4.1.5 Trading blocs and the World Trade Organisation (WTO)

Question 1

What does the WTO generally do?

Answer 1

The World Trade Organisation (WTO) permits trade blocs, provided that they result in lower import protection against outside countries than before the creation of the trade bloc.

Question 2

What are 5 examples of regional trade blocs?

Answer 2

1. USMCA - United States-Mexico-Canada agreement
2. Mercosur – Brazil, Argentina, Uruguay, Paraguay and Venezuela
3. Association of Southeast Asian Nations Free Trade Area – known as ASEAN
4. Common Market of Eastern and Southern Africa includes Zambia, Rwanda, Swaziland, Ethiopia and Kenya
5. Trans-Pacific Partnership (TPP) – an agreement negotiated between Australia, Brunei, Chile, Canada, Malaysia, Mexico, New Zealand, Peru, Singapore and Vietnam (the USA under Trump dropped out)

Question 3

What is a free trade area?

Answer 3

A free trade area (FTA) is an area of which there are no import tariffs or quotas on products from one country entering another

Question 4

What are current examples of free trade areas?

Answer 4

• EFTA: European Free Trade Association consists of Norway, Iceland, Switzerland and Liechtenstein
• USMCA: Revised trade agreement between the USA, Mexico & Canada
• South Asian Free Trade Area between Afghanistan, Bangladesh, Bhutan, India, Maldives, Nepal, Pakistan and
  Sri Lanka
• African Continental Free Trade Area: New agreement with 55 nations
• Pacific Alliance: Chile, Colombia, Mexico and Peru

Question 5

What is a bilateral trade agreement?

Answer 5

A bilateral trade is the exchange of goods between two economies / groups of economies promoting trade in goods and services and flows of FDI. The two countries will reduce or eliminate import tariffs, import quotas, export restraints, and other non-tariff trade barriers to encourage trade and investment.

Question 6

What are examples of bilateral trading agreements?

Answer 6

• EU-Japan Economic Partnership Agreement
• ASEAN – China Free Trade Area
• EU-South Korea Free Trade Deal
• China-Australia Free Trade Agreement

Question 7

Explain what the African Continental Free Trade Area is

Answer 7

In 2018, over 40 African countries signed the African Continental Free Trade Area, which aims to accelerate economic integration in Africa and increase trade within the continent. In 2016, intra-Africa trade grew to 19 per cent of Africa’s trade, up from 15 per cent in 2014 and 10 percent in 2008.

Question 8

Examine how a free trade area might stimulate economic growth in Sub-Saharan Africa (using chains of analysis)

Answer 8

Question 9

What are advantages and disadvantages of the new African continental free trade area?

Answer 9

Question 10

Explain the agreements that countries in a customs union have

Answer 10

• Abolish tariffs and quotas between member nations to encourage free movement of goods and services.
• Adopt a common external tariff on imports from non-members countries. In the case of the EU, the tariff
  imposed on, say, imports of South Korean TV screens will be the same in the UK as in any other EU country
• Preferential tariff rates apply to trade agreements that the European Union has entered into with third
  countries or groupings of third countries

Question 11

What are examples of customs unions?

Answer 11

• The EU is a customs union. The EU also has customs union agreements with Turkey, Andorra and San Marino.
• Another example of a customs union is the South African Customs Union involving Botswana, Lesotho, Namibia, South Africa, Swaziland.
• Another is the Eurasian Customs Union involving Armenia, Belarus, Kazakhstan, Kyrgyzstan and Russia

Question 12

How is a trade bloc different from an FTA?

Answer 12

A trading bloc is essentially an agreement between countries to lower their import tariffs and perhaps extend
this to reducing the use of non-tariff barriers to trade. In a free trade area, each country continues to be able
to set their own distinct external tariff on goods imported from the rest of the world.

Question 13

How is a customs union different from a free trade area?

Answer 13

A customs union is different from a free trade area, in which means no tariffs are charged on goods and
services moving within the area. It adds on a common external tariff (CET) on all products flowing from
countries outside the customs union, unless specific trade deals have been established. Revenues from import
tariffs are combined for all member states. The countries in a customs union negotiate as a bloc when discussing trade deals with countries outside the union. A good example is the recently introduced bilateral
trade deal between the European Union and Japan.

Question 14

What are common markets?

Answer 14

Common markets represent a deeper integration between participating countries. They usually extend beyond free trade in goods and services to include free movement of labour across borders and the relaxation of capital controls.

Question 15

What are ways in which a customs union differs from a single market?

