Unit 15.2 and 15.3 Flashcards
What is a economic integration
countries join together to make trade easier by reducing barriers like tariffs
What is a preferential trade agreement
agreement between two or more countries to lower trade barriers on particular products in trade barriers between each other
What are the different types of trading blocs
Free trade area
Customs Union
Common market
Monetary Union
What is a free trade area
A Free Trade Area (FTA) is where countries agree to eliminate trade barriers like tariffs among themselves. Each country in an FTA still decides its own trade policies with non-member countries. For instance, NAFTA, an FTA between the US, Canada, and Mexico, allows them to trade freely with each other, while they maintain their own tariffs with the EU.
Explain Customs Union
A customs union agreement between countries means free trade between members, but they set a common external tariff against non-members.
An example is the Southern African Customs Union (SACU), which is an agreement between the Republic of South Africa, Botswana, Namibia, Lesotho and Swaziland. This means tariffs on cars are removed among SACU’s members, but all members of SACU set a 10 per cent tariff on cars imported from non-members. The common external tariff ensures each country imports goods at a similar price and does not gain a competitive advantage over another member of the union by setting a different tariff.
Explain common market
A common market means there is free trade between members and there is also free movement of labour and capital.
The East African Community (EAC) is a common market among the following East African countries: Burundi, Kenya, Rwanda, Tanzania and Uganda. This means individuals are free to work in all the countries in the common market. The free movement of capital also means businesses can raise funds from banks to invest from all the different countries in the common market.
Explain Monetary Union
Monetary union is one of the final stages of economic integration where member countries adopt a single currency and have a central bank that sets monetary policy for the countries in the union. The members of the EU who have adopted the Euro are an example of this.
What are the different types of preferential trade agreements
Bilateral:
Regional:
Multilateral:
Strength of trading blocs
Better Resource Allocation & Employment: Trading blocs lead to freer movement of production factors, creating jobs and allowing capital to move to where it’s most profitable, thus optimizing resource use.
Production Efficiency & Economic Growth: Removing trade barriers increases production efficiency, helping the economy grow faster as inefficient producers lose protection.
Stronger Bargaining Power: Trading blocs give countries more influence in international negotiations, improving their ability to be heard and achieve goals.
Political Advantages: Economic integration reduces the likelihood of conflicts and promotes more investment, labor, and financial flows, especially as cooperation may lead to further benefits for member countries.
Increased Competition: Fewer trade barriers within blocs lead to more competition, benefiting consumers with lower prices and better resource allocation.
Market Expansion: Firms gain access to larger markets, which can significantly increase their exports.
Economies of Scale: Larger markets enable firms to grow and reduce costs, benefiting from economies of scale.
Consumer Benefits: The removal of trade barriers results in lower prices and a wider variety of goods for consumers.
Increased Investment: Trading blocs can attract both internal and external investments, fueling further economic growth and potentially leading to more innovation and development within the bloc.
Disadvanatage of trading blocs
Unequal Distribution of Gains and Possible Losses: Not all countries or stakeholders within a trading bloc benefit equally, which can create internal conflicts and complicate reaching agreements.
Loss of Sovereignty: Economic integration can lead to a loss of national sovereignty over economic policy, with decisions shifting to the trading bloc level.
Challenge to Multilateral Trading Systems (WTO): Trading blocs may disrupt the broader WTO’s efforts towards global trade liberalization and could lead to trade conflicts between different blocs.
