LS4 - Trading Blocs And The WTO Flashcards
How can trade be liberalised
On a global basis through WTO, on a regional basis through trade blocs, or unilaterally
Problems with trade in first half of 20th centurry
High degree of protectionism, no dispute settlement mechanism
Problems with GATT
Only a treaty - not permanent, trade dispute mechanism was flawed
WTO
Permanent institution formed in 1995, provided formal mechanism to resolve trade disputes
Trade bloc
Group of countries that mutually agree to reduce or remove trade barriers
Free trade agreement
FTAs can be bilateral or multilateral, reduce trade barriers below WTO levels, tariffs and quotas removed by FTAs
Advantages of FTA
Competitive sectors benefit
Improved choice for consumer
Reduced admin work/costs
Increase in FDI
Trade creation - more efficient allocation of resources (if TC>TD)
Disadvantages of FTA
Decline of uncompetitive sectors
Risk of structural unemployment
Trade diversion - less efficient allocation of resources (if TD>TC)
Individual countries lack bargaining power which makes it hard to get advantageous trade deals
Other countries in trade bloc may set trade policy that improves competitiveness of rival firms/industries
Trade creation and diversion
What is a trading bloc likely to lead to out of the two
Trade creation-when trade is created by the joining of a customs union. Consumption shifts from a high cost domestic producer to a low cost partner producer
Trade diversion- consumption shifts from a lower cost producer outside the trading bloc to a higher cost producer within e.g. New Zealand butter vs European butter
§ A trading bloc is more likely to lead to trade diversion than trade creation when it has a very high external tariff as this will push countries to buy from within the bloc or if there is a relatively small cost difference between goods purchased within and outside the block. The higher the tariffs imposed by a country before joining the market, the more likely it is that trade creation rather than diversion will take place.
§ If joining a FTA leads to more trade creation than diversion, it is welfare improving. If it leads to more diversion than creation, the FTA is reducing welfare.
Customs union
FTA that impose uniform trade restrictions on non members
Common external tariff
Trade policy agreed by customs union members that sets identical trade restrictions on non members
Advantages and disadvantages of a trading bloc
Encourages specialisation (resources are allocated where countries have a comparative advantage + economies of scale (productive efficiency, lower average costs- profitability
§ Greater competition domestically-removal of barriers- encouraging innovation , lower prices-=productive and allocative efficiency- increase in world efficiency
§ Firms may be able to grow much larger by creating a larger customer market- may be difficult given different customer markets in different countries. Economies of scale will be increased
§ Firms inside the bloc are protected from cheaper imports from outside, for example those in the EU are protected from Chinese imports.
§ Greater choice for consumers- welfare increase
§ Creates employment opportunities, if leads to an increase in output
DISADVANTAGES:
Inefficient producers within the bloc are protected from efficient producers outside the bloc= trade diversion consumers lose out e.g. zombie firms
§ Less national sovereignty. Loss of resources, most successful countries will attract capital and labour. Regional ineq
§ Reduction in competition as inefficient firms are driven out of the business – monopoly power. market –oligopolistic
§ Retaliation as the creation of one regional trading bloc - lead to creation of others = can lead to trade disputes.
§ Countries are no longer able to benefit from trade with countries in other blocs- blocs likely to distort world trade
One dynamic loss may be the loss of resources, most successful countries attract capital and labour (since both are free in a common market)= heightens regional inequalities as the richest countries experience faster rates of growth. Firms may set up factories etc. in the poorer countries, as labour is cheaper, and therefore helps them to grow but also mean they lose the most skilled labourers to more successful countries
§ Creating and maintain trading blocs can distract governments from the gains of signing full free trade agreements. Bilateral trade agreements can bring very little gain to the two countries making the agreement but can take up significant government resources.
§ They distribute the gains from trade unequally, developed countries often gaining most and developing countries being impacted little.
§ May be weak if they cover a very limited range of goods.
§ Trading blocs can be seen as ‘second best’ solutions in a world with protectionism. Economic efficiency would be
maximised if there were no barriers to trade.
