Trading Blocs at the WTO Anderton: Ch. 65/66 (Common markets, Monetary Unions; WTO) Getting started guide, Edexcel Link – p69 http://qualifications.pearson.com/content/dam/pdf/A%20Level/econo mics-a/2015/teaching-materials/Getting_Started_Guide_new.pdf

From Specification Starting Here …

Key Definitions – please copy to your notes • Free or Preferential trade areas – these are blocs in which groups of countries agree to abolish (or begin to reduce) trade restrictions between themselves but maintain their own restrictions with other countries. • Customs unions – these have free trade internally and a common set of protectionist measures. Examples include EU, the North American Free Trade Agreement (NAFTA) and the Association of Southeast Asian Nations (ASEAN). • Common markets – these have the same characteristics as customs unions but also allow the free movement of factors of production. Notably there must be an no special treatment by members toward their own domestic industries (hence EU not quite here) • Monetary unions – these are customs unions which adopt a single currency (Euro area EU).

Stages of Economic Integration Draw the following chart – ink in the headers but pencil in the contents (Discuss with a colleague) Stages of Economic Integration Tariffs on Trade between countries in the agreement? Common Tariffs on Imports from outside the agreement area? Free factor mobility within the area? Harmonisation of Economic Policies? Preferential Trade Agreement   Free Trade Agreement Customs Union Common Market Economic Union

Stages of Economic Integration Completing the chart: Stages of Economic Integration Tariffs on Trade between countries in the agreement? Common Tariffs on Imports from outside the agreement area Free factor mobility within the area Harmonisation of Economic Policies Preferential Trade Agreement Reduced No Free Trade Agreement None Customs Union Yes Possible Common Market Desirable Economic Union

From Specification

Trading blocs and the World Trade Organisation (WTO) Regional trade agreements where monetary unions: Costs include? Benefits include? -------------------------------------------------------------------------------- What is the: Role of WTO? How have RTA’s ↑ trade creation & ↑ trade diversion? (↑ = Increased)

Trading blocs and the World Trade Organisation (WTO) Costs of monetary union regional trade agreements transition costs (costs of changing price lists, slot machines, etc.), loss of independent monetary policy and loss of exchange rate flexibility. Benefits: elimination of transaction costs, price transparency, reduction in exchange rate uncertainty and increased attractiveness for foreign direct investment (FDI). The WTO promotes free trade (“Trade liberalisation”) between member countries. It is also responsible for resolving trade disputes between member countries. (Organises conferences to ↑ Trade Liberalisation; 2001 Doha Round) Trade within RTA’s has also significantly increased (“trade creation”) as a result of their emphasis on free trade. However, this is at the expense of trade with non-members (“trade diversion”) who may be subject to trade barriers. This is in conflict with the primary aim of the WTO. ↑

Quick definition: We will go deeper into these terms / ideas in a subsequent lesson Trade Creation Consumption shifts from high-cost producer to low-cost producer within a trading bloc – specialisation leads to comparative advantage winning the trade battle. Ie UK prior to joining EU paid a tariff on imported French wine (high cost); after joining EU, paid no tariff and imports more wine at far lower cost Trade Diversion Consumption shifts from lower-cost to a higher-cost producer (decline in world efficiency) – eg. if tariff exists on all imports of lamb, and New Zealand is the lowest cost producer, then UK will import from New Zealand. But once customs union created, there is no tariff on Irish lamb so it bears a cheaper price tag, even though Irish may be higher cost producers – loss to world efficiency/welfare as UK chooses Irish lamb

Role of the WTO assisting settlement of disputes between conflicting countries with advisors & mediators policing agreements through dispute settlement – judgements by specially-appointed independent experts policy review – constant assessment of existing agreements, their effectiveness and their transparency work with developing countries – looking for increased participation of these countries in global trading system technical assistance – training officials from over 100 countries in matters relating to international trade

From Specification

WTO conflicts with RTA’s?

Potential Conflicts Between WTO & Trading Blocs Barriers go up between members & non-members Members trading can lead to trade diversion – less efficiency Weaker countries may be excluded from larger markets Trading bloc rules may prevent members from pursuing potential benefits of trade with non- members If trade becomes concentrated in these zones, WTO may become obsolete or powerless

WTO conflicts with RTA’s? Similar criticisms as per Globalisation: Exploit workers in LDCs (in contrast to MEDCs) Environmental damage in LDCs Developing/Poor countries forced to lower trade barriers while efficient developed countries retain protection Erode native cultures Force down raw material prices while keeping high tech goods at high prices Ownership of trade rules unfairly rests with richer countries Fair criticism? Probably not – actually criticism of Free Trade and results of Free Trade WTO not have power to set wage rates etc., simply to lobby for Trade Liberalisation and Adjudicate Disputes

WTO are Goodies increased living standards due to increased world efficiency (evidence of N. Korea not participating) environmental issues arise from production, not trade – laws should be at source trade leads to greater equality – increased wages, etc – World Bank says trade benefits poor as much as rich trade removes protection of large companies which have to face lower cost alternatives

WTO are Baddies Christian Aid says poorest countries have suffered, losing market share – companies do the trading agriculture is particularly dominated by a few firms who still have protection & benefits from domestic governments big firms often exploit their position with brands & patents WTO rules don’t allow countries to set environmental restrictions on imported goods

With reference to Extract 1, explain the role of the World Trade Organisation (WTO) (5)

For next time…….(<1 lesson)