Trading Blocs & the WTO

Question 1

How many types of trading blocs are there?

Answer 1

4

Question 2

What are the types of trading blocs?

Answer 2

1) Free trade areas/agreement
2) Customs unions
3) Common markets
4) Monetary/currency union unions

Question 3

What is a regional trade bloc?

Answer 3

Intergovernmental associations that manage and promote trade activities for specific regions of the 🌎

Question 4

What is a free trade area (agreement)?

Answer 4

• trade barriers are removed between member countries
• BUT individual nations can still impose tariffs on nations external to free trade area e.g. NAFTA (North Atlantic Free Trade Area)

Question 5

What is a customs union?

Answer 5

• free trade(✖️ barriers to trade) between member states

- BUT common external tariff on 🚘 imported from outside the bloc e.g. EU

Question 6

What is a common market?

Answer 6

• same as customs union BUT FOP e.g. labour can ALSO be moved freely within area (between member states) alongside 🚘 and 🧹
• e.g. MERCOSUR (south-American) and East African Common Market (COMESA)

Question 7

What is a monetary union?

Answer 7

• customs union which adopts common currency

- e.g. Eurozone of the EU- adopted common currency 💶

Question 8

What are the costs (negatives ➖) 👎 of regional trade agreements (blocs)?

Answer 8

👎- Trade diversion- Trade may be diverted away from a low cost producer outside the bloc to a high cost producer within the bloc because of the tariffs imposed on 🚘 from nations external to the trading bloc
👎- distortion of comparative advantage- trade restrictions on 🚘 from nations outside bloc distorts comparative advantage (nation outside bloc could have comparative advantage if trade barriers ✖️ present BUT trade barriers forces nation to potentially trade with nation with artificial comparative advantage)-> ⬇️ efficient allocation of resources-> ⬇️ global economic growth than potential
👎- FOR MONETARY UNIONS- loss of independent monetary 💴 policing- nations involved✖️ control own interest and exchange rates

Question 9

What are the benefits (positives ➕) 👍 of regional trade agreements (blocs)?

Answer 9

👍- Trade creation- removal of trade barriers between member countries of bloc-> ⬆️ specialisation and trade between them (1 of these countries now may have true comparative advantage after trade barriers removed)
👍- ⬆️ FDI- global companies e.g. TNCs may invest in trading blocs to avoid trade restrictions

Monetary union benefits:
👍- eliminates transaction costs- ✖️ costs involved in changing currencies when 🚘 imported/exported as same currency for all nations in Union
👍- price transparency- consumers can compare prices more easily in foreign nations in the union
👍- eliminates currency fluctuations between member countries … lack of uncertainty potentially attracts FDI

Question 10

What is the role of the WTO in trade liberalisation?

Answer 10

1) promotes free trade among 164 member countries through ‘rounds of talks’
2) settles trade disputes between members

Question 11

What are possible conflicts between regional trade agreements (blocs) and the WTO?

Answer 11

• Regional trade agreements can either lead to trade creation or trade diversion or even both
• trade creation is a goal of the WTO BUT trade diversion is ✖️… if trade diversion created as result of regional trading bloc then this may conflict with aims of WTO
• HOWEVER argued that growth in both number of and size of regional trade agreements has contributed to the goal of the WTO of promoting free trade