Answer 15

• A single market is a stronger and deeper form of integration than a customs union.
• A single market involves the free movement of goods and services, capital and labour.
• In addition to a common external tariff, a single market also tries to cut back on the use of non-tariff barriers
  such as different rules on product safety and environmental standards replacing them with a common set of
  rules governing trade in goods and services within the common market.

Question 16

What four key freedoms are the EU built on?

Answer 16

1. Free Trade in Goods: Businesses can sell their products anywhere in EU member states and consumers can
   buy where they want with no penalty
2. Mobility of Labour: Citizens of EU states can live, study and work in any other EU country
3. Free Movement of Capital: Financial capital can flow freely between member states and EU citizens can use
   financial services such as insurance in any EU state.
4. Free Trade in Services: Services such as pensions, architectural services, telecoms and advertising can be
   offered in any EU member state.

Question 17

Explain the Potential economic benefits from countries joining the EU single market

Answer 17

Question 18

What is a monetary union?

Answer 18

• Monetary union is a form of economic integration beyond participation in a single market e.g the Euro Area.

Question 19

Explain the possible advantages from joining the single currency.

Answer 19

Question 20

Explain the risks and drawbacks from committing to joining a single currency

Answer 20

• A country’s central bank loses the freedom to set monetary policy interest rates solely to meet macro objectives such as lowering inflation (higher interest rates) or preventing a recession (lower interest rates)
• Joining a common currency means that the option of a managed depreciation / devaluation of the exchange rate to help improve price competitiveness in overseas markets is also lost. Instead to become more price
  competitive, a government may have to maintain deflationary fiscal policies to achieve an internal devaluation
  of the price level
• There are also adjustment costs when switching currencies including menu costs and the risk that some retailers will increase prices when the currency is switched to make extra profit in the short term

Question 21

Explain when an Optimal Currency Area works best

Answer 21

• Where each economy has a flexible labour market to cope with external shocks. Flexibility might include:
  o Flexibility in real wages and salaries during an economic cycle
  o Workers with adaptable skills to reduce the risk of structural unemployment
  o High geographical mobility within & between countries
  o Flexible employment contracts including short-term job contracts
• When the effects of interest rate changes or a movement in the exchange rate have a broadly similar effect on businesses and households from country to country.

Question 22

How has joining a single currency not benefited Greece?

Answer 22

The economic crisis that engulfed Greece is a good example of the perils of joining a single currency when the country was unused to low interest rates, too willing to increase their household and government debt and suffering from a lack of price and non-price competitiveness with established (and richer) EU nations.

Question 23

What is trade creation?

Answer 23

Trade creation occurs when countries agree a trade deal that lowers tariffs between them (this may extend to a formal customs union). As a result of a reduced tariff, consumers in a participating nation can now source imports from a lower cost country which leads to lower prices and a rise in real incomes.

Question 24

How can an increase in regional trade agreements be seen as a threat to globalisation?

Answer 24

The WTO has
noted a trend towards regionalisation of trade for example within East Asia or the European Union. Some of the world’s poorest countries might not be able to negotiate favourable tariff or quota free access to many of the markets of rich, advanced countries. The WTO would prefer a global trade deal covering many goods and services rather than having to deal with over 4,000 separate free trade deals across the global economy in 2018.

Question 25

What are the 4 roles of the WTO, according to the WTO itself?

Answer 25

conductor, tribunal, monitor and trainer

Question 26

Explain the role of WTO as conductor

Answer 26

Members of the WTO have come up with a set of rules that apply to international trade; the WTO ensures that these
rules are followed.

Question 27

Explain the role of WTO as tribunal

Answer 27

This role involves settling disputes between members. Member are encouraged to sort out disputes by themselves,
but occasionally the WTO needs to convene a panel of experts.

Question 28

Explain the role of WTO as monitor

Answer 28

The WTO reviews the trade policies of its members to make sure that WTO rules are being applied fairly and
consistently.

Question 29

Explain the role of the WTO as trainer

Answer 29

The WTO provides training to government officials in (mostly) developing countries, to help them engage in trade
with other WTO members

Question 30

How can trade blocs both be for and against the WTO’s aims?

Answer 30

Trade blocs engage in free trade with their members (which is in line with WTO aims) but often put up trade restrictions / barriers against non-members (which is against WTO aims). All WTO members are also currently members of at least
1 regional trade agreement.

Question 31

How can regional trade agreements support the WTO’s aims?

Answer 31

Agreements on a
local or regional scale often go beyond what might have been possible in multilateral trade discussions, and can pave
the way for new policies to be rolled out to all WTO members. Agreements on intellectual property, environmental
protection and investment at regional level have informed WTO discussion on a multilateral level.