Economic integration

Trade agreements, trading blocs, monetary union and WTO

What is economic integration?

Occurs as countries reduce trading barriers between themselves and become more interdependent

How can economic integration occur?

1. Trade agreements

2. Trading blocs

3. Formation of monetary union

What are four types of trade agreements?

1. Bilateral

2. Preferential

3. Multilateral

4. Regional

What is a preferential trade agreement (PTA)?

An agreement between two or more countries providing preferential (better) terms and conditions of trade to member countries

Example: Vietnam has preferential tariff rates with Australia

What is a bilateral trade agreement?

A preferential trade agreement between two countries and aims to reduce or eliminate barriers to trade

Example: Vietnam signed a bilateral trade agreement with Korea in 2015

What is a regional trade agreement (RTA)?

A preferential trade agreement usually between more than two countries in the same geographical region

Example: Armenia created an agreement with the EU in 2019 to create the EU-Armenia RTA

What is a multilateral trade agreement?

A legally binding preferential trade agreement between more than two countries or trading blocs and is usually negotiated and overseen by the WTO

Example: The East African Community was created in 2005 between seven African countries

What are the advantages of trading blocs?

• Greater access to markets offer the potential for economies of scale

• With freedom of labour, there are greater employment opportunities

• Membership in a trading bloc may allow for stronger bargaining power in a new multilateral negotiations

• Greater political stability and cooperation between the countries within the bloc due to increased interdependence

• Trade creation: occurs when a RTA leads to the expansion of trade between member countries. By eliminating or reducing trade barriers, such as tariffs or quotas, within the agreement, member countries can access new markets and increase their trade volumes

What are the disadvantages of trading blocs?

• Loss of sovereignty as nations increasingly give up their autonomy, perhaps most visible when joining a monetary union (nations lose the ability to set their own monetary policy)

• Multilateral trading negotiations become more challenging as countries within a trading bloc have to maintain the existing bloc rules when dealing with third-party countries

• Trade diversion: Occurs when a RTA redirects trade away from more efficient external suppliers. It can sometimes lead to higher costs and reduced efficiency due to the loss of access to lower-cost suppliers outside the agreement

What is the WTO?

• Established in 1995 to promote free trade

• Believe free trade is the best way to raise living standards, create jobs and improve people’s lives

• Has two main roles in liberalising trade

What is a trade liberalisation?

The process of rolling back the barriers to free trade eg. removing tariffs

What are the two main roles of the WTO?

1. It brings countries together at conferences and encourages them to reduce or eliminate protectionist trade barriers between themselves

2. 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 and the WTO will then run a hearing and make a judgment

What are the objectives of the WTO?

• Improving people’s lives

• Promotion of fair competition

• Protecting the environment

What are the functions of the WTO?

• Trade negotiations

• Implementation and monitoring of trade agreements

• Dispute settlement

• Building trade capacity between nations

• Outreach to governments and influential organisations on behalf of member countries

What are two effects from regional trade agreements?

1. Often shift trade from a non-member who is more efficient in producing certain goods/services, to a member country who is less efficient (trade diversion)

2. Regional trade members then often institute common trade barriers on non-members which is the opposite of trade liberalisation (protectionism)

What are two key factors which continue to undermine the influence of the WTO?

Difficulties in reaching agreement on services and primary products

• MEDCs continue to subsidise many firms producing primary products which allows them to dominate global markets

  • LEDCs do not have the tax revenue to do the same for their firms and so they are unable to compete

• Firms from LEDCs are frequently blocked from offering services (which generate higher profit and income) in MEDCs

  • This prevents free trade in services

Unequal bargaining power of members

• Firms and individuals from MEDCs tend to be better networked and will unashamedly work their connections so as to gain better trading conditions

• Largely, wealthier countries will also pressurise WTO negotiations in order to secure the outcome they want

• It is much harder to LEDCs to gain preferential terms in trade negotiations due to this power imbalance