Summary
Trade liberalization involves reducing barriers to trade, such as tariffs and quotas, to encourage free trade globally. Trading blocs are groups of countries that form agreements to reduce or eliminate trade barriers among themselves.
- World Trade Organization (WTO) — an international body that promotes and regulates global trade. Example: The WTO was established in 1995 to replace the General Agreement on Tariffs and Trade (GATT).
- Trading Bloc — a group of countries that agree to reduce trade barriers among themselves. Example: The European Union (EU) is a well-known trading bloc.
- Trade Creation — occurs when trade shifts from high-cost to low-cost producers within a trading bloc. Example: A country starts importing cheaper goods from a bloc member instead of a non-member.
- Trade Diversion — happens when trade shifts from low-cost to high-cost producers due to external tariffs. Example: A country buys more expensive goods from a bloc member due to tariffs on cheaper non-member goods.
Exam Tips
Key Definitions to Remember
- World Trade Organization (WTO)
- Trading Bloc
- Trade Creation
- Trade Diversion
Common Confusions
- Confusing trade creation with trade diversion
- Misunderstanding the role of the WTO versus trading blocs
Typical Exam Questions
- What is an economic and monetary union? An economic and monetary union is a type of trading bloc with a common currency and coordinated economic policies.
- State two possible ways a trading bloc might conflict with the objectives of the WTO? Trading blocs can lead to trade diversion and may not adhere to the WTO's most-favored-nation clause.
- With reference to Extract B, discuss the likely economic benefits to the EU of forming a trade agreement with Mercosur. Benefits may include increased market access, reduced tariffs, and enhanced economic cooperation.
What Examiners Usually Test
- Understanding of the WTO's role in trade liberalization
- Differences between types of trading blocs
- Costs and benefits of trading bloc membership