Flashcards in Unit 4: Chapter 2 - Growing Economic Integration Deck (74):
What is the primary purpose of the WTO?
To open trade for the benefit of all
What does the WTO promote?
Trade liberalisation by encouraging countries to lower protectionist barriers and increase trade flows thus creating larger markets, greater access to raw materials, more competition, lower prices and greater choice, it wants to promote free trade
What is the WTO responsible for?
Ensuring that countries act in accordance to various trade agreements they have signed
What will the WTO help to resolve?
Complaints through negotiations between countries involved
What have the WTO organised?
A series of negotiations aimed at reducing tariffs and quotas
What type of groups have criticised the WTO?
Anti-globalisation, environmental and developmental lobbies
What is a criticism of the WTO in terms of small countries?
Small countries in the WTO wield little influence
What is a criticism of the WTO in terms of politics?
The politicians representing the most influential countries in the WTO focus on the commercial interests of profit-making companies rather than the interests of all despite the WTO claiming to help the developing countries
Why does the WTO argue that subsidies are not beneficial?
Things that we subsidise could be bought from poor countries
What are rich countries doing which allows them to block imports from developing countries?
They are able to maintain high import duties and quotas on certain products
What has there been an increase in (in terms of rich countries having more power in the WTO)?
Non-tariff barriers such as anti-dumping measures being allowed against developing countries
What is happening in the agriculture market that shows how rich countries have more say in the WTO?
The maintenance of high protection of agriculture in developed countries whilst developing ones are pressed to open their markets
Why do more developed countries have more power in the WTO?
Many developing countries do not have the capacity to follow the negotiations and participate actively
Why is the WTO still viewed to be good despite its criticisms?
Some of the negotiations they have arranged could generate gains in real income, the WTO does not have the power to destroy cultures and it my have a pro free trade bias but it cannot force poor countries to enter into internationally binding agreements
Why are more regional trade agreements predicted to be formed?
If trade talks continue to fail, many observers believe regional groupings will play an even bigger role
What do RTAs tend to form the basis of?
What is a trading bloc?
An agreement between states, regions or countries to reduce barriers to trade between the participating regions
How can trading blocs vary?
They can vary from two countries reducing tariffs on each other's goods/ reducing bureaucracy by simplifying import/export procedures to full blown economic and monetary union
What does a simple free trade agreement involve?
A reduction in current tariff and non-tariff import controls in order to liberalise trade in goods and service between countries
What does a free trade area involve?
No internal trade barriers
What does a customs union involve?
No internal trade barriers and a common external tariff
What does a single market involve?
No internal trade barriers, a common external tariff and factor and asset mobility
What does a monetary union involve?
No internal trade barriers, a common external tariff, factor and asset mobility and a common currency
What does an economic union involve?
No internal trade barriers, a common external tariff, factor and asset mobility, a common currency and common economic policy
What is a free trade area and what are the effects?
Countries agree to remove tariff and non-tariff barriers between them to promote free trade in goods and services, the effect is a gain in consumer surplus and a country can consume beyond its PPF
What is a customs union?
Countries agree to abolish tariffs and quotas between member nations to encourage the free movement of goods and services and countries agree to adopt a common external tariff on imports from non-member countries
What is an example of the customs union in action?
Goods and services that originate in the EU circulate between member states duty-free however these products might be subject to other charges such as excise duty or VAT
What does a customs union lead to?
What does the common external tariff in a customs union prevent?
Countries imposing their own unilateral tariffs on different products that differ from other nations in the customs union
What is a single market?
It involves the free movement of goods and services, capital and labour (i.e. the four factors of production) and the concepts are broadened to encompass economic policy harmonisation such as in areas of health and safety legislation
What does deeper economic integration require?
Some form of political integration which in turn requires shared aims and values between nations
What does trade creation involve?
A shift in domestic consumer spending from a higher cost domestic source to a lower cost partner source within a union
What is trade creation the result of?
Abolitions of tariffs on intra-union trade
What should trade creation stimulate?
An increase in intra-union trade within the customs union and it should lead to an improvement in the efficient allocation of scarce resources and gains in consumer and producer surplus
What are the effects of trade creation in terms of economic welfare?
Countries engage in more trade with each other and this gives rise to an increase in economic welfare
What are the effects of trade in terms of comparative advantage?
Countries can now produce goods where they have a comparative advantage
What are the effects of trade creation in terms of specialisation?
This specialisation means a more efficient use of the world's scarce resources and therefore higher levels of output which equal higher levels of global income
What is trade diversion?
A shift in domestic consumer spending from a lower cost world source to a higher cost partner source
What is trade diversion the result of?
The elimination of tariffs on imports from the partner but a common external tariff on non-partner countries
What is the result of the common external tariff?
It makes imports in the whole trading bloc more expensive
What can trade diversion lead to?
Higher costs for producers and higher prices for consumers if previously they had access to a lower cost/lower price supply from a non-EU country
Whether the net change in welfare raises or lowers the UK's economic welfare will depend on what as a result of a common external tariff?
The price elasticity of the UK's demand and supply curves and how much more expensive EU producers were when compared to the most efficient global producers before the imposition of the tariffs
What does protectionism in the form of an import tariff result in?
A deadweight social loss of welfare
What type of protectionist measures can be defended in terms of efficiency and why?
Only short term protectionist measures as they can be used to protect infant industries
What does the overall effect of a customs union on the economic welfare of citizens in a country depend on?
Whether the customs union creates effects that are mainly trade creating or trade diverting
What is the exchange rate mechanism?
One of the foundation stones of economic and monetary
unions, it gave currencies a central exchange rate against the European currency unit which in turn gave them central cross-rates against one another
What was the aim of the exchange rate mechanism?
