Chapter 70- Trading Blocs Flashcards
What are two reasons for countries to enter trading blocs?
- Countries prefer to trade within their geographical region —> it is cheaper to transport goods shorter distances (lower costs).
- Cultural ties and familiarity with nearby markets reinforce regional trading preferences.
Regional trade agreements? (2)
RTAs are made between two or more countries within a geographical region, and are designed to facilitate trade by bringing down barriers.
-RTAs create trading blocs. A trading bloc is a group of countries that have signed a regional trade agreement to reduce or eliminate tariffs, quotas, etc barriers between themselves.
What are the different forms of trading blocs? (6)
- Preferential trading areas
- Free trade areas
- Customs union
- Common markets
- Single market
- Economic unions
What are preferential trading areas? (2)
- PTAs allow certain types of products from participating countries to receive a reduced tariff rate.
- A PTA may become a free trade area over time.
What are free trade areas? (2)
- FTAs exist where member states remove all trade barriers, such as tariffs and import quotas, between themselves. But each member state keeps different trade barriers against non-member states.
- An example of an FTA is the North American Free Trade Agreement (NAFTA).
What is a customs union?
Similar to a FTA, except that the members adopt a common set of barriers against non-members. This means that when a product is shipped from outside the union to any of the member states, only one set of rules regarding customs duties and rules of origin will apply. Then, the product can be moved freely throughout the countries within the union. E.g. of a customs union is CARICOM.
What are common markets? (4)
- Where goods, labour and capital can move freely across the member states.
- Tariffs are generally removed and non-tariff barriers eliminated or at least reduced.
- Workers can relocate from one country to another without restriction.
- Examples of common markets include ASEAN and the Southern Common Market (Mercosur) in South America.
What is a single market?
Where almost all trade barriers between members have been removed and common laws or policies work to make the movement of goods and services, labour and capital between countries as easy as the movement within each country. Borders, standards and taxes are harmonised as much as possible. EU is a single market.
What are economic unions? (3)
- An economic union is a type of trade bloc involving both a customs union and a common market.
- It’s aim is normally closer economic, political and cultural ties between member states.
- Where an economic union involves a common currency it is called an economic and monetary union.
The European Union and the single market? (6)
- The EU is the most powerful trading bloc in the world.
- EU went from 6 founding members in 1993 to 28 countries as of 2015.
- EU developed a single market.
- A monetary union was completed in 2002, allowing businesses operating in most European countries to move and compete equally in all other countries, mostly operating to similar standards and paying in a common currency (the euro).
- However, not all European countries belong to the union, including Switzerland, Norway and Iceland.
- Nor did all sign up to a single currency: The UK, Denmark and Sweden did not join the euro and kept their own separate currencies.
ASEAN free trade agreement? (4)
- South East Asia is a very diverse region: economically, politically and culturally.
- It aims to promote regional peace and stability.
- It has completed free trade agreements with China, Korea, Japan, India, Australia and New Zealand.
- It has an agreement covering trade in goods as well as one relating to customs.
NAFTA- The North American Free Trade Agreement? (6)
- Free trade zone for Canada, Mexico and the United States.
- The agreement covers trade and investment, labour, financial dealings, etc.
- Members agree to eliminate tariffs on most manufactured goods and to treat investors from the other two countries as if they were domestic investors.
- The US, Mexico and Canada still negotiate independently with non-NAFTA countries and trading blocs over the rules that govern their trading relationships.
- NAFTA has been beneficial to US and Canadian consumers through the lowering of prices for agricultural products. Sellers in each country have benefitted from the larger and more diverse markets on offer.
- However, some believe the agreement has been bad for Mexico. Since joining NAFTA, overall economic growth has not increased significantly, real wages have declined and unemployment has increased. The flood of heavily subsidised corn from the US clearly caused problems for Mexican farmers. The lower priced corn was beneficial to Mexican consumers, who could buy cheaper flour for their staple food, tortillas. However, the competition drove many poor, small farms out of business.
Benefits of trading blocs? (2)
- The free movement of goods and services enables firms to be cost competitive internationally.
- Access to larger market means an increased customer base, which could allow a firm to benefit from economies of scale.
What are 2 disadvantages of trading blocs?
- Increased size of market means more competition. This could mean firms need to innovate and invest more (potentially lower profits).
- Firms may not get an agreement that suits them. They may have higher costs due to taxes.
