14.8 - Trading Blocs & the WTO - notes
14.8 - Trading Blocs & the WTO
Definitions and types of trading blocs
Trading blocs represent agreements between governments aimed at promoting and managing trade among member countries. These associations work by removing or reducing protectionist barriers, such as tariffs, to facilitate easier trade. Agreements can be bilateral, involving just two countries or blocs, or multilateral, involving more than two.
Main types of trading blocs
The types form a ladder of deepening integration: each one keeps the features of the type above it and adds something more. The table below sets them out in that order.
| Type of bloc | What it adds (defining feature) | Example |
|---|---|---|
| Free trade area | All trade barriers between members removed; each member keeps its own barriers on non-members | Association of Southeast Asian Nations Free Trade Area (AFTA) |
| Customs union | Adds common tariffs on imports from non-members | Southern African Customs Union (SACU) |
| Common market (single market) | Adds free movement of factors of production, such as labour and capital, between members | Caribbean Community (CARICOM) Single Market |
| Economic union | Members integrate further, adopting similar economic policies, regulations, and rules | - |
| Monetary union | Members share a single currency and a common monetary policy, often managed by a central bank | West African Economic and Monetary Union |
| Economic and monetary union | Combines economic integration with a shared currency and monetary policy | - |
How trading blocs help achieve WTO objectives through trade creation
Trading blocs can support the goals of the World Trade Organization (WTO) by promoting freer trade, which boosts competition and efficiency. One key way is through trade creation, where removing barriers shifts trade patterns towards the lowest-cost sources within the bloc.
Benefits of trade creation in trading blocs
- Specialisation based on comparative advantage - Countries focus on producing goods where they are most efficient, leading to better resource use and lower prices.
- Alignment with WTO aims - This process opens up trade, encourages competition, and improves overall economic efficiency.
Effects when a country joins a customs union
When a country enters a customs union, tariffs on imports from other members are removed, altering price structures.
Economic impacts:
- Increased consumption - Lower prices boost demand in the importing country.
- Shift in supply - Domestic production may decrease, while imports from more efficient member producers rise.
- Changes in welfare - Governments lose tariff revenue, and producer surplus falls, but consumer surplus grows, resulting in a net increase in economic welfare.
How trading blocs conflict with WTO objectives through trade diversion
While trading blocs can promote trade internally, they may hinder global free trade by imposing barriers on non-members, conflicting with WTO principles of open competition.
Drawbacks of trade diversion in trading blocs
- Redirected trade patterns - Barriers against non-members divert trade away from potentially cheaper external sources to higher-cost producers within the bloc.
- Limited specialisation - Non-member countries cannot fully exploit their comparative advantages due to restricted access.
- Opposition to WTO goals - This reduces competition, preventing the most efficient, lowest-cost goods from dominating global markets.
The impact of trading blocs and the WTO on developing countries
Trading blocs and the WTO have mixed effects on developing countries, influencing their ability to grow economically and compete globally.
Positive impacts on developing countries
- Reduction in global protectionism - Blocs can simplify negotiations by grouping countries, potentially lowering barriers worldwide.
- Role of free trade in development - WTO policies promoting free trade have driven rapid growth in countries like China and India by expanding market access.
Negative impacts on developing countries
- Challenges from exclusion - Non-member developing countries may face unequal trading terms, limiting their development and access to markets.
- Barriers to free trade progress - Excessive trade diversion within blocs can slow the move towards global free trade.
- Restrictions on protecting infant industries - WTO rules may prevent developing countries from shielding new industries, keeping them reliant on agriculture.
- Potential harm to efficiency - This can limit individual economies and global specialisation benefits.
Disputes arising from agricultural policies in trading blocs
Agricultural policies within trading blocs often lead to international disputes, particularly when they distort global markets and affect farmers in other countries.
Key causes of agricultural trade disputes
- Subsidies and import restrictions - These protect domestic farmers but can flood external markets with cheap surplus goods, undercutting competitors.
- Buffer stocks and low-price exports - Governments may sell excess stocks at artificially low prices abroad, harming farmers in importing countries who struggle to compete.
- WTO interventions - The WTO has helped reduce agricultural subsidies, improving competitiveness for developing countries' products.