LS4 - Trading Blocs & WTO Flashcards
1
Q
Types of trading blocs
A
- free trade area
- customs union
- common market
- monetary unions
2
Q
Free trade area
A
An area where countries agree to trade goods with other members without protectionist barriers. E.g. the North American Free Trade Agreement (NAFTA)
3
Q
Customs union
A
- 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
4
Q
Common market
A
- member countries agree to remove trade barriers, and to harmonise regulations in order to promote the free movement of goods, services, and FoPr (such as labor and capital) among member countries
- when EU was established, it was a common market as EU citizens can work in any country in the EU
5
Q
Monetary unions
A
- sometimes called a currency union
- members share the same currency - more economically integrated than a customs union and free trade area e.g. the Eurozone
- use the same interest rate
6
Q
Benefits of regional trade agreements
A
- trade creation
- reduced transaction costs - no trade barriers or border controls
- EoS - firms can exploit their comparative advantages as there is a larger potential market in which to trade
- enhanced competition -> efficiency gains
- migration - supply of labour increases
7
Q
Costs of regional trade agreements
A
- trade diversion
- migration - some countries lose their best workers
8
Q
Trade creation and trade diversion
A
- trade creation is a theory that derives from a country’s membership of a customs union
- trade creation occurs when a country consumes more imports from a low cost producer inside the customs union, 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
9
Q
Role of the WTO
A
- promotes world trade through reducing trade barriers and policing existing agreements
- settles trade disputes
10
Q
Possible conflicts between regional trade agreements and the WTO
A
- 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
11
Q
Advantage of FDI
A
- AD increases -> increase in output and employment
12
Q
Evaluation of FDI
A
- repatriation of profits to shareholders in country from which it originated
13
Q
Economic integration
A
- process whereby countries coordinate to reduce trade barriers and to harmonise monetary & fiscal policy
14
Q
Trading blocs
A
- a group of countries that join together and agree to increase trade between themselves
15
Q
Bilateral/multilateral trade agreements
A
- agreements to reduce tariffs & quotas between 2/multiple countries
16
Q
Advantages of being part of a monetary union
A
- non-fluctuating exchange rate (becomes much easier to trade)
- reduced costs from currency conversion (can be used for investment by business and spending by consumers)
- increased business confidence knowing the cost of raw materials without unexpected fluctuations
- easier to compare prices between member nations
17
Q
Disadvantages of being in a monetary union
A
- loss of monetary policy autonomy (monetary policy set may not be suitable for all nations in union)
- unable to alter exchange rate to boost trade competitiveness
- high cost of currency conversion
