4.1.5 Trading blocs and the World Trade Organisation (WTO)
Types of trading blocs (regional + bilateral trade agreements):
RTA consists of bilateral trade agreements + multilateral trade agreements
signed agreement between countries to reduce or eliminate protectionist barriers (tariffs,
quotas, export subsidies) b/w themselves = trade liberalisation + free trade amongst them.
EU / AfCFTA / NAFTA
- economic gains from specialisation (predicted by the theory of comparative
advantage) + losses due to trade diversion = any RTA will produce an inferior
outcome to a multilateral agreement.
- YET, an RTA is better than no agreement.
- Some economists think RTAs lead to a loss of economic welfare due to gains from
trade creation being outweighed by the losses from trade diversion.
- free trade areas
- free trade of g+s between countries (trading bloc/trade union) as they
eliminate all protectionist barriers such as tariffs and quotas. This then allows
each individual country to impose external tariffs on imports to other
non-member countries
- customs unions
- free trade of goods between countries who then impose a common external
tariff on all other non-member countries
- common markets / single market
- custom union + free movement of land, labour and capital
- removes both tariff and non-tariff barriers = deeper form of integration
= free-flows
- can cause brain drain if country vetoes out agreement (e,g Brexit of
UK from the EU)
- based on assumption of no transport/transaction costs
- monetary unions: conditions necessary for success + the eurozone
- when countries in a trading bloc/union share the same single currency (e,g
EU euro)
- Mundell optimal currency area: conditions required for single currency to work
(similar economies, labour mobility)
EU
- one size fits all interest rate set by ECB (European Central Bank)
- but it is difficult to presume that the same system would work in one country
with the euro as another (e,g France & Greece )
necessary to have:
1. Free movement of labour
2. Capital mobility associated with wage and price flexibility
3. Automatic fiscal transfers when individual countries are performing poorly
4. Countries to share the same trade cycle
BENEFITS OF A MONETARY UNION COSTS OF A MONETARY UNION
- reduction in transaction costs = - loss of control/autonomy over
attracts greater FDI as investors monetary policy = limits ability to
, less concerned about currency risk response to domestic economic
= boost trade and crisis
- elimination of exchange rate - loss of control over exchange rate
fluctuations and risk as greater price policy and interest rate -> given
stability = boosts more trade and current differences in economic
investment development, perhaps unlikely that
one common policy would be
optimal for all)
- reduction in region-wide price - resulting inability to respond
differentials differently to asymmetric shocks
- a larger and more diverse economic - changeover costs/menu costs =
area = greater financial integration = consumer confusion
may be less vulnerable to
exogenous shocks and speculative
currency attacks = greater access to
liquid financial markets and access
to credit
- reduces rate of inflation / increase - may be inflationary if all producers
consumer surplus round up their new prices/loss of
consumer surplus.
BENEFITS OF RTAs COSTS OF RTAs
+ increased specialisation and trade = + loss of tax revenue from import
increased benefits from theory of tariffs from member countries =
comparative advantage = reduced government spending on
economies of scale = increased total healthcare, education, infrastructure
output = export led economic growth + over reliance/overdependence on
= increased world GDP -> Foreign external export led growth =
currency earnings can be increased dangerous if trade partners go into
and used for debt servicing, recession
purchasing of capital goods
+ increased demand for country’s + susceptible to volatility of commodity
exports = increased employment market prices -> economic
rates in domestic firms = rising real downturns affecting BofP
incomes for domestic workers as + vulnerability to external exogenous
wage rates rise = increased sofl shocks
Types of trading blocs (regional + bilateral trade agreements):
RTA consists of bilateral trade agreements + multilateral trade agreements
signed agreement between countries to reduce or eliminate protectionist barriers (tariffs,
quotas, export subsidies) b/w themselves = trade liberalisation + free trade amongst them.
EU / AfCFTA / NAFTA
- economic gains from specialisation (predicted by the theory of comparative
advantage) + losses due to trade diversion = any RTA will produce an inferior
outcome to a multilateral agreement.
- YET, an RTA is better than no agreement.
- Some economists think RTAs lead to a loss of economic welfare due to gains from
trade creation being outweighed by the losses from trade diversion.
- free trade areas
- free trade of g+s between countries (trading bloc/trade union) as they
eliminate all protectionist barriers such as tariffs and quotas. This then allows
each individual country to impose external tariffs on imports to other
non-member countries
- customs unions
- free trade of goods between countries who then impose a common external
tariff on all other non-member countries
- common markets / single market
- custom union + free movement of land, labour and capital
- removes both tariff and non-tariff barriers = deeper form of integration
= free-flows
- can cause brain drain if country vetoes out agreement (e,g Brexit of
UK from the EU)
- based on assumption of no transport/transaction costs
- monetary unions: conditions necessary for success + the eurozone
- when countries in a trading bloc/union share the same single currency (e,g
EU euro)
- Mundell optimal currency area: conditions required for single currency to work
(similar economies, labour mobility)
EU
- one size fits all interest rate set by ECB (European Central Bank)
- but it is difficult to presume that the same system would work in one country
with the euro as another (e,g France & Greece )
necessary to have:
1. Free movement of labour
2. Capital mobility associated with wage and price flexibility
3. Automatic fiscal transfers when individual countries are performing poorly
4. Countries to share the same trade cycle
BENEFITS OF A MONETARY UNION COSTS OF A MONETARY UNION
- reduction in transaction costs = - loss of control/autonomy over
attracts greater FDI as investors monetary policy = limits ability to
, less concerned about currency risk response to domestic economic
= boost trade and crisis
- elimination of exchange rate - loss of control over exchange rate
fluctuations and risk as greater price policy and interest rate -> given
stability = boosts more trade and current differences in economic
investment development, perhaps unlikely that
one common policy would be
optimal for all)
- reduction in region-wide price - resulting inability to respond
differentials differently to asymmetric shocks
- a larger and more diverse economic - changeover costs/menu costs =
area = greater financial integration = consumer confusion
may be less vulnerable to
exogenous shocks and speculative
currency attacks = greater access to
liquid financial markets and access
to credit
- reduces rate of inflation / increase - may be inflationary if all producers
consumer surplus round up their new prices/loss of
consumer surplus.
BENEFITS OF RTAs COSTS OF RTAs
+ increased specialisation and trade = + loss of tax revenue from import
increased benefits from theory of tariffs from member countries =
comparative advantage = reduced government spending on
economies of scale = increased total healthcare, education, infrastructure
output = export led economic growth + over reliance/overdependence on
= increased world GDP -> Foreign external export led growth =
currency earnings can be increased dangerous if trade partners go into
and used for debt servicing, recession
purchasing of capital goods
+ increased demand for country’s + susceptible to volatility of commodity
exports = increased employment market prices -> economic
rates in domestic firms = rising real downturns affecting BofP
incomes for domestic workers as + vulnerability to external exogenous
wage rates rise = increased sofl shocks
