Theme 4 - CC4 Trade Blocs, Patterns Of Trade

Question 1

Define Trading Blocs

Answer 1

A group of countries which have signed an agreement to reduce or eliminate tariffs, quotas and other protectionist barriers barriers between themselves.

Question 2

What are the types of trading blocs?

Answer 2

• Free trade areas
• Customs unions
• Common (single) markets
• Monetary unions

Question 3

What are Free trade areas?

Answer 3

• a group of countries between which there is free trade in g&s but where member countries are allowed to set their own level of tariffs against non-member countries. E.G. USMCA

Question 4

What are customs unions?

Answer 4

A group of countries between which there is free trade in G&S and which imposes a common external tariff on imported goods from outside the market. E.G. Mercosur

Question 5

What is single market

Answer 5

A customs union, where in addition, both labour and capital of freedom of movement within the area & where there are common product standards between countries. e.g. EU

Question 6

What is a monetary union

Answer 6

A group of countries which share a common currency with all other characteristics of a single market. e.g. Eurozone

Question 7

Define trade creation

Answer 7

The switch from purchasing products from a high-cost producer to a low-cost producer in the trade bloc.

Question 8

Define trade diversion

Answer 8

The switch from purchasing products from a low-cost producer to a higher cost producer inside trade bloc because of tariff imposed on low cost producer.

Question 9

Give 4 benefits of membership of a trade bloc
Give a suitable diagram

Answer 9

• Trade creation
• Specialisation according to comparative advantage - every country produces where they have lowest opportunity cost which ^Efficiency,^ Productivity ^LR Growth
• Benefits to consumers of increased competition - Cheaper goods, Consumer sovereignty, ^Innovation, ^Quality of goods.
• Economies of scale - define, LRAS falls due to lower cost production.
  
  • Larger markets and free trade means its easier for firms to grow e.g. can bulk buy (purchasing EOS)

DRAW TARIFF DIAGRAM SHOWING THE EFFECTS OF A REMOVAL OF TARIFFS ON IMPORTS

Question 10

Give 4 costs of membership of a trade bloc

Answer 10

• Trade diversion
• Problems of increased competition for domestic firms:
- Deindustrialisation from being in trade bloc, countries trade by comparative advantage. Loss of jobs in economy, fall in output and LR Growth
- Firms less competitive
- ^ Imports and trade deficit
- Fall in revenue and profits

Question 11

Evaluate trade blocs - effect on global trade

Answer 11

• Depends on size of trade blocs, if large GDP, likely to have significant effect on global trade.
• Depends on if they impose barriers on goods outside trade bloc (e.g. free trade area vs customs union)
• May not have significant effect on global trading patterns if countries outside bloc have lower COP.

Question 12

Give costs and benefits of Customs unions (common external tariffs)

Answer 12

✅ Protectionism
- Trade blocs are very powerful in trade negotiations
-Fair for all countries

❌^Costs of imports, fall in living standards
- Cannot sign own trade deals with countries outside trade bloc

Question 13

Give costs and benefits of Single market (Free movement of labour)

Answer 13

✅^Supply of labour, decreased wages and COP
- ^Tax revenues for governments
- More skilled workers, ^Productivity and growth, fill gaps in labour force

❌More competition for jobs
- Increased demand for housing and public services

Question 14

Define patterns of trade

Answer 14

refers to the % of trade between countries

Question 15

What are 4 changing factors that effect patterns of trade

Answer 15

• Comparative advantage
• Impact of emerging economies
• Growth of trading blocs and bilateral trading agreements
• Changes in relative exchange rates

Question 16

Explain changes in comparative advantage influencing patterns of trade

Answer 16

• There has been a recent growth in the exports of manufactured goods from developing countries to developed countries.
  -This is because developing countries have gained an advantage in the production of manufactured goods, due to their lower labour costs, so production shifted abroad.
  -The deindustrialisation of countries such as the UK has meant the manufacturing sector has declined.
• This means that production of manufactured goods has shifted to other countries , such as China, whilst the UK now focuses more on services, such as finance.

Question 17

Explain emerging economies influence on patterns of trade

Answer 17

Countries grow at different rates and when they grow, they are likely to need to import more goods and services than before as well as exporting more to pay for this. Emerging economies shift the trade pattern by taking up a larger proportion of a country’s imports and exports than they had previously.

Question 18

Explain relative exchange rates influence on patterns of trade

Answer 18

The exchange rate affects the relative prices of goods between countries. Prices are an important factor in determining whether consumers
buy goods and so a change in price will affect the pattern of trade. It can be argued that the UK’s trade deficit with Europe is due to the strength of the pound. China have kept their currency weak in order to increase their trade surplus by making
exports more competitive.

Question 19

Explain trade blocs influence on patterns of trade

Answer 19

These increase the level of trade between certain countries and so influence the pattern of trade because trade increases between these countries and decreases between others. Joining the EU meant that the UK traded a lot more with European countries than previously, and less with countries outside the EU.

Question 20

Give 3 benefits of Brexit

Answer 20

1) Increased wages for jobs - fewer people coming in country and less competition for jobs. E: Danger of cost push inflation and limited AS. Immigrants fill gaps in labour force.
2) Control of immigration - a points based immigration system would allow the govt to immigration to match it to housing supply and service provision e.g. education.
E: Problems in housing market are structural
3) Greater freedom of taxation - No longer has to obey EU rules
E: Could remove VAT on necessities e.g. tampons but not on luxury goods as it raises high tax revenues.
4) Membership fee - Immediate cost saving as no longer need to contribute to EU budget as a net contributor. Would save 8.5bn over 5 year period
E: Estimations that Brexit cost UK 130Bn in lost growth and investment had UK continued with same pattern from 2016 to 2020. Also, UK still playing ST fees as part of leaving.

Question 21

Give 3 costs of brexit

Answer 21

1) Large cost - Economists argued Brexit will cost over 4% of lost GDP in LT: Net cost is 121bn
E: Lost growth not felt by general population as they never had it.
2) Trade friction between UK and EU - loss of trade felt in wide number of areas.
- Cost passed on to consumer causing inflation and shortages.
3) End to freedom of movement - ^Costs and legal difficulties to EU/UK citizens wanting to work in EU/UK.
- Causing shortages e.g. 15k lorry drivers left after brexit
-EU Visa now costs >£73
4) Lowering standards - less laws and regulations as set by EU e.g. sewage/product environmental standards

Question 22

Why might trade blocs help to achieve the aims of the WTO?

Answer 22

Trade blocs create free trade between the members of the trade bloc which is a main aim of the WTO to increase productivity & efficiency for trade by reducing barriers.
E: Only beneficial if more trade is created than diverted.

Question 23

Give possible conflicts between trade blocs and the WTO

Answer 23

• Trade blocs result in trade diversion (define/explain)
• Prevents specialisation according to comparative advantage.