• A PREFERENTIAL TRADE AGREEMENT (PTA) is an agreement between 2+ countries to lower trade barriers between each other on PARTICULAR PRODUCTS.

• A BILATERAL TRADE AGREEMENT is an agreement between TWO COUNTRIES.

• A MULTILATERAL TRADE AGREEMENT involves an agreement between MANY COUNTRIES. 

• A REGIONAL TRADE AGREEMENT is an agreement between a group of countries that are WITHIN A GEOGRAPHICAL REGION.

• This is an obvious benefit arising from the ABILITY OF FIRMS TO SELL BEYOND THEIR NATIONAL BOUNDARIES, increasing their exports and leading to GREATER REVENUES.

• The elimination of trade barriers (along with INCREASED COMPETITION and ECONOMIES OF SCALE) increased competition and economies of scale) results in LOWER PRICES FOR CONSUMERS. In addition, increased imports mean a GREATER VARIETY OF GOODS from which consumers can choose. 

• If a trading bloc develops into a COMMON MARKET, which involves FREE MOVEMENT OF FACTORS OF PRODUCTION, this also results in BETTER USE OF THESE WITHIN THE BLOC.

• For example, WHEN A LABOUR SHORTAGE OCCURS IN ONE MEMBER COUNTRY while a SURPLUS OCCURS IN ANOTHER, workers are MORE ABLE to MOVE ACROSS BORDERS to FILL THE VACANCIES.

• GREATER ECONOMIC INTEGRATION is likely to result in a REDUCED LIKELIHOOD OF HOSTILITIES BETWEEN COUNTRIES whose economies become MORE INTERDEPENDENT through increased trade, investment, labour, and financial flows.

• Imagine you are a small, independent store becoming part of the Amazon online family which gives you access to all types of cost saving services as well as massive online exposure on its marketplace at a lower member rate. 

• As a member, however you now have to charge all non-members a higher rate.

  • • • Using the list of advantages above create an analogy illustrating how each of these benefits can be enjoyed by the new online store.

• As mentioned the potential for LOW-COST & MORE-EFFICIENT IMPORTERS to enter the market and force out UNCOMPETITIVE DOMESTIC FIRMS, raises the possibility of INCREASED DOMESTIC UNEMPLOYMENT.

• Countries forming a trading bloc are UNLIKELY TO GAIN EQUALLY from the operation of the trading bloc, and this CREATES THE POTENTIAL FOR CONFLICTS BETWEEN MEMBERS and makes it DIFFICULT TO REACH AGREEMENTS. 

• Continuing on from our online store analogy do the following:

  • • • Using the list of disadvantages above expand the previous analogy illustrating how each of these can be suffered by the new online store.

Given what you have read above, can you 

CREATE A PAPER 2 DATA RESPONSE QUESTION THAT FEATIRES AS MANY OF THESE DISADVATAGES AND ADVANTAGES AS POSSIBEL

HYPOTHETICAL COUNTRY IS FINE...

COMMON MKT

• ELIMINATES TRANSACTION COSTS: Whenever there is a conversion of one currency into another, banks (or others) charge a fee for the conversion; this is a type of transaction cost. A single currency eliminates these transaction costs, resulting in significant savings that have the effect of encouraging trade, investments and international financial flows of all kinds. It has been estimated that the savings from the elimination of transaction costs of currency conversions within the eurozone countries amount to about 1% of the combined GDPs of the countries involved. 

• PROMOTES A HIGHER LEVEL OF INWARD INVESTMENT: Inward investment refers to investments from outsiders towards the member countries with a common currency, and these can be expected to rise because of the absence of currency risk within an expanded market, resulting in greater economic growth. 

• A single currency involves a LOSS OF EXCHANGE RATES AS A MECHANISM FOR ADJUSTMENTS. If a member country has a trade deficit with another member country, it NO LONGER HAS ITS OWN NATIONAL CURRENCY TO DEPRECIATE (or DEVALUE in a fixed system) to correct the imbalance BY MAKING ITS EXPORTS CHEAPER.

• Similarly, if a member country has a HIGHER RATE OF INFLATION and its goods become less competitive abroad, the problem cannot be solved by currency depreciation or devaluation, TO LOWER IMPORTED INFLATION.

• Fiscal policy is constrained by the convergence requirements. Whereas each member country retains the ability to carry out its own fiscal policy, there are restrictions imposed by the convergence requirements, as noted above: in the case of European Monetary Union, total public debt cannot be greater than 60% of GDP and the budget deficit of any given year cannot be greater than 3% of GDP. 

• This limits the government’s ability to borrow according to domestic needs and priorities. For example, in a recession, since a government cannot pursue an independent expansionary monetary policy, it would need to pursue expansionary fiscal policy; however, if its deficit or debt is already approaching the limits, it cannot do this without violating the rules.

