4.1.5 Trade bloc and the World Trade Organisation (WTO) Flashcards
(8 cards)
Types of trading blocs: free trade areas
A free trade area is where there are no import tariffs or quotas on products from one country entering another.
-> USMCA (formerly NAFTA)
->South Asian Free Trade Area
-> Pacific Alliance
Types of trading blocs: customs unions
A customs union is a group of countries that agree to (a) abolish tariffs and quotas and (b) adopt a common external tariff on imports from non-member countries.
-> The EU
->South African Customs Union
-> The Eurasian customs union
Types of trading blocs: common markets
Customs union where factors of production, as well as goods and services, can be moved freely within the area.
-The EU
-Mercosur
-East African Common Market
Types of trading blocs: monetary unions - condition necessary for their success
Customs unions that adopt a common currency.
-> The EU
Benefits of regional trade agreements
Trade creation - the removal of trade barriers between member countries of a bloc will result in specialisation and trade between them.
Increase in FDI - global companies may wish to invest inside a trading bloc to avoid trade restrictions.
Role of the WTO in trade liberalisation
The role of the WTO is to promote free-trade, by organising negotiations to reduce barriers to free trade such as tariffs and quotas, as well as being concerned with enforcing trade rules and settling disputes.
Costs of regional trade agreements
Trade diversion - trade may be diverted away from low-cost producers outside of the bloc to high-cost producers within the bloc - resulting in a loss of efficiency.
Loss of independent monetary policy - countries in monetary unions are unable to control exchange rates and interest rates - resulting in financial crises spreading more quickly.
Possible conflicts between regional trade agreements and the WTO
WTO promotes trade creation whereas regional trade agreements create trade diversion.
