OCR A Level Economics: Economic integration, the EU and the WTO (H460) – Revision Notes

These notes condense the second part of Trade policies and negotiations from the OCR A Level Economics (H460) specification, Version 3.0 (June 2026), for first assessment in 2021. Read the study guide for full explanations and the practice questions to test yourself. The OCR Economics hub, the checklist and the free diagnostics help you plan. All figures below are invented.

Key definitions

Term	Meaning
Free trade area	Members remove trade barriers between themselves and keep their own external tariffs
Customs union	Free trade area plus a common external tariff (CET)
Monetary union	Customs union plus a single currency and one central bank
Economic union	Monetary union plus a single market and common policies
Trade creation	Dearer home output replaced by cheaper partner imports
Trade diversion	Imports switched from a cheaper outsider to a dearer partner
Trade deflection	Outsider goods entering a free trade area through the lowest-tariff member
Rules of origin	Tests to decide whether goods qualify for tariff-free treatment
Most-favoured-nation (MFN)	A concession given to one WTO member must be given to all
Bound tariff	A ceiling above which a member has promised not to raise a tariff

Ladder of integration

1. Free trade area: examples include the USMCA.
2. Customs union: the EU operates one.
3. Monetary union: the euro area.
4. Economic union: the EU comes closest, but its members still run separate budgets.

Each rung gives more gains (scale, competition, lower costs) and takes more sovereignty.

Method: analysing trade creation and diversion

1. List the landed price from each source: price plus tariff, or price times (1 + tariff rate).
2. Find the cheapest source before the union.
3. Remove the tariff on the partner only. Find the cheapest source after.
4. Same source or home to partner at a lower resource cost: trade creation. Outsider to dearer partner: trade diversion.
5. Production effect: units replaced multiplied by the cost saved. Consumption effect: ½ × price fall × extra units.
6. Diversion loss: units diverted multiplied by the extra cost per unit.
7. State who gains (consumers), who loses (government revenue, home producers, outsiders).

Worked reminder: trade creation (flat home supply)

Home firms supply tiles at 40 ducats. The partner sells at 32 and an outsider at 34. The tariff on all imports is 50%. Demand is Q = 600 − 5P.

• Landed prices: partner 32 × 1.5 = 48, outsider 34 × 1.5 = 51. Both exceed 40, so home firms supply Q = 600 − 200 = 400.
• After the union: partner at 32. Q = 600 − 160 = 440.
• Production effect = 400 × (40 − 32) = 3,200. Consumption effect = ½ × 8 × 40 = 160.
• Net gain = 3,360.

Worked reminder: trade diversion (flat home supply)

Home cost is 70. An outsider sells pumps at 40 and a partner at 50. The CET is 50%. Demand is Q = 400 − 2P.

• Landed prices: outsider 60, partner 75. Home 70. Imports come from the outsider at 60, Q = 280.
• Tariff revenue = 20 × 280 = 5,600.
• After the union the partner is cheapest at 50, Q = 300.
• Consumer gain = 10 × 280 + ½ × 10 × 20 = 2,900.
• Net = 2,900 − 5,600 = −2,700. Check: diversion loss 10 × 280 = 2,800, consumption gain 100, net −2,700.

The pattern: creation raises welfare because the resource cost of supplying the good falls. Diversion lowers it because that cost rises.

Intra-bloc share

Share = trade with members ÷ total trade × 100. Imports of 180 with 54 from members: 30%. Later 220 with 99 from members: 45%. Outside imports fell from 126 to 121. A rising share is not proof of diversion. Diversion needs imports from cheaper outsiders to fall, so compare outside volumes before and after.

Consequences at a glance

	Gains	Losses
Members	Lower prices, choice, economies of scale, competition, inward investment	Job losses in uncompetitive sectors, lost tariff revenue, less sovereignty
Outsiders	Access to a big market if competitive, tariff jumping by firms	Lost exports, retaliation risk, weak bargaining position

Judgement: a bloc is a stepping stone if it widens liberalisation and a stumbling block if it replaces global deals.

Monetary union

• Gains: no conversion cost, no exchange-rate risk, price transparency. A firm exporting 8 million at a 1.8% conversion margin saves 144,000.
• Costs: one interest rate. With a 3% common rate and inflation of 6% in X and 0.5% in Y, real rates are −3% and +2.5%.
• Needs: flexible wages, labour mobility or fiscal transfers to cope with asymmetric shocks.

EU membership

Advantages	Disadvantages
Large tariff-free market, scale economies	Budget contribution
Competition and lower prices	Less control of policy; euro members lose their rate and exchange rate
Free movement of labour	Diversion, notably in food through the CAP
Inward investment, regional funds	Compliance costs, adjustment pain
Joint bargaining power	Uneven effects across regions

Variation between members: size and trade dependence (a country sending 75% of exports to the bloc, 3 in 4, is more exposed), net budget position (pays 9.0bn, receives 6.0bn, net contribution 3.0bn, 0.5% of GNI of 600bn), euro membership, sector mix and labour flows.

WTO: role and record

Role	How it helps free trade
Negotiating forum	Rounds cut and bind tariffs
Non-discrimination	MFN and national treatment spread liberalisation
Dispute settlement	Settles clashes without trade wars
Transparency	Policies reviewed and published

Progress	Difficulties
Tariff cuts over successive rounds	Doha Round (launched 2001) largely stalled
Uruguay Round: WTO created, agriculture and services brought in	Consensus among a diverse membership
Trade Facilitation Agreement (agreed 2013)	Farm support and market access split rich and poor members
Nairobi decision on farm export subsidies (2015)	More regional deals, appeals stage blocked since December 2019

Farm subsidy example: 20 a tonne on 5 million tonnes costs 100 million; if the world price falls from 200 to 185 (7.5%), an exporter of 4 million tonnes loses 60 million.

Evaluation chains to practise

Use the pattern claim, because, so, but, overall.

• Customs union. Tariff-free partner goods lower prices (claim). Home output is replaced by cheaper imports, so resources move to better uses (because). Consumers gain and real income rises (so). But if the CET keeps out a cheaper outsider, the gain can turn into a loss, and the government loses revenue (but). The net effect depends on the gap between partner and outsider prices and the height of the old tariff (overall).
• Monetary union. One currency removes conversion costs and risk (claim), which encourages trade and investment (so). But a single rate fits some members badly, and a member in trouble loses the option of a cheaper currency (but). It works better when wages are flexible, workers can move and transfers exist (overall).
• EU membership. Judge by member: an exporter with most sales in the bloc gains from the single market; a net contributor with a large farm sector may see the budget as a cost; a euro member with weak competitiveness may suffer most in a downturn. Time matters too: scale gains build slowly, adjustment costs come first.
• WTO. It lowers barriers, spreads concessions and settles disputes (claim). But it can only act by consensus and relies on members to comply (but). Its record is strong on goods tariffs and weaker on agriculture and on newer areas of trade (overall).

Quick self-test

1. Landed price of an item costing 100 outside with a 25% tariff?
2. Which stage adds a common external tariff?
3. Country A has a 10% tariff and B has 40% on goods costing 100 outside. What gain per unit can be made by deflecting trade through A?
4. A tariff of 12% is levied on 250 of goods. How much is collected?
5. In a union the common rate is 4% and inflation in one member is 7%. What is its real rate?
6. A union causes trade