To stabilise exchange rates, encourage trade within Europe and control inflation
How did the exchange rate mechanism work?
It gave countries an upper and lower limit on either side of this central rate within which they could fluctuate
Why did the ERM break down?
When a number of currencies could no longer keep to the limits
What became one of the convergence criteria for deciding a country's suitability to join the single currency and complete monetary union?
A currency's ability to stay within its margins
What were the effects of the ERM crisis?
In some countries it reinforced doubts about the desirability and even the feasibility of a single currency whereas in other countries it strengthened the country's determination to qualify for the euro
What did most countries conclude as a result of the ERM crisis?
In a world of newly freed capital movements, the single currency was the only way to achieve currency stability
What is monetary union?
It occurs when at least two countries share the same currency
What are two examples of monetary unions?
Economic and monetary union of the European Union and the West African Monetary Union
What are the benefits of a monetary union in terms of intra-union trade?
A single currency should encourage intra-union trade
What are the benefits of a monetary union in terms of greater competition?
Greater competition will benefit consumers, more research and development might lead to more innovation and new products, competition should mean lower prices and more choice
What are the benefits of monetary union in terms of foreign exchange dealing costs?
Foreign exchange dealing costs and exchange rate risk would be eliminated lowering costs for businesses and consumers, lower costs and lower risks could lead to higher levels of investment, the main perceived advantages are a reduction in transaction costs and an end to destabilising currency shifts
To who will the elimination of transaction costs be particularly beneficial to?
It will be particularly relevant to any country which exports a considerable amount of its output to the union and it will also be helpful to small and medium sized enterprises which may not be able to reap sizeable economies of scale
What are the benefits of monetary union in terms of less currency instability?
A single currency would bring an end to internal currency instability and a reduction of external currency instability - this would enable exporters to project future markets with greater certainty (this could unleash great potential for growth), the currency would have the enhanced credibility of being used in a large currency zone and so it would be more stable against speculation than individual currencies are now and this should filter through to greater price stability
What are the benefits of a monetary union in terms of price transparency?
Price transparency would improve information on prices for consumers, relative costs for union countries' businesses and relative wages for workers; a single currency highlights price differentials, the subsequent enhancement of competition will increase economic efficiency and should cause price convergence thus ending any market discrimination; increased price transparency should see improved freedom of movement of factors of production and capital which should increase efficiency - this may also help keep inflation under control
What is an evaluation of the price transparency argument for monetary union?
Consumers won't necessarily fly to another country to get the product
What are the benefits of a monetary union in terms of access to a more liquid European capital market?
Access to a more liquid European capital market (a larger pool of financial resources) should mean lower interest rates for businesses looking to borrow, the pool of available euros is larger as there are more banks which means there is more opportunity to borrow and the costs may be lower
What was the problem with lower interest rates in the eurozone?
Lower interest rates led to problems across the eurozone because as interest rates converged across Europe, the formerly high interest rate countries went on a borrowing spree, this borrowing spree was largely financed by banks in Germany and other traditionally low interest rate countries - that's why the current debt problems of the European periphery are also a big problem for the European banking system as a whole
What are the benefits of a monetary union in terms of freer markets?
Freer markets should allow greater exploitation of economies of scale as well as increased domestic consumption; larger firms may be better placed to compete with multinationals in global markets; larger firms may however mean that economic integration, rather than enhancing competition, could well lead to greater oligopoly or monopoly power - this will place great emphasis on the EU's competition commission
What are the costs of a monetary union in terms of loss of macroeconomic control over monetary policy?
The Bank of England would no longer be able to set interest rates to suit the UK economic conditions if Britain joined the single currency, monetary policy cannot be used to boost AD, another problem is the inability for a country to print more money to pay off debts - individual countries are unable to use quantitative easing to increase liquidity or devalue
What are the costs of a monetary union in terms of loss of macroeconomic control over fiscal policy?
The stability and growth pact stated that the budget deficit of a country should not exceed 3% of GDP and public debt should not exceed 60% of GDP, this pact has limited the scope for countries to use fiscal policy to stimulate the economy in an economic downturn
What does an economic and monetary union imply?
It implies potential for tax harmonisation and a further loss of economic sovereignty, tax harmonisation would appear to be an important factor in stimulating the free movement of capital in a single market - the government may then be further restrained in its public spending plans
What are the costs of a monetary union in terns of economic sovereignty?
A single currency will affect UK economic sovereignty and may affect income inequality: the independence of the European Central Bank should lead to price stability without political interference however doubts remain on whether the ECB which is setting one interest rate for the entire Eurozone can cope with asymmetric shocks within the EU
What are the costs of monetary union in terms of the theory of optimal currency areas?
This theory highlights that either there must be significant labour and capital mobility or fiscal transfers from Europe in order to re-stimulate the UK economy
What are the costs of monetary union in terms of external economies of scale?
Some economists foresee external economies of scale becoming more significant, this could cause a clustering effect where particular industries will gather in booming productive cores, outside these cores there will be a less dynamic periphery which might lead to regional disparities in income and employment; there may therefore need to be an enhanced role played by European regional policy
What has subsequent problems within the eurozone caused?
These problems have confirmed some people's fears that if we had joined we would be in a very different situation than we are now for the worse
Why might the costs of staying out of the EMU be very high?
There was evidence that the UK faced a loss of inward investment, a loss of trade with Europe; a loss of political influence and perhaps eventual exclusion from the EU
Why might there be an imbalance in costs and benefits for different firms from the one-off cost of adapting to the Euro?
Domestic services will face the cost of converting to the euro but will not benefit from the possibility of increasing exports