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Trading blocs and the WTO (Types of trading blocs (Regional trade blocs…
Trading blocs and the WTO
Types of trading blocs
Regional trade blocs are intergovernmental associations that manage and promote trade activities for specific regions of the world
1 Free trade areas
Trade barriers are removed between members of countries, but individual members still impose tariffs and quotas on countries outside the area.
2 Customs unions
This includes free trade and common external tariff on goods imported from outside the bloc
3 Common markets
This includes the same as level 1 and 2 but there is free movement of labour, capital and factors of production in the area
This is that there is a customs union with the adopt of a single currency
Cost of trading blocs
Trade diversion
Trade may be diverted away from low-cost producers outside the bloc to high-cost producers within the bloc because of the remove of tariffs in the area
Distortion of comparative advantage
, the existence of trade restriction on goods from other countries from outside the agreement will distort the comparative advantage and lead to a less efficient allocation of resources lowering global economic growth
Loss of independent monetary policy
this is relevant to countries that are unable to control their own interest rates and exchange rates rates and tailor them to their own country
Benefits of a trading bloc
Trade creation
the removal of trade barriers between members of countries of the bloc will result in
Increase in FDI
global companies may wish to invest inside the trading bloc to avoid trade restrictions
Benefits of a monetary union
Elimination of transaction costs
meaning there would be no costs involved with changing currencies when good are imported or exported
Price transparency
A single currency means that consumers have the ability to compare prices more easily between national borders
Elimination of currency fluctuations between member countries
this will eliminate uncertainty and promote FDI
Role of the WTO in trade liberalisation
They promote free trade among 188 members through rounds of talk
Settle trade disputes between country members
Possible conflicts between regional trade agreements and the WTO
There is trade creation
There is trade diversification
agreements should not have too much global isolation