4.1.5 (a) - trading blocs

what is a trading bloc

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

aka economic integration

are there levels to this?

yes!

v low economic integration = bilaterial agreements

v high economic integration = monetary unions (eg. Eurozone)

4 types of trade blocs

free trade areas

customs unions

common markets

monetary unions

free trade areas

countries abolish trade restrictions (like tarriffs) between themselves, but maintain their own restrictions with whoever else

example of free trade area

CUSMA —> Canada - US - Mexico Agreement

they free trade with each other but deal with cuba as they like

customs unions

all g+s produced by member countries are traded tarrif free

AND

member countries agree on a common tarrif rate for imports from third party countries (common external barriers)

example of customs union

EU

common markets

g+s traded tariff free, common external tarriffs are in place

AND

fops flow freely between member countries

why the free flow of fops

improve allocation of resources

lower costs of production

example of common market

EU

monetary unions

same as customs union + common market

AND

a common currency issued by a common central bank

example of monetary union

Eurozone

4 essential conditions for a successful monetary union

movement of labour

similar trade cycles

mobility of finance

fiscal transfers

movement of labour

labour can move freely without any barriers (including language)

similar trade cycles

avoids tension

EG. southern europe in depression vs northern europe in temporary recession after 2008 crisis

mobility of finance

prices + wages can adjust based on market conditions of member nations

fiscal transfers

automatic fiscal transfers important to help economies

(because they have lost monetary policy so they rely wholly on fiscal)

benefits/costs of a free trade area

trade creation - ↑ efficiency + ↑ income

trade diversion - countries reallocate trade to partners = ↓ global efficiency

benefits/costs of a customs union or common market 

tariffs eliminated = cheaper imprts

common tariffs to 3rd parties simplifies trade

structural unemployment

↑ neg externalities of production

benefits/costs of a monetary union

simplifies trading costs - no exchange rate to deal with

can benefit from improved monetary policy (union interest rates may be lower than individual)

expensive to transition to monetary union (menu change prices)

loss of monetary policy

loss of sovereignty (decision making authority)