4.1.5 Trading blocs and the World Trade Organisation (WTO)

trading bloc

group of countries who come together and agree to reduce or eliminate any barriers to trade that exist between them

number of regional trade agreements in 2022

Globally,there were more than 320 regionaltrade agreements in eectin 2022

types of trading blocs

free trade areas

o customs unions 

common markets o

monetary unions

free trade area

bloc in which countries agree to abolish trade restrictions between themselves but maintain their own restrictions with other countries

example of free trade

Canada–United States–Mexico Agreement(CUSMA)

In the diagram above, Mexico, Canada and the USA have reduced/eliminated many trade restrictions between themselves The USA refuses to trade with Cuba and has placed a complete ban on all exports/imports to Cuba Canada trades with Cuba butimposes taris on all imports Mexico trades freely with Cuba

customs union

greement between countries in which all goods/services produced by members are traded tari free. Additionally, countries agree on common tari rates on imports from all external (third party) countries

example of customs union

In the diagram above, countries in the European Union have eliminated all tari barriers between themselves butimpose common tari barriers on third party countries such as the UK or China

common market

Similarly,to a customs union, goods/services are traded tari free in common markets. Additionally,the four factors of production ow freely between member countries The goal is to improve the allocation of resources between the common market members and lower costs of production

what is the eu

customs union and a common market

monetary union 

akes integration a step further. Members enjoy all ofthe benets of a customs union and common market, butthen also establish a common central bank which issues a common currency and controls the monetary policy of member countries

example of monetary union

eurozone

essential conditions for a succesful monteray union

• free movement of labour

• similar trade cycles

• mobility of finance 

• automatic fiscal transfers to countries performing poorely

movement of labour in eurozone

. The main languages ofthe Eurozone are English, French and German butlanguage is still a limiting factor

different trade cycles eurozone examle

afterthe 2008 Financial Crisis, Southern European countries were in a depression compared to the temporary recession in Northern European countries. This created extreme pressure on the survival ofthe Eurozone

examle of fiscal transfers eurozone

scaltransfers to Spain, Portugal and Greece post 2008 Financial Crisis were very weak. Political tensions emerged in which citizens of wealthier countries (Germany) did not wanttheirtax revenue used to bail out countries with perceived poor scal history (Greece)

benefits of regional trade agreements 

• trade creation improves efficiency and higher income

• tariffs between member states eliminated

• common tariffs to 3rd party countries simplify trading conditions

benefits of monetary union

A monetary union simplies trading costs and provides pricing transparency

Some member countries gain from improved monetary policy conditions e.g. European interest rates may well be lower than an individual country's rates would have been

There is less uncertainty surrounding exchange rates as members all use the same currency

costs of regional trade agreements

• Trade diversion occurs as countries reallocate trade to partners in their agreement. This may worsen global eciency

• Some domestic industries experience structural unemployment

• Increased negative externalities of production, resource depletion and environmental damage

costs of monetary union

Transitioning to a monetary union can be expensive and firms may find it hard to adjust/change their menu prices

Member countries lose their ability to set interest rates and control the supply of money (monetary policy)

Loss of sovereignty

World trade organisation

The World Trade Organisation (WTO) was established in 1995 to promote free trade They believe free trade is the best way to raise living standards, create jobs and improve people's lives

trade liberalisation 

process ofrolling back the barriers to free trade e.g. removing taris

WTO main roles in liberalising trade

. It brings countries together at conferences and encourages them to reduce or eliminate protectionist trade barriers between themselves e.g. The Doha Round conferences .

It acts as an adjudicating body in trade disputes. Member countries can file a complaint if they believe a trading partner has violated a trade agreement. The WTO will then run a hearing and make a judgement

evaluation of effectiveness of trade agreements

larger economies tend to selectively choose which rulings ofthe WTO to abide by. Smaller (usually developing) economies tend notto have thatluxury.

problem with WTO

WTO judgements are not legally binding. Members voluntarily submitto them (or not). A judgementin favour of a trade dispute does allow the aggrieved nation to put protectionist measures in place with the WTO's approval. The hope is thatthese measures willthen force the nation committing the violation to back down and resolve the trade issue.

conflicts between regional trade agreements and the WTO

While these are benecial to the members in the agreement(as they strengthen ties and create more trade between them),they also create conicts with the stated aim of the WTO - to liberalise trade Regional agreements often shift trade from a non-member who has comparative advantage,to a member who does not Regionaltrade members then often institute common trade barriers on nonmembers which is the opposite oftrade liberalisation (protectionism) Regionaltrade agreements can be benecialfor member countries but may result in global ineciency in the allocation ofresources The WTO advocates for free trade between all member countries

bilateral agreements

between 2 countries of trading blocs

multilateral agreements

between more than 2 countries of trading blocs