4.3: Economic Integration

What is economic integration? (2)

- Economic cooperation between countries.

- Coordination of economic policies.

What is a preferential trade agreement (PTA)?

Agreement between countries to lower trade barriers.

What is a bilateral trade agreement?

Trade agreement between two countries.

What is a multilateral trade agreement?

Trade agreement between three or more countries.

What is a regional trade agreement?

Trade agreement between many countries within a geographical region.

What is a trading bloc?

Group of countries that have agreed to reduce trade barriers.

What are the types of trading blocs? (4)

- Free trade areas.

- Customs union.

- Common market.

- Monetary union.

What is a free trade area (FTA)?

Countries that agree to gradually eliminate trade barriers between themselves.

What policies do members in a FTA have against non-members?

Each member pursues own policies towards non-members.

What are some examples of free trade areas (FTAs)? (3)

- North America Free Trade Agreement (NAFTA).

- Association of Southeast Asian Nations (ASEAN).

- South Asian Association for Regional Cooperation (SAARC).

What is the problems with free trade areas (FTAs)?

Imports into member countries from non-members could be sold to other members.

What is a customs union?

Countries that agree to reduce trade barriers and adopt a common policy towards non-members.

What policies do members in a customs union have against non-members?

Common policy towards non-members.

What are some examples of customs union? (3)

- Central European Free Trade Agreement (CEFTA).

- South African Customs Union (SACU).

- Pacific Regional Trade Agreement (PARTA).

What is the problem with a customs union?

Members must coordinate policies towards non-members; may lead to disagreements.

What is a common market?

Countries that:

- eliminate all trade barrier,

- have a common external policy

- and allow free movement of FoPs between them.

What policies do members in a common market have against non-members?

Common policy towards non-members.

What are some examples of a common market? (2)

- European Economic Community (EEC).

- CARICOM Single Market and Economy (CSME).

What is the problem with a common market?

Members must coordinate policies towards non-members; may lead to disagreements; may lose policy-making power.

What are the advantages of a trading bloc? (11)

- Trade creation.

- Increased competition.

- Expansion into larger markets.

- Economies of scale.

- Lower prices.

- Greater consumer choice.

- Increased investment.

- Better use of FoPs, improve resource allocation/employment.

- Improved efficiency.

- Stronger bargaining power.

- Political advantages.

What is trade creation?

When high-cost goods (produced/imported) are replaced by low-cost imports.

What are the advantages of trade creation? (3)

- Increased efficiency.

- Greater allocative efficiency.

- Increased consumption.

How do trading blocs lead to increased competition?

Domestic producers are not protected from foreign competition, must compete and be efficient.

How do trading blocs lead to expansion into larger market?

Firms have access to consumers outside of national boundaries.

How do trading blocs lead to economies of scale?

Firms have access to larger markets and produce/export more.

What is economies of scale?

When average costs decrease as a greater output is produced.

How do trading blocs lead to lower prices?

Foreign firms may sell cheaper OR domestic producers forced to become efficient and lower prices to be competitive.

How do trading blocs lead to greater consumer choice?

Foreign producers may supply different brands, qualities etc.

How do trading blocs lead to increased investment?

Firms are attracted by enlarged market size and are likely to invest.

How do trading blocs lead to improved resource allocation?

Firms become more efficient to maintain competitiveness.

Common markets include free movement of FoPs.

How do trading blocs lead to greater efficiency?

Firms become more efficient to maintain competitiveness.

How do trading blocs lead to stronger bargaining power?

Countries that trade in large groups have more power; more likely to be heard and achieve objectives.

What political advantages do trading blocs lead to? (3)

- Less chance of hostilities.

- Political stability and cooperation.

- Increased interdependence.

What are the disadvantages of a trading bloc? (4)

- Trade diversion.

- May challenge multilateral trading negotiations.

- Unequal distribution of gains and losses.

- Loss of sovereignty.

What is trade diversion?

When low-cost imports are replaced by high-cost imports.

How may trading blocs challenge multilateral trading negotiations?

May create trade conflicts with non-members; slows down trade liberalisation.

How may trading blocs lead to unequal distribution of gains and losses?

Some members may gain, others may not gain to the same extent or even lose.

How do trading blocs lead to a loss of sovereignty?

Governments lose some indepedent decision-making power.

What is a monetary union?

A common market with a common currency and central bank.

What is an example of a monetary union?

European Union.

What are the advantages of a monetary union? (5)

- Fixed exchange rates; no exchange rate risk/uncertainty.

- Price transparency (due to no exchange rate issues).

- No transaction costs for currency conversion.

- Larger market attracts investment.

- Greater negotiating and bargaining power.

What are the disadvantages of a monetary union? (3)

- No independent monetary policy.

- Cannot use exchange rates to correct trade imbalances.

- Limited room for independent fiscal policy.

- Loss of economic sovereignty.

- Policies affect each member differently; disagreements.

What are the functions of the World Trade Organisation (WTO)? (6)

- Administers WTO trade agreements.

- Provides a forum for trade negotiations.

- Handle trade disputes

- Monitors national trade policies.

- Provides technical assistance/training for developing nations.

- Cooperates with other international organisations.

What are some criticisms of the World Trade Organisation (WTO)? (5)

- Promotes trade rules that do not favour developing nations.

- Unable to reach agreement on agricultural protection.

- Does not distinguish between developed and developing.

- Ignores environmental and labour issues.

- Members have unequal bargaining power.