4.1.5 Trading blocs and the World Trade Organisation (WTO)

Trade blocs

A group of countries that come together and form agreements to promote trade and economic cooperation among themselves.

Agreements in trade blocs

The agreements often involve reducing or elimination barriers to trade.

Regional trading bloc

Agreement signed by a group of countries within a geographical region to reduce/eliminate barriers to trade.

Bilateral agreements

Agreements that occur between two countries.

Multilateral agreements

Agreements that occur between three or more countries.

Free trade areas (FTAs)

2+ countries within a region agree to reduce/eliminate barriers to trade on all goods coming from members.

Elimination of tariffs and quotas

FTAs involve the elimination or reduction of import tariffs and quotas on trade between member countries.

External tariffs and quotas

Each member establishes its own external tariffs and quotas.

Customs union

Removes trade barriers between member countries and uses a common external tariff against non-members.

Coordination of trade policies

Member countries coordinate their trade policies with respect to non-members.

Common markets

Free trade in all factors of production between members.

Common external tariff

Common markets impose a common external tariff.

Single market

A common market aims to establish a single market, relying on a level of harmonisation of micro-economic policies.

Removal of customs posts

Common markets involve the removal of customs posts between members.

CELL

Factors of production that are allowed free movement due to the removal of trade barriers.

Economic integration

A higher degree of economic cooperation among countries.

Eurozone

A monetary union where member states share a common currency, the euro.

Fiscal discipline

A condition necessary for the success of the Eurozone to prevent economic imbalances.

Criteria for Eurozone success

Having similar rates of inflation and interest among member states.

Common monetary policy

A policy implemented by a central bank, specifically the ECB for the Eurozone.

Political commitment

The willingness of member states to give up some economic sovereignty for the union.

Specialisation

The process where countries focus on producing certain goods, increasing output.

Economies of Scale (EoS)

Cost advantages that firms experience as their scale of operation increases.

Trade creation

The shift in consumption from a high-cost domestic producer to a low-cost foreign producer.

Impact of trading blocs

Increased competition from foreign firms leading to innovation and lower prices.

Trade diversion

When consumption shifts from a low cost producer outside the bloc to a high cost producer inside it.

Regional inequalities

Richer countries will attract the best labour and capital and will experience quicker rates of growth.

Increased trade

RTAs increase trade which increases economic growth.

Efficiency gains

Reducing trade barriers allows resources to be allocated more efficiently.

Economies of scale

This will reduce production costs.

Political cooperation

RTAs can promote political cooperation and peace among member countries.

Complexity

Complying with different rules and regulations can be complex for business.

Exclusion

Non-member countries face great disadvantage, potentially causing international tensions.

Loss of sovereignty

Deeper integration may lead to giving up some sovereignty in trade policy.

Role of the WTO in trade liberalisation

It plays a critical role in promoting global trade liberalisation.

Negotiation

Facilitating trade amongst members to reduce trade barriers.

Dispute settlement

Resolving trade disputes through a rules-based system.

Monitoring

Monitoring trade policies and practices of member countries to ensure they comply with WTO rules.

Technical assistance

Providing technical assistance to developing countries to help them participate in global trade.

Choice

Choice of buying from the rest of the world, not just domestically produced goods.

Innovation

More competition due to free trade leads to an incentive to innovate.

Overdependence

A potential risk associated with free trade.