Edexcel A Level Economics A

Revision Notes

A LevelEconomics AEdexcelRevision Notes4. A Global Perspective4.1 International Economics4.1.5 Trading Blocs & the World Trade Organisation (WTO)

4.1.5 Trading Blocs & the World Trade Organisation (WTO)

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Types of Trading Blocs

  • A trading bloc is a group of countries who come together & agree to reduce or eliminate any barriers to trade that exist between them
  • There are different levels of economic integration ranging from relatively low integration in a bilateral agreement to high integration in a monetary union e.g. the Eurozone
  • Globally, there were more than 420 regional trade agreements in effect in 2022
  • The trading blocs below each have an increased level of economic integration

Free Trade Areas

  • A free trade area is a bloc in which countries agree to abolish trade restrictions between themselves but maintain their own restrictions with other countries e.g Canada–United States–Mexico Agreement (CUSMA)

4-1-5-types-of-trading-blocs---free-trade-area

Mexico, Canada & The USA have a free trade agreement but can deal individually with Cuba as they see fit

  • In the diagram above, Mexico, Canada & the USA have reduced/eliminated many trade restrictions between themselves
    • The USA refuses to trade with Cuba & has placed a complete ban on all exports/imports to Cuba
    • Canada trades with Cuba but imposes tariffs on all imports
    • Mexico trades freely with Cuba

Customs Unions

  • A customs union is an agreement between countries in which all goods/services produced by members are traded tariff free. Additionally, countries agree on common tariff rates on imports from all external (third party) countries

4-1-5-customs-union

Countries within the European Union trade freely between themselves & have common barriers with all third-party countries e.g. UK

  • In the diagram above, countries in the European Union have eliminated all tariff barriers between themselves but impose common tariff barriers on third party countries such as the UK or China

Common Markets

  • Similarly, to a customs union, goods/services are traded tariff free in common markets. Additionally, the four factors of production flow freely between member countries
    • The goal is to improve the allocation of resources between the common market members & lower costs of production
    • The European Union is a customs union & a common market 

Monetary Unions

  • A monetary union takes integration a step further. Members enjoy all of the benefits of a customs union & common market, but then also establish a common central bank which issues a common currency & controls the monetary policy of member countries
    • Prior to Brexit, the UK was a member of the European Customs Union & common market but never joined the Eurozone

Essential Conditions for a Successful Monetary Union Such as the Eurozone

Movement of labour Similar trade cycles

Labour should be able to move freely without any major barriers e.g. language. The main languages of the Eurozone are English, French & German but language is still a limiting factor
The trade cycles of member countries should be similar so as to avoid tensions with the union e.g. after the 2008 Financial Crisis, Southern European countries were in a depression compared to the temporary recession in Northern European countries. This created extreme pressure on the survival of the Eurozone
Mobility of finance Fiscal transfers

There should be complete mobility of finance with prices & wages free to adjust based on market conditions. This is a strength of the Eurozone & labour markets fluctuate based on members market conditions
 


To maintain stability, there should be automatic fiscal transfers to countries that are performing poorly. This is especially important as members have lost the use of monetary policy to deal with a crisis in their nation e.g. fiscal transfers to Spain, Portugal & Greece post 2008 Financial Crisis were very weak. Political tensions emerged in which citizens of wealthier countries (Germany) did not want their tax revenue used to bail out countries with perceived poor fiscal history (Greece)

Costs & Benefits of Regional Trade Agreements

Benefits & Costs of Regional Trade Agreements

Benefits Costs

  • Trade creation improves efficiency & generates higher income

  • Trade diversion occurs as countries reallocate trade to partners in their agreement. This may worsen global efficiency

  • Tariffs between member states are eliminated
  • Common tariffs to third party countries simplify trading conditions

  • Some domestic industries experience structural unemployment
  • Increased negative externalities of production, resource depletion & environmental damage

  • A monetary union simplifies trading costs & provides pricing transparency
  • Some member countries gain from improved monetary policy conditions e.g. European interest rates may well be lower than an individual country's rates would have been
  • There is less uncertainty surrounding exchange rates as members all use the same currency

  • Transitioning to a monetary union can be expensive & firms may find it hard to adjust/change their menu prices
  • Member countries lose their ability to set interest rates & control the supply of money (monetary policy)
  • Loss of sovereignty

Role of the WTO in Trade Liberalisation

  • The World Trade Organisation (WTO) was established in 1995 to promote free trade
    • They believe free trade is the best way to raise living standards, create jobs & improve people's lives

  • Trade liberalisation is the process of rolling back the barriers to free trade e.g. removing tariffs
  • The WTO has two main roles in liberalising trade
  1. It brings countries together at conferences & encourages them to reduce or eliminate protectionist trade barriers between themselves e.g. The Doha Round conferences
  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. The WTO will then run a hearing & make a judgement

Exam Tip

WTO judgements are not legally binding. Members voluntarily submit to them (or not). A judgement in favour of a trade dispute does allow the aggrieved nation to put protectionist measures in place with the WTO's approval. The hope is that these measures will then force the nation committing the violation to back down and resolve the trade issue. 

When evaluating the effectiveness of trade agreements, it is worth noting that larger economies tend to selectively choose which rulings of the WTO to abide by. Smaller (usually developing) economies tend not to have that luxury.

Conflicts Between Regional Trade Agreements & the WTO

  • In March 2022 there were 320 regional trade agreements globally
  • While these are beneficial to the members in the agreement (as they strengthen ties & create more trade between them), they also create conflicts with the stated aim of the WTO - to liberalise trade
    • Regional agreements often shift trade from a non-member who has comparative advantage, to a member who does not
    • Regional trade members then often institute common trade barriers on non-members which is the opposite of trade liberalisation (protectionism)

  • Regional trade agreements can be beneficial for member countries but may result in global inefficiency in the allocation of resources
  • The WTO advocates for free trade between all member countries

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