LS4 - Trading Blocs & WTO

Question 1

Types of trading blocs

Answer 1

• free trade area
• customs union
• common market
• monetary unions

Question 2

Free trade area

Answer 2

An area where countries agree to trade goods with other members without protectionist barriers. E.g. the North American Free Trade Agreement (NAFTA)

Question 3

Customs union

Answer 3

• countries in a customs union have established a common trade policy with the rest of the world. E.g. they might use a common external tariff.
• they also have free trade between members.
• the European Union is an example of a customs union

Question 4

Common market

Answer 4

• this establishes free trade in goods and services, a common external tariff allows free movement of capital and labour across borders
• when EU was established, it was a common market EU citizens can work in any country in the EU

Question 5

Monetary unions

Answer 5

• sometimes called a currency union
• members of a monetary union share the same currency - more economically integrated than a customs union and free trade area e.g. the Eurozone
• monetary unions use the same interest rate

Question 6

Costs & benefits of regional trade agreements

Answer 6

• trade creation and trade diversion - trade has been created between members but diverted from elsewhere
• reduced transaction costs - no barriers to trade or no border controls so cheaper and simpler to trade
• economies of scale - by specialising, firms/countries can exploit their comparative advantages as there is a larger potential market in which to trade
• enhanced competition - more efficiency
• migration - supply of labours is increased however some countries lose their best workers

Question 7

Trade creation and trade diversion

Answer 7

• trade creation occurs when a country consumes more imports from a low cost producer, and fewer from a high cost producer
• trade diversion occurs when trade shifts to a less efficient producer
• usually, a country might stop importing from a cheaper producer outside a trade bloc to a more expensive one inside the trading bloc

Question 8

Role of the WTO

Answer 8

• promotes world trade through reducing trade barriers and policing existing agreements
• settles trade disputes

Question 9

Possible conflicts between regional trade agreements and the WTO

Answer 9

• trading blocs might distort world trade or adversely affect those who do not belong to them - inefficient allocation of resources
• conflicts between blocs could lead to a rise in protectionism - a common external tariff contradicts WTO’s principles since protectionism is imposed on those who are not members