trading blocs + free trade Flashcards
what is the impact of growth of trading blocs and bilateral trading agreements?
With more trading blocs, trade has been created between members, but diverted from elsewhere
when does trade creation occur
Trade creation occurs when a country consumes more imports from a low cost producer, and fewer from a high cost producer
when does trade diversion occur?
country might stop importing from a cheaper producer outside a trading bloc to a more expensive one inside the trading bloc
protectionist barriers are often imposed on countries who are not members
so trade is diverted from producers outside the bloc to producers within the trading bloc.
what is the WTO and what is their aim?
regulates global trade
what does the WTO believe ideal trade should be?
- non discriminatory- countries arent to allowed to have very free trade with one country but very strict protectionism with another- all trade agreements should be done formally
- trade should be as free as possible
- trade should be predictable- so that countries can create an environment where there businesses can flourish, jobs can be created, investment
- promoting fair competition through protectionism and then taken away when this is achieved
- trade beneficial for developing countries through special provisions
what is the function of the WTO?
- set and enforce rules om international trade- if rules broken= fines
- resolve trade disputes to prevent retaliation e.g continual protectionism between two countries
- provide a forum for negotiating trade liberalisation for countries so that agreements can be organised quicker + quicker which is good for global free trade
- monitor trade liberalisation- to make sure trade is actually free
- to increase transparency or decision making process- countries can understand how a decision has been made and if countries believe a rule is unfair they can criticise
- to make sure there’s co operation with major economic institutions
what is free trade?
trade without barriers such as tariffs, quotas
what are the benefits of free trade?
- inc dynamic efficiency
- improvement of allocation of world resource- incentive to specialise when they have a cost advantage so that you can sell to world market
- access to goods that wouldnt be produced domestically
- lower prices for consumers- inc consumer surplus
- huge amount of international competition
- economies of scale as trade allows firms firms to increase scale of production exploiting EoS - decrease AC that can be passed onto consumers
- greater consumer choice + quality
- economies grow- can supply world market- exports inc which inc AD
why doesnt the world market need a rise in price to supply more
they have comparative advantage
how can you show the effects of free trade diagrammatically?
what is economic integration?
a process by which countries co ordinate to reduce trade barriers and to harmonise monetary and fiscal policy aka trade liberalisation
what is a trading bloc
a group of countries which come together and agree to increase trade between themselves
what is bilateral trade?
agreements to reduce tariffs and quotas between 2(bi)/ multiple (multi)countries
what are the different types of integration?
preferential trading area (PTA)
free trade area (FTA)
customs union
common market
monetary union
full economic integration
what is a free trade area?
countries come together to eliminate all trading barriers between them but they are free to trade however they want to countries outside the free trade area e.g NAFTA
what is a customs union?
is a free trade area but without the freedom of trade with countries outside the free trade area- common external barriers are imposed on non member countries e.g EU
what is a common market?
is a customs union but with deep integration e.g common policies ,theres also free movement of labour between member nations e.g EU
what is a monetary union?
is a common market but countries within this union adopt the same currency and central bank e.g eurozone
what is trade creation?
trade creation is a theory that comes from a countrys membership of a customs union
it is the movement from a high cost domestic producer to a low cost producer inside the customs union/ low cost trading partner
how would you show the effects of trade creation diagrammatically?
difference between Q1 to Q2 is the number of imports coming in from a non member country of a customs union
what happens when a member joins a customs union?
tariff is removed once a nation becomes a member joins the customs union
- domestic supply decreases, demand increases
- consumer surplus inc, gain of world efficiency due to decrease in domestic supply
- existing members of customs union are now willing to import more from the nation that newly joined as a member (werent a member before)
- costs lower when new nation joins the customs union, creating trade as the new member can trade freely with all the members of the customs union
- general benefits of free trade also apply
what is trade diversion?
- theory derives a countries entry into a customs union
- movement from a low cost foreign producer to a high cost producer within the customs union (efficient to non efficient producer)
how do you show the effects of trade diversion diagrammatically?
what happens in trade diversion and why does it lead to loss of domestic efficiency?
domestic supplier (in the customs union) produces at a higher cost compared to non member as the non member has the comparative advantage and the domestic supplier doesnt
what is the effect of a county joining a customs union
- when country decides to join the customs union, has to impose trade barrier on country outside of customs union- price of import from that country increases
- this allows suppliers from the customs union to join the market and are now more competitive due to the common external tariff imposed on the non member country
- demand of domestic consumers decrease, and supply of domestic producers in the customs union
- previously the excess demand was satisfied by the imports coming in from non member country as its too expensive and not competitive enough, but now is being satisfied by the domestic producer in the customs union
- trade is diverted from the non member country to member countries
what is the features of the EU?
- customs union
- free trade between member nations- no tariffs/ quotas
- common external barriers on imports from non member countries
what common policies does the EU have for its members?
