Trading Blocs & the World Trade Organisation (WTO) (Edexcel A Level Economics A)
Revision Note
Written by: Steve Vorster
Reviewed by: Jenna Quinn
Types of Trading Blocs
A trading bloc is a group of countries who come together and 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)
In the diagram above, Mexico, Canada and the USA have reduced/eliminated many trade restrictions between themselves
The USA refuses to trade with Cuba and 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
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 and lower costs of production
The European Union is a customs union and a common market
Monetary unions
A monetary union takes integration a step further. Members enjoy all of the benefits of a customs union and common market, but then also establish a common central bank which issues a common currency and controls the monetary policy of member countries
Prior to Brexit, the UK was a member of the European Customs Union and common market but never joined the Eurozone
Essential Conditions for a Successful Monetary Union Such as the Eurozone
Movement of labour | Similar trade cycles |
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Labour should be able to move freely without any major barriers e.g. language. The main languages of the Eurozone are English, French and 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 and wages free to adjust based on market conditions. This is a strength of the Eurozone and 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 and 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 and Costs of Regional Trade Agreements
Benefits | Costs |
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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 and 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
It brings countries together at conferences and encourages them to reduce or eliminate protectionist trade barriers between themselves e.g. The Doha Round conferences
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 and make a judgement
Examiner Tips and Tricks
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 and 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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