Trading Blocs Flashcards
What is a regional trading bloc?
An area within which countries agree to eliminate or reduce trading barriers in order to gain mutual benefits.
Advantages of regional trading blocs?
1) trade creation: higher domestically produced goods are substituted for lower cost imports.
2) EOS from increasing output
3) employment
4) trade protection: those in the bloc protected from cheaper non-members.
Disadvantages of regional trading blocs?
1) trade diversion: lower cost goods from non-members replaced with expensive goods from members.
2) non member may restrict trade
3) inefficient members are protected.
Four stages of economic integration
Free trade area -> customs union -> single market -> economic/monetary union.
What is a free trade area?
They agree to remove tariffs, taxes and quotas of trade between members.
Each decide their own policies towards non-members.
What is a customs union?
It’s a group of countries that remove trade barriers to encourage free trade, could still be subject to excise duties.
Adopt a common-external tariff towards non-members.
Preferential tariff rates apply to preferential trade agreements that EU has entered with a 3rd country.
What is a single market?
It’s a deeper form of economic integration.
Removes restrictions on movement of labour, capital goods and services.
Concept is broadened to include policy harmonisation on things such as product standard, employment law etc.
What is a monetary union?
Closest form of economic integration.
Share the same currency and have a monetary policy.
Agree to fix their exchange rates, requires a common monetary policy that sets the interest rates for the whole single currency area.
What is trade creation?
It’s an effect of increased economic integration. It’s where economic integration leads to higher cost domestic production being replaced by imports from a more competitive lower cost member.
Eg increase in demand for Dacia cars since Romania joined the EU.
What is trade divergence?
It’s a switch from a lower cost foreign source outside the customs union to a higher cost supplier inside the customs union.
When it joins it has to adopt a common external tariff which increases the price of the outsiders goods.
Whats included in the convergence criteria?
Criteria needed to join the monetary union.
1) stable prices - inflation no higher than 1.5% of lowest 3 countries.
2) stable exchange rates - must of been stable for 2years.
3) Government budget deficit less than 3% of GDP in one year.
4) public debt - no more than 60% of GDP
5) interest conveyance- within 2% of lowest 3
Why would you join a monetary union?
1) lower transaction costs: no cost to exchange.
2) increased certainty: exchange rate fixed.
3) eliminate currency conversion -> boost trade.
1) price transparency: easier to compare.
2) price convergence : more pressure to be competitive.
3) economic stability: access to EU bank
4) reduced vulnerability to external shocks.
Why you wouldn’t join a monetary union?
1) loss of control of monetary policy
2) trade patterns: diversion?.
3) Structural reforms : increase structural reforms to increase competitiveness -> Structural unemployment.
4) exposure to eurozone economic problems.
