Understanding the WTO - the Basics

To what extent do trading blocs contradict the Most Favoured Nation clause of the WTO?

Click here to understand this basic principle of the WTO:

https://www.wto.org/english/thewto_e/whatis_e/tif_e/fact2_e.htm

Key point:

1. Most-favoured-nation (MFN): treating other people equally      Under the WTO agreements, countries cannot normally discriminate between their trading partners. Grant someone a special favour (such as a lower customs duty rate for one of their products) and you have to do the same for all other WTO members.

This principle is known as most-favoured-nation (MFN) treatment

Key evaluation point:

Some exceptions are allowed. For example, countries can set up a free trade agreement that applies only to goods traded within the group —   discriminating against goods from outside. Or they can give developing countries special access to their markets. Or a country can raise barriers against products that are considered to be traded unfairly from specific countries. And in services, countries are allowed, in limited circumstances, to discriminate. But the agreements only permit these exceptions under strict conditions. In general, MFN means that every time a country lowers a trade barrier or opens up a market, it has to do so for the same goods or services from all its trading partners — whether rich or poor, weak or strong.

Explain likely impact on income distribution of inflation falling “below the 2% target” (Extract 3, lines 5–6).

If Inflation rate slows down from +2% to +1% then effect on income distribution widens (2) as real value of savings and borrowings eroded at a slower rate (2) so higher income households will find their savings have higher purchasing power in the future whereas low income households will not find inflation eroding the real value of the money they owe.


If  the UK experiences a sustained period of deflation then inequality may widen further. When households borrow money "we expect inflation to rescue us from our debt" (Marryn Somerset Webb, FT - Deflation isn't such a bonus afterall). The house your parents bought for £90,000 may today be worth £400,000 after two decades of inflation. £90,000 debt seemed very large to them initially - now imagine yourself buying a house for £500,000 and the economy experiencing two decades of deflation.

Lower inflation may though mean lower interest rates resulting in a narrowing of inequality -see earlier posting.

Lower inflation may also mean less fiscal drag as tax bands do not rise with inflation so tax revenue does not rise without the state raising tax rates. The Government might need to make benefit cuts or increase tax on high income erarners so impact on inequality is exogenous here.

AS: Banking Failure

Despite the base rate of interest falling from 5% to 0.5% and staying low for the last 4-5 years high street banks have not passed on these falls in the rate of interest e.g. household loans at 10 % or business loans or credit card charges at 20%. To overcome this and force the banks to lower interest charges the Bank of England has increased the quantity of money supplied in the economy, known as Quantitative Easing (QE). So far £375 billion has been pumped into the economy to encourage credit easing.

Assess the impact of low interest rates on the distribution of income.

Winners are borrowers as they have less interest to pay. Borrowers are likely to be low income households on low incomes struggling to survive – however high income households may also borrow money e.g. mortgages to buy houses in London and the South East.

Savers  are losers e.g. rich pensioners – however low income household in temporary work may also be saving as they fear their ability to survive if they become unemployed.

So overall income inequality may be reduced.

A2: Understanding the different types of trading blocs

Essentially you will be aware of the EU - but how does it compare to NAFTA or the ASEAN trading bloc. The former may be moving closer to the EU model but there is also a possibility of the EU trading bloc moving back towards being just a Free Trade Area. Couple of useful artices here;

http://www.tutor2u.net/economics/revision-notes/a2-macro-trade-agreements.html

http://people.stern.nyu.edu/rlevich/f1999/Chap-11.pdf

A2: Limits to Growth and Development

A couple of good articles gere - the first one provides good real world country examples wheras the second one acts more as a revision check -e.g the foreign currency gap which may mean that an LEDC earns insufficient US dollars from their exports of primary commodities to afford imports of manufactured items plus servicing debts which they have to pay in US dollars. A weakening of their currency against the US dollar will further worsen this situation.

click on link and scroll down to article
http://www.tutor2u.net/economics/revision-notes/a2-macro-economic-growth-constraints.html

https://edecon.wordpress.com/2011/06/19/limits-to-growth-and-development/

A2: De-Globalisation

You are expected to be aware of modern examples of protectionism - restricting global trade in goods and services - to help with this the following is an excellent BBC article but please do email me any more recent examples and I will post up to share and credit you, email tgray@cherwell.oxon.sch.uk :

http://www.bbc.co.uk/news/business-18104024

This rise in protectionism is one feature of de-blobalisation along with:

Growing financial/capital controls putting a stop to global financial markets:

http://www.bbc.co.uk/blogs/legacy/today/evandavis/2009/01/the_threat_of_deglobalisation.html

And Immigration controls - free movement of labour:

http://www.economist.com/topics/immigration