avoid CET = positive multiplier effect for the area the firm invests in
19
Q
Costs of trade blocs
A
- adjustment costs
- regional multiplier effect
- monopoly/oligopoly power
- emergence of regional trade blocs
- growth of multinationals
20
Q
Adjustment costs (cost of trade blocs)
A
- applies to countries/firms in an adverse way by the formation of trade blocs e.g. a fall in demand for their exports or increase in demand for imports = domestic market losses + leave the industry = unemployment increases
- structural unemployment could have damaging impacts on the region/local economy
- resources need to be geographically +occupationally mobile to prevent this
21
Q
Regional multiplier effects (costs of trade blocs)
A
- downward multiplier effect from closures
- impact on structure of the workforce - young, qualified leave + old, less qualified stay
- region becomes less attractive for new investment
- infrastructure deteriorates = danger of downward spiral for those areas
22
Q
Monopoly/oligopoly power (cost of trade blocs)
A
- formation of the single market may encourage the development of monopoly power across the European market
- potential to exploit customers = higher prices + less choice (increased standardisation)
- firms could act collusively
23
Q
Emergence of regional trade blocs (costs)
A
- May promote a tendency for regional blocs to dominate the pattern of trade e.g. Europe v. America - disputes tend to develop between these groups (e.g. steel)
24
Q
Growth of multinationals (costs of trade blocs)
A
- drive out local businesses and/or use suppliers from home country
25
What conditions are necessary in a monetary union?
- countries joining a single currency need to have their economies aligned = convergence
- similar interest rates + inflation so then one interest rate + exchange rate can be suitable for all
- similar borrowing levels
- convergence needs to be sustained
26
Example of a monetary union?
Eurozone = 20 countries
27
Criteria for the eurozone
- interest rates + inflation need to be aligned to achieve target inflation of less than 2%
- budget deficit no more than 3% of GDP
- national debt no more than 60% of GDP
28
Advantages of the Euro
- **trade creation** = no long a requirement to exchange currencies when trading, encourages trade between member states = price of goods + services will not be influenced by exchange rate fluctuations
- **transaction costs** = currency transaction costs are zero = lowers business costs which can help reduce prices + promote efficiency
- **price transparency** = consumers + firms do not have to factor exchange rates into price comparisons = increases competition, reduces prices, increases consumer surplus + improves efficiency
- **certainly** = a single currency gives greater certainty for consumers + firms as prices can be accurate predicted within the euro area = encourages investment + economic growth
29
Disadvantages of the euro
- trade diversion = trade can be diverted away from countries that do not have the euro due to exchange rate risks + transaction costs
- loss of control of monetary policy = ECB sets interest rates for all countries in eurozone, which may not be appropriate to them all
- convergence issues = countries who want to join must achieve certain economic criteria so that economies are ‘comverged’ = May be achievable in short term but May hide underlying structural issues or create future problems
- fiscal policy constraints = stability + growth pact requires the govt to strictly control their budget deficits = creates limitations for the govt to meet their own economic objectives + hard to keep to due to external factors e.g. Covid
- asymmetric shocks = a single policy by the ECB might affect members in different ways as some countries will be more sensitive to changes + will want to respond in different ways which is not allowed
30
What are the aims of the WTO?
- aims to lower trade barriers + encourage international trade by helping countries negotiate the necessary agreements
- therefore contributing to economic growth + development
- specific aim e.g. reducing/eliminating obstacles to trade (trade blocs with CETs), agreeing rules for trade (anti dumping, subsidies guidelines), monitoring trade agreements to ensure fair play, settling disputes
31
State 4 functions of the WTO
- negotiation forum = govts go to discuss + solve trade issues
- organisation for liberalising trade e.g. free trade
- set of rules = based on the WTO agreements signed by the majority of the worlds trading nations which provide legal rules for international commerce (contracts binding govts), need to be transparent + predictable
- helps to settle disputes = trade relations often involve conflicting interests = settle these using a neutral procedure based on agreed legal foundation
32
What principle does the WTO follow?
- most favoured nation principle = countries can’t discriminate between their trading partners
- therefore, a reduction in a tariff for one country must be extended to all countries
33
Under what circumstances does the WTO allow protectionism?
- actions taking against dumping
- subsides + special ‘countervailing’ duties to offset the subsidies
- emergency measure to limit imports temporarily, designed to ‘safeguard’ domestic industries
34
What is anti-dumping actions?
- dumping is when a company exports a product at a price which is lower than the price it normally charges in its home country = unfair competition
- many govts take action against dumping to protect their domestic industry
- the WTO agreement allows govts to act against dumping where genuine (material) injury to the competing domestic industry is occurring
- the govt has to be able show dumping is taking place + calculate the extent of dumping (how much lower the export price is compared to home market price)
35
Record of the WTO
- successful in reducing tariffs on manufactured goods
- less successful in reducing barriers to trade in services + non-tariff barriers have grown e.g. administrative regulations which offset some of the gains from tariff reduction
- negotiation forum not always successful in resolving disputes
36
Criticisms of WTO
- free trade benefits developed countries more than developing countries = developing countries need protectionism to develop new industries + the WTO applies the same rules to developing countries thereby restricting them
- diversification = developing countries need to diversify into other sectors away from primary products + therefore need tariff protection at least in the short term which industrialised nations used when developing
- environment = free trade has often ignored environmental considerations e.g. free trade has enabled imports be made from countries with the least environmental protection, + many criticise WTO’s primary objective being maximisation of GDP
