Trading Blocks and the WTO

Question 1

Trading Bloc definition

Answer 1

A group of countries that trade freely but protect themselves from imports rom non-members

Question 2

Types of trading blocs

Answer 2

1. Free trade areas
2. Customs unions
3. Common markets
4. Monetary Unions

Question 3

What are free trade areas

Answer 3

Trade barriers are removed between member countries but individual members can still impose tariffs and quotas on countries outside the area.

Question 4

What are customs unions

Answer 4

Free trade between member states and a common external tariff on goods imported from outside the bloc

Question 5

What are common markets

Answer 5

Customs unions but not only goods and services can be moved freely within the area but also factors of production, esp labour

Question 6

What are monetary unions

Answer 6

Customs unions that adopt a common currency

Question 7

Benefits of regional trade unions

Answer 7

1. Trade creation - removal of trade barriers = increased specialisation and trade
2. Increase in FDI - TNCs invest inside trading bloc to avoid trade restrictions
3. Monetary union = no cost involved in changing currencies when the goods are exported / imported
4. Monetary union = single currency = ability to compare prices more easily
5. Monetary union = no currency fluctuations between countries = no uncertainty = increase FDI

Question 8

Costs of regional trade unions

Answer 8

1. Trade diversion - trade might be diverted from low-cost producers to high-cost producers who are in the trading bloc due to tariffs outside the bloc
2. Distortion of comparative advantage - trade restrictions = distort comparative advantage = less efficient allocation of resources = lowering of global economic growth
3. Loss of independent monetary policy = unable to control own interest rates and exchange rates

Question 9

Role of WTO in trade liberalisation

Answer 9

1. Promote free trade among 188 countries through ‘rounds of talks’
2. Settle trade disputes among members

Question 10

Conflicts between regional trade agreements and WTO

Answer 10

trading blocs = trade creation (which is the goal of the WTO) and trade diversion (which is not)
EVA: growth in number and size of trading bloc = contribute to WTO goal of promoting free trade