4.4 - Economic Integration

What is a bilateral trade agreement?

A trade agreement between two countries to reduce or eliminate tariffs.

What is a regional trade agreement?

An agreement among a group of geographically close countries to facilitate trade (e.g. NAFTA, EU).

What is a multilateral trade agreement?

A trade agreement involving many countries, usually under the WTO.

What is a preferential trade agreement?

An agreement to give certain products from certain countries preferential access by reducing tariffs or other trade restrictions.

What is a free trade area?

A group of countries that eliminate tariffs among themselves but retain individual external trade policies.

What is a customs union?

A group of countries that eliminate internal tariffs and adopt a common external tariff on non-members.

What is a common market?

A customs union with free movement of labor and capital between member countries.

How does economic integration increase competition?

By opening domestic markets to foreign firms, pushing local firms to be more efficient and innovative.

Compare trading blocs: FTA vs Customs Union vs Common Market

FTA: removes tariffs only. Customs Union: FTA + common external tariff. Common Market: Customs Union + free movement of labor/capital.

How can trading blocs lead to economies of scale?

Firms sell to a larger market, allowing for lower average costs of production.

How do trading blocs increase employment opportunities?

Free movement of labor allows workers to move where jobs are available.

How do trading blocs improve bargaining power?

Larger markets can negotiate better trade terms globally.

How can trading blocs lead to political stability?

Shared economic interests foster cooperation and reduce the risk of conflict.

What is a potential loss of sovereignty in a trade bloc?

Countries may need to follow common rules or regulations that limit independent policy decisions.

Why are multilateral trade negotiations difficult in trading blocs?

Blocs may prioritize internal policies over global trade liberalization.

What is trade creation?

When production shifts from high-cost domestic producers to low-cost producers in a trading partner.

What is trade diversion?

When trade shifts from a more efficient producer outside the bloc to a less efficient one within due to common external tariffs.

What is a monetary union?

A common market with a shared currency and central bank (e.g. Eurozone).

Advantages of a monetary union?

Eliminates exchange rate risk, reduces transaction costs, promotes trade and investment.

Disadvantages of a monetary union?

Loss of monetary policy control, asymmetric shocks, risk of trade diversion, loss of exchange rate flexibility.

What are the objectives of the WTO?

Promote free trade, resolve disputes, ensure fair competition, and encourage economic growth.

What are challenges facing the WTO?

Reaching agreements on services and agriculture, and power imbalance among members.