- agriculture- support local farmers by setting a minimum price on agriculture produce
- fishing policies- quota on how much fish is allowed to be fished by each fisherman to prevent depletion of population of fish
- competition
- regional policies- social cohesion policies for improving poverty levels and increasing infrastructure, promote tourism, increase employment
- envrionmental policies- allowed levels on pollution
- free movement of labour and capital- members can work anywhere in the EU
- co ordination of economic policy
- monetary union- 17/28 members adopting the euro
recall the benefits of regional trade agreements
trade creation
reduced transaction costs
economies of scale
enhanced competition
migration
recall the costs of regional trade agreements
trade diversion
benefits of dynamic efficiency may not be evenly spread across each member in a trade agreement
migration may mean that some countries may lose their best workers
explain how reduced transaction costs is a benefit of regional trade agreements
since there are no barriers to trade or border controls → its cheaper and simpler to trade
explain how economies of scale is a benefit of regional trade agreements
- firms can take advantage of a larger potential market in which to trade
- by specialising, firms and countries can exploit their comparative advantages and the gains of efficiency and advanced technology can be reaped
explain how enhanced competition is a benefit of regional trade agreements
- since firms operate in a more competitive market they become more efficient → better allocation of resources
- could be long run benefits of dynamic efficiency
explain how migration is a benefit of regional trade agreements
by being a member of a customs union → supply of labour increased which could help fill labour shortages
what may be the possible conflicts between regional trade agreements and the WTO
- trading blocks may distort word trade or affect those who don’t belong to them
- there could be an inefficient allocation of resources due to policies
- conflicts between blocs could lead to a rise in protectionism on non member countries which contradicts the WTOs principles
- some may argue that the WTO is too powerful or that it ignored the problems of developing countries because developed countries dont trade completely freely with developing countries which limits their ability to grow
- setting up a customs union or free trade area could be seen to violate the WTOs principles of having all trading partners treated equally
- trade diversion violates WTOs principles
how can the idea that a customs union or free trade area violates the WTOs principles be evaluated
they can complement the trading system and the WTO strives to ensure that non members can trade freely and easily with members of a trading bloc
can open up trade between members which encourages competitiveness and improves efficiency
what are the costs of international trade
- structural and regional unemployment
- too much specialisation → country can become dependent and may not be able to cope with an external shock
- difficulties in developing in new industries some industries may struggle to establish themselves in the face if fierce international competition
what is the impact of trading blocs on developing countries
can limit development of non member developing countries
can limit progress towards free trade if theres excessive trade diversion
what is the impact of the WTO on developing countries
has played a part in the reduction of the level of subsidies on EUs agricultural goods -> makes developing countries agricultural products more competitive
however WTO may prevent developing countries from protecting their infant industries
- this may stop them from diversifying away from agriculture and hold back from improvements in efficiency
what are the benefits of economic integration
trade creation within the trading bloc
more trade= greater efficiency within the bloc due to competition, EoS, specialisation
non members may gain from improvements in efficiency and infrastructure within the bloc as the cost of the exports from the bloc will fall
removal of tariffs - inc CS
what are the drawbacks of economic intergration
producer surplus and govt revenue will reduce if tariffs are removed
trade diversion -> barriers imposed on non members who are more efficient -> reduction in efficiency
no overall increase in trade
non members cant fully exploit their comparative adv
what are the benefits of monetary unions
adopting a single currency -> dont need to consider costs related to buying another currency when they buy goods from countries within the union ->price comparisons simple
no exchange rate risks when trading within union
policies they need to adopt may be beneficial in the long run
what are the drawbacks of monetary unions
policies that need to be adopted to suit the whole union may not be helpful for individual countries economies
countries lose a lot of sovereignty as they lose control of their monetary policy
can no longer change interest and exchange rates to help with their macroeconomic objectives as only the central bank can change them
what is sovreignity
the ability of countries to make decisions and control their own economies
what are the two main institutions which make up the EU
european commission
European central bank (ECB)
what does the european commission do
has one commissioner from each member country
allocates EU funding
manages budgets
proposes laws and helps enforce them
what des the ECB do
manages the euro and tries to keep price stable
sets interest rates to control inflation
issues euro bank notes
manages foreign currency reserves to maintain euros exchange rate
what are the advantages of enlarging (more members joining) the EU on existing members
increased EoS and price competition -> higher efficiency and lower prices
migration from new member states to old members which will increase AS and help with economic growth
migrants employed at lower wage rates than domestic workers -> reduce cost of p and inc productive capacity
migration may bring skilled workers to existing members
what are the disadvantages of enlarging the EU on existing members
migration may lead to overcrowding in cities
increase in demand for services, housing and benefits
migrants may contribute to domestic unemployment
if new member states are poorer than existing -> may increase income inequality
increased competition may drive domestic firms out of business
what are the advantages of enlarging the EU on new members
new members will benefit from Eos and price competition -> higher efficiency and lower prices
people in new ember states gain freedom to live and work wherever they choose in other member states
can trade freely with EU countries
what are the disadvantages of enlarging the EU on new members
have to comply with EU laws which may conflict with what the govt thinks is best for the country
increased costs for firms and govt as they have to comply with regulations on product safety
migration from new to existing members may lead to domestic labour shortages in the new member country
structural unemployment if firms cant compete with existing members
