Trading blocs and restrictions on trade

Question 1

PTA

Answer 1

Tarrifs and barriers moved on some goods

Question 2

FTA

Answer 2

Complete removal of trade barriers and tariffs within bloc

Question 3

Customs union

Answer 3

Remove tariffs and barriers
Impose common external tariffs on non members

The EU

Question 4

Common markets

Answer 4

Removal of all barriers
Work as one market
Common external tarrifs

GCC and EU

Question 5

Monetary unions

Answer 5

Work with single currency

European central bank (EU)
Sets interest rates, controls money supply

Question 6

Evaluate monetary unions (good or bad)

Answer 6

Good
- Price stability
- Less exchange rate costs

Bad
- Loss of independence
- Countries may need different exchange rates (Greece)

Question 7

Why should a country join a trade bloc?

Answer 7

Specialisation, comparative advantage, increased productivity, increased output, lower prices
Trade creation
Lower unemployment, less relative poverty, less relative poverty
Increased consumer choice
Lower prices for consumers
Larger markets, increase market share
Increased competition, more efficiency, lower costs

Question 8

Why should a country not join a trade bloc?

Answer 8

Trade diversion (loss of trade with countries that are not in the bloc)
A fall in international competition, firms leaving industry
Retaliation from other trading blocs
Specialisation, may cause loss of jobs in another country, as they stop producing
Depends on the number of trading blocs
Exploitation of resources, poorer countries lose out

Question 9

Trade diversion

Answer 9

Country goes from buying from a low cost producer to a high cost producer

Question 10

Trade creation

Answer 10

Removal of tarrifs and barriers
Move from high cost producer to low cost producer

Shift from domestic wine to French wine

Question 11

Role of the WTO in trade

Answer 11

Promote trade liberalization
Ensure countries stick to trade agreements

They can impose trade sanctions
All countries must agree if they want to do something

Question 12

Conflicts with the WTO

Answer 12

China and US are protectionists
Trade wars
Trading blocs (common external tariffs) go against their rules

Question 13

Infant industry argument

Answer 13

New domestic industries
Can not compete in international market
They have higher AC as they need to cover sunk costs

Question 14

Job losses

Answer 14

Domestic firms may be unable to compete
Job losses

However steel tariffs led to retaliation from China and causes job losses in soy bean industry
May lead to inefficiency

Question 15

Protection from dumping

Answer 15

Dumping is when countries sell excess supply at low prices
This will harm domestic firms

China imposes tariffs on steel parts from US to prevent this

Question 16

Terms of trade

Answer 16

Excess demand for an imported good
Causes price to rise
Terms of trade worsen
Restrictions cause demand to fall
Price falls

Question 17

Protect national security

Answer 17

They may impose regulations on certain dangerous goods
To protect domestic consumers

Question 18

Tariffs

Answer 18

Taxes on imported goods

Question 19

Subsidies

Answer 19

Grants given to domestic firms by the government

Question 20

Quotas

Answer 20

Limits placed on the number of imports

Question 21

Non tarrif barriers

Answer 21

Increased regulation
Embargos