4.1.5 Trading Blocs and WTO Flashcards
(38 cards)
4.1.5a
Define a Trading Bloc
A group of countries that agree to reduce / remove trade barriers between them to encourage easier and increased trade.
4.1.5a
Define Regional Trade Agreements
treaties between two or more countries in a specific region to reduce or eliminate trade barriers
4.1.5a
Define Bilateral Trade Agreements
trade deals between two countries that agree to reduce or remove trade barriers to increase trade and economic cooperation between them
4.1.5a
Types of Trading Blocs
- Free trade areas
- Customs Unions
- Common Markets
- Monetary Unions
4.1.5a
Free Trade Areas
- Member countries remove tariffs and quotas between themselves on most or all goods and services.
- Each member maintains its own external tariffs on imports from non-members.
E.g NAFTA
4.1.5b
Arguments for Free Trade
- specialisation
- increased competition
- Access to larger markets
4.1.5b
Arguments for Free Trade : specialisation
specialise in goods where they have a comparative advantage,
→ produce more efficiently at lower opportunity costs
→ total world output increases because resources are better allocated,
→ raises economic welfare + potential living standards globally
4.1.5b
Arguments for Free Trade : Increased Competition
- Free trade = more competition between firms,
→ producers must cut costs + innovate to stay competitive,
→ this improves productive efficiency (lower AC ) and allocative efficiency (better matching consumer preferences),
→ consumers benefit from lower prices and higher quality goods
= larger consumer surplus
4.1.5b
Arguments for Free Trade : Access to International markets
- firms access larger international markets through free trade,
→ exploit EoS by producing on a larger scale,
→AC fall + firms become more efficient,
→ lower prices + greater consumer surplus.
4.1.5b
Arguments Against Free trade
- infant industries
- Lost market share
- externalities
4.1.5b
Arguments Against Free trade : Infant Industries
- domestic infant industries face competition from established foreign firms,
→ they may struggle to grow or achieve economies of scale,
→ this can lead to their premature closure,
→ causing loss of future jobs and potential economic growth
4.1.5b
Arguments Against Free trade : Lost Market Share
- free trade = inefficient domestic industries to lose market share,
→ some firms will close and workers become unemployed,
→ structural unemployment increases and incomes fall in certain sectors or regions,
→ leading to social and economic disruption
4.1.5b
Arguments Against Free trade : Externalities
- free trade increases long-distance transport of goods,
→ carbon emissions and environmental damage rise,
→ negative externalities like pollution and climate change increase,
→ overall social welfare may decrease
4.1.5b
Free Trade Evaluation
-
4.1.5a
Customs Unions
• Like FTAs but with an additional feature: members adopt a common external tariff (CET) on imports from non-members.
• This prevents trade deflection (importing through the member with the lowest external tariff).
• Example: The East African Community (EAC
4.1.5a
Common Markets
• Customs union + free movement of factors of production (labour and capital) across member countries.
• Allows workers and investment to flow freely, increasing efficiency and integration.
• Example: The European Economic Community (EEC) before evolving into the EU
4.1.5a
Monetary unions
• Common market + a shared currency and monetary policy across member countries.
• Requires a central monetary authority and coordination on fiscal policies.
• Example: The Eurozone (countries that use the euro).
4.1.5a
Conditions Necessary for Monetary Unions
- Labour Mobility
- Fiscal Transfers
- Similar Business Cycles
- Political Integration
4.1.5a
Conditions Necessary for Monetary Unions : Labour Mobility
Workers must be able to move easily between countries to adjust to regional shocks
4.1.5a
Conditions Necessary for Monetary Unions : Fiscal Transfers
Mechanisms to redistribute resources to regions affected by economic downturns.
4.1.5a
Conditions Necessary for Monetary Unions : Similar Business Cycles
Member countries should have similar economic conditions for a common monetary policy to be effective
4.1.5a
Conditions Necessary for Monetary Unions : Political integration
Strong governance structures to enforce rules and coordinate policies
4.1.5a
Evaluation for CET
TRADE DIVERSION
A country has a comparative advantage for a good
Country part of Trade Bloc buys that good from a country WITHOUT comparative advantage
As CET increases costs for country WITH comparative advantage
Thus making it cheating to import from country without comparative advantage but within trade bloc
4.1.5b
Costs for Regional Trade Agreements
- Trade Diversion
- Adjustment Costs = structural unemployment for loss of businesses that cannot keep up
- Monopoly / Oligopoly Risks = big cheap firms put smaller / domestic firms at risk
- Loss of sovereignty = Dependancy for imports from other countries = exposed to exogenous
- Environmental issues = transportation costs
