LS4 - Trading Blocs and WTO

Question 1

How can trade be liberalised?

Answer 1

On a global basis through WTO, on a regional basis through trade blocs, or unilaterally

Question 2

Problems with trade in first half of 20th c

Answer 2

High degree of protectionism, no dispute settlement mechanism

Question 3

Problems with General Agreement on Tariffs and Trade (GATT)

Answer 3

Only a treaty - not permanent, trade dispute mechanism was flawed

Question 4

World Trade Organisation (WTO)

Answer 4

Permanent institution formed in 1995, provided formal mechanism to resolve trade disputes

Question 5

Trade bloc

Answer 5

Group of countries that mutually agree to reduce or remove trade barriers

Question 6

Free Trade Agreement/Area (FTA)

Answer 6

FTAs can be bilateral or multilateral, reduce trade barriers below WTO levels, tariffs and quotas removed by FTAs

Question 7

Advantages of FTAs

Answer 7

• Competitive sectors benefit
• Improved choice for consumers and firms
• Reduced admin work/costs for govts and firms
• Increase in FDI
• Trade creation - more efficient allocation of resources (if TC>TD)

Question 8

Disadvantages of FTAs

Answer 8

• Decline of uncompetitive sectors
• Risk of structural unemployment
• Trade diversion - less efficient allocation of resources (if TD>TC)
• Individual countries lack bargaining power which makes it hard to get advantageous trade deals
• Other countries in trade bloc may set trade policy that improves competitiveness of rival firms/industries

Question 9

Trade Creation and Diversion

Answer 9

Trade creation - moving trade from high cost producer to low cost producer
Trade diversion - moving trade from low cost producer to high cost producer
Allows other countries to prosper, so whole bloc grows

Question 10

Customs Union

Answer 10

FTA that impose uniform trade restrictions on non members

Question 11

Common external tariff

Answer 11

Trade policy agreed by customs union members that sets identical trade restrictions on non members