Trading Blocs and the World Trade Organisation (WTO) 4.1

Question 1

Trading Bloc Def.

Answer 1

a group of countries which have preferential trading arrangements between members. This involves the partial or complete elimination of trade barriers.

Where there are just two parties to a trade agreement it is known as a bilateral trade agreement (BTA)

Question 2

Types of Trading Bloc

4

Answer 2

Free trade area (FTA) - No Tariffs or quotas on members, can set them on non-members. e.g. NAFTA

Customs Union (CU) - No tariffs on members, all set same teariffs on non-members e.g. EU

Common (or Single) Market - Not just a CU, but also free trade in services and labour e.g. EU

Monetary (or Currency) Union - When 2 or more countries share the same currency e.g. EU

Question 3

Advantages and Disadvantages of Trading Blocs

Answer 3

Advantages

• Trade creation (switched from domestic wine producers to French when joining the EU)
• Economies of Scale through a larger market
• Increased competition & choice -> increased efficiency

Disadvantages

• Trade diversion - favours members over non-members -> inefficient Bloc members favoured over efficient non-members (NZ butter switched too EU butter). This is more likely if the tariffs on non-members are high
• Gains from trade can be distributed unequally

Question 4

The World Trade Organisation (WTO)

Answer 4

Created after WW2
The WTO supervises a rules based system for international trade. Its aim is to promote free trade by the gradual removal of tariff and other trade barriers.

Question 5

Trade Creation & Diversion

Answer 5

Trade Creation - When a country moves from buying from a high cost (outside their Bloc) to lower cost country (in their Bloc) e.g. When UK joined the EU wine consumption shifted from domestic producers to lower cost French producers

Trade Diversion - When a country moves from buying from a low cost (outside their Bloc) to higher cost country (in their Bloc) e.g. UK switched from New Zealand butter to EU butter