Economic integration: economic interdependence between countries is usually achieved by agreement between countries to reduce or eliminate trade barriers between them.
Preferential trade agreements
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Preferential trade agreements: the agreement between 2 or more counties to lower trade barriers between them on particular products.
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Bilateral trade agreement: the agreement to lower trade barriers between 2 trading partners.
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Regional trade agreement: the agreement to lower trade barriers between countries within a region.
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Multilateral trade agreement: the agreement to lower trade barriers between many countries.
Trading blocs
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Free trade area (FTA): members of the trading bloc agree to free trade between themselves.
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Countries are allowed to set their own trade policies with countries outside the bloc.
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e.g. the ASEAN Free Trade Area (1992): Brunei Darussalam, Indonesia, Malaysia, the Philippines, Singapore, Thailand (added Cambodia, Laos, Myanmar and Vietnam in 1999).
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Customs union: free trade amongst bloc members and they agree to set the same tariffs against non-bloc in bloc member countries.
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Common external tariff.
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e.g. the European Union (1968): Belgium, Germany, France, Italy, Luxembourg and, the Netherlands.
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Common market: free trade between bloc members.
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Common external tariff.
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Common product standards: products produced in bloc meet the same standards.
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Free movement of factors of production: labour and capital can move freely throughout the bloc.
Advantages and disadvantages of trading blocs
Advantages | Disadvantages |
Trade creation
• By joining a customs union: production of goods and services are transferred from high-cost high cost domestic producers to lower-cost lower cost countries within the customs union.
• Consumers benefit from access to lower-cost lower cost goods.
Increased competition
• Leads to increased efficiency of firms thus the lower price for consumers.
Lower prices and greater choice for consumers.
Economies of scale
• Decreased unit cost may lead to lower prices of products for consumers.
Increased investment
• Investment expenditure is a component of AD → AD increase → economic growth.
Improved efficiency
• Free movement of factors of production: workers move from areas of high unemployment to areas of low unemployment. | Trade diversion (HL only)
• The pProduction of a good is transferred from a low cost producer (outside the customs union) to a higher cost producer (within the customs union).
• More of the world’s scarce resources are used to produce the same amount of goods and services.
The challengeChallenge to WTO trade negotiations
• Might impose high trade barriers to countries outside the trading bloc
Loss of sovereignty
• Countries should give up some powers to the authority in charge of joining a trading bloc.
• The deeper the integration, the greater the loss of sovereignty. |
Monetary union
Monetary union: free trade between bloc members.
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Common external tariff and common product standards.
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Free movement of factors of production.
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Common currency and common central bank.
Advantages and disadvantages of monetary union (HL only)
Advantages | Disadvantages |
Eliminates exchange rate fluctuations / risks.
• Firms’ cost of imported raw materials and the price of finished goods sold will not be affected by exchange rate fluctuations.
Price transparency.
• Single currency: easy to compare prices from different producers.
Eliminates exchange rate costs.
• EncouragesEncourage trade and investment within the monetary union.
Encourages foreign direct investment (FDI).
• Multinational corporations (MNCs) want to be located in a country in a monetary union.
Lower inflation.
• Government have thean incentive to ensure low inflation.
• Leads to lower uncertainty, higher investment, and economic growth. | Loss of control over interest rates.
• Interest rates set by the central bank for the bloc of countries.
Loss of control over the exchange rate of the currency.
• Loss of government authority.
• Struggle to respond to economic crises.
Initial costs of changing to the new currency. |
World trade organisation (WTO)
World trade organisation: aims to promote free trade between all nations.
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Hold rounds of talks between members to encourage a reduction in protectionism.
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Administers WTO trade agreements.
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Help implement trade agreements between members → promote greater trade liberalisation.
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Mediate trade disputes between members.
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Make legal judgments on trade disputes.
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Provide technical assistance and training for developing countries.
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Cooperates with other national organisations (e.g. the World Bank).
Criticisms of the WTO
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Favours wealthy nations over poor nations.
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Agreements made at WTO meetings by richer countries and ‘announced’ later to poor nations.
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Grant larger tariff reductions to developed countries.
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Unable to reach an agreement on agricultural products.
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e.g. the ‘Doha Round’ (trade negotiation) - 2001: collapsed because developed countries were unwilling to reach an agreement on agricultural subsidies.
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Ignore environmental and labour issues.
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Ignores child labour issues.
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Reduce trade barriers to countries with low environmental standards.
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WTO members have unequal bargaining power.
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Developed countries have the power to set the agenda for discussions.
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Developing countries might be fearful to speak up due to the fear of retaliation.