4.1.5 Trading Blocs and the World Trade Organisation

• Types of Trading Blocs

  -Free Trade Area

  -Customs Union

  -Common Market

  -Monetary Unions
• Free Trade Area


  Trade without protectionist barriers allows comparative advantages to be exploited thus increasing efficiency e.g. NAFTA or the EFTA
• Customs Union


  Countries that have a common trade policy with the rest of the world and free trade between members e.g. the European Union and it's import duties
• Common Market


  Free trade, a common external tariff and free movement of capital and labour e.g the EEA or CACM (European Economic Area or Central American Common Market)
• Monetary/ Currency Unions


  Countries which share a currency and monetary policy, making them more economically integrated. An optimal currency zone is achieved through real convergence
• EU Convergence Criteria


  -Gross national debt below 60% of GDP

  -Inflation below 1.5% of the three lowest inflation countries

  -Budget deficit cannot exceed 3% of GDP

  -Bond yield has to be below 2% of the yield of the countries with the lowest interest rates to ensure a stable exchange rate
• Optimal Currency Zone

  Real convergence is required to be optimal meaning members respond similarly to shocks and policy changes by having flexibility in product and labour markets (geographical and occupational mobility) or using fiscal transfers to resolve regional economic imbalances.
• Impacts of Trade Agreements


  -Trade creation and diversion

  -Reduced transaction costs due to no trade barriers

  -Economies of scale

  -Increased competitiveness

  -Migration increases labour supply

  -Increased inequality between developed and developing nations
• Role of the WTO in Trade Liberalisation


  -Reduces trade barriers

  -Settles trade disputes and organises trade negotiations

  -Requires all countries to agree to a new rule
• Conflicts in Trade Agreements and the WTO


  -Distorts world trade and may lead to an inefficient allocation of resources

  -Increased protectionism as non-member states may retaliate against the common external tariff

  -WTO is powerful and biased

  -Customs unions and FTAs violated the WTO principle