1. Trading Blocs at the WTO
Anderton: Ch. 65/66 (Common markets, Monetary Unions; WTO)
Getting started guide, Edexcel Link – p69
mics-a/2015/teaching-materials/Getting_Started_Guide_new.pdf

2. From Specification
Starting Here …

3. 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).

4. 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

5. 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

6. From Specification

7. 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)

8. 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. ↑

9. Trade Diversion
Example: UK imports Apples with no tariffs applied. Therefore the world’s lowest cost producer will supply the UK with Apples (eg New Zealand). However if UK joins a customs union (eg EU), it must charge all non-members a tariff on imports. Therefore trade in Apples will be diverted away from non-members (New Zealand) and toward the member of the customs union with the cheapest Apples (eg France).
Under Trade Diversion, consumption shifts from a lower-cost to a higher-cost producer. This is a decline in world production efficiency.

10. Trade Creation
In Trade Diversion we saw that when UK joined EU, they were forced to pay higher prices for Apples from France rather than New Zealand thanks to the common external tariff.
Why then did UK join the EU?
Customs unions (EU), facilitate Trade Creation -> an increase in trade among member nations in the good or service of each nation's comparative advantage.
UK estimated that no tariffs on its exports to the EU would offset higher consumer costs AND damage to now “unprotected” UK industries.
Arguments for protectionism include the infant industry argument, national defense, outsourcing, and issues with health and safety regulations. However, customs unions are typically formed with friendly nations, eliminating the national defense argument

11. 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

12. From Specification

13. WTO conflicts with RTA’s?

14. 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

15. 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

16. 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

17. WTO are Baddies
Christian Aid says poorest countries have suffered, losing market share – MNCs do the trading, not Governments
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

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

20. For next time…….(<1 lesson)