A2: Trading blocs and the WTO

(2) ‘Trading blocs are becoming increasingly important in the world economy.’ 

(a) Discuss the benefits to a country of belonging to a trading bloc. (20 marks) 

(b) To what extent might the policies of trading blocs conflict with the objectives of the World Trade Organisation? (30 marks)

a) The meaning of a trading bloc should be made clear i.e. group of countries with agreed tariff reductions but excluding countries not in the bloc e.g. ASEAN. Different types of blocs - free trade area (NAFTA), customs union - MERCOSUR http://ec.europa.eu/trade/policy/countries-and-regions/regions/mercosur/ . Economic and customs union (EU).

Up to three points should be considered and evaluated with specific reference to a blocs and a country in the world economy e.g UK and EU

Benefits include: • Increased specialisation and trade within the bloc; • Benefits resulting from above (law of comparative advantage); • Increased potential market for firms; • Possibility of benefiting from economies of scale; • Greater choice and lower prices for consumers.

Evaluative points: *what else is happening inthe world economy - financial crisis, oil volatility. * Risk of blocs breaking up - UK leaving EU, Euro instability -PIIGS exit risking break up. * Problems with comparative advantage theory. * Lack of integration - mergers within blocs. * Trade diversion rather than trade creation. *trading bloc development provides benefits/costs e.g EU single market, single monetary and possibly fiscal policy - immigration control, over demand side policies.

(b) To what extent might the policies of trading blocs conflict with the objectives of the World Trade Organisation? (30 marks)

To what extent = how significant! This means you do not always have to counter your point - you can say it is really significant in support of your point or it is relevant but very low significance compared to something else.

The objectives of the World Trade Organisation should be explained i.e. • promoting world trade through the reduction in trade barriers • policing existing agreements. Evidence of understanding of how the WTO operates should be evident - decisions made at WTO meetings USA+EU+Japan v BRICS +LEDCs but they need in the end to agree as consensual view so compromise, examples of WTO decisions.

Specific examples of trading blocs conflict with the objectives of the WTO should be evident.

Trading blocs might:

1.  Distort world trade; Factory Asia 50% of world manufacturing, development of comparative advantage hard to compete against for LEDC's - problems with South American countries gaining access to NAFTA markets or African to EU to develop comparative advantages. Trade diversion v Trade creation - e.g. Poland's entry to EU as EU's grain basket.
2. Have adverse effects on those countries who do not belong to them; Russia or Turkey and EU. However forming own trade blocs - Russia's membership of new Eurasian Economic Union (EEU) - a customs union http://www.bbc.co.uk/news/world-asia-32403837, Monaco (tax free haven)/Switzerland/Norway's (oil) success outside EU
3. Lead to inefficient allocation of resources e.g. CAP operated by the EU; 
4. Contradict the Most Favoured Nation clause of WTO - however there are exceptions when it comes to the development of free trade area (trade blocs) - for example ASEAN development such as Thailand opening up its vehicle industry to allow imported components from within the ASEAN region but USA may feel not being treated equally.
5. Result in conflicts between different trading blocs and increased protectionism between blocs e.g CAP in EU - tariffs and subsidies, dumping. However EU's revising preferential trade agreements with former African colonies and WTO exemption to help development of poorest countries (new Protectionism). http://www.euractiv.com/development-policy/eu-africa-economic-partnership-n-news-532274 Old example of EU v USA (NAFTA) - US steel protectionsism resulting in WTO allowing EU to reatliate against US jeans and oranges reulting in US dropping restrictions. 
6. EU sanctions and trade restrictions against Russia goes against WTO MFN  - however WTO exemption. Russia took 20 years to join WTO - will it leave? WTO exemptions allowing trade restrictions against countries that engage in unfair practice (slave labour, low environmental standards, employment conditions, human rights abuses) - power of blocs to vote in WTO meetings - specific examples e.g. Malaysia. Difficulty in reaching consensus at WTO level  https://www.wto.org/english/thewto_e/whatis_e/tif_e/org1_e.htm
7. WTO losing power as trading blocs become more powerful e.g. Sub Saharan Africaneconomies losing access to USA in export of raw materials to Mexico. Emergence of TTIP - EU/USA bi-lateral trade agreement http://www.bbc.co.uk/news/uk-politics-30493297

There should be a clear understanding of the WTO together with consideration of four factors which should be identified, explained and their significance should be considered.