• Monetary policy pursued by the single central bank impacts differently on each member country, depending on its own particular circumstances. Since countries are likely to differ from each other with respect to degrees of inflation, unemployment, etc., or generally where they are in the business cycle, the single monetary policy pursued by the single central bank is unlikely to suit every country’s needs and may be inappropriate. For example, if some countries face unemployment and others face inflation, an expansionary monetary policy would suit the needs of the first group but would make the inflation worse in the second group.

• THE WORLD TRADE ORGANIZATION (WTO) is the only GLOBAL INTERNATIONAL ORGANISATION dealing with the rules of trade between nations. 

• At its heart are the WTO AGREEMENTS, NEGOTITED and SIGNED by the bulk of the world’s trading nations and ratified in their parliaments. The goal is to help producers of goods and services, exporters, and importers conduct their business.

1) NON-DISCRIMINATION: The WTO continues the GATT’s emphasis on equal, non-discriminatory treatment for all member countries (excepting trading blocs).

2) FREE TRADE: Trade barriers should be lowered through negotiations.

3) PREDICTABILITY: Governments, firms, investors, etc., should have confidence that trade barriers will not be raised arbitrarily.

4) PROMOTION OF FAIR COMPETITION: Unfair practices such as dumping and export subsidies are discouraged.

5) DEVELOPMENT & ECONOMIC REFORM SHOULD BE ENCOURAGED Developing countries should be offered flexibility with respect to lowering their trade barriers, more time to adjust to change and special privileges.

• IT ADMINISTERS WTO TRDE AGREEMENTS: The WTO helps in the implementation and administration of international trade agreements.

• IT PROVIDES A FORUM FOR TRADE NEGOTIATIONS: The WTO provides a forum for members to discuss their trade problems and negotiate trade agreements on how to liberalise trade. This is one of the most important WTO functions.

• IT HANDLES TRADE DISPUTES: When WTO members disagree on trade issues, the WTO makes decisions to resolve the differences on the basis of the legal foundations of the trade agreements. CHECK IT OUT HERE!

• IT MONITORS NATIONAL TRADE POLICIES: The WTO carries out periodic reviews of its members’ national trade policies. Members are required to notify the WTO of any changes in trade policy. The WTO also examines new trading bloc arrangements.

• IT PROVIDES TECHNICAL ASSISTANCE & TRAINING FOR DEVELOPING COUNTRIES: The assistance provided to developing countries concerns trade-related issues arising from WTO trade agreements.

• IT FACILITATES CO-OPERATION WITH OTHER INT'L ORGANISATIONS: The WTO cooperates with other international organisations (such as the World Bank and International Monetary Fund discussed in Chapter 18), in order to facilitate co-ordination of global polices.

• AGRICULTURAL PRODUCTION & EXPORT SUBSIDIES GIVEN TO FARMERS IN DEVELOPED NATIONS has NOT BEEN DEALT WITH, nor has the issue of them DUMPING SURPLUSES ON THE WORLD MARKETS, and subsequently lowering the world price, to the detriment of developing countries who overwhelmingly rely on agricultural exports.

• The WTO HAS ENCOURAGED THE REMOVAL OF TRADE BARRIERS ON GOODS the removal of trade barriers on goods that have very LOW ENVIRONMENTAL STANDARDS, have questionable records on their USE OF CHILD LABOUR and which can be considered DEMERIT GOODS (overproduced due to government support). 

• Increasing levels of economic integration between nations highlight interdependence between the economies of different countries. Increasing levels of international trade within the different types of trading blocs show one level of interdependence, but the emergence of common markets and monetary union demonstrates an even deeper level of transnational cooperation. The European Union probably represents the most advanced level of international interdependence. Closer and closer trading ties, the free movement of labour and capital, a common currency (Euro) and a central bank make the EU a model of interdependence between nations. The closer and closer ties between countries in the EU are not without its challenges and the UK's 'Brexit' from the EU showed a clash between international cooperation and loss of national sovereignty.

• Distinguish between a free trade area (such as ASEAN), a customs union and a common market.  (4)

• Using information from the text/data and your knowledge of economics, evaluate the possible effects of this agreement on trade between India and Malaysia. 

• Using information from the text/data and your knowledge of economics, evaluate the possible impact of Latvia joining the eurozone. 

• Using information from the text/data and your knowledge of economics, discuss the possible advantages and disadvantages of a monetary union for members of the West African Monetary Zone (WAMZ). 

• Evaluate the likely impact on South Sudan of its membership of the EAC common market

• Explain possible disadvantages that may be associated with the adoption of a single currency. 

• Explain the differences between free trade areas (FTAs), customs unions and common markets as types of international economic integration. 

• Using real world examples, explain the factors that allow a country to have a comparative advantage in the production of a good or service. 

• With the aid of a diagram, explain the potential trade gains and trade losses arising from the formation customs union.

Evaluate the likely impact on South Sudan of its membership of the EAC common market

Define the term monetary union indicated in bold in the text (2)

Define the term comparative advantage indicated in bold in the text (2)

Using a cost diagram, explain how membership in the common market may allow producers in South Sudan to gain economies of scale (4)

Evaluate the likely impact on South Sudan of its membership of the EAC common market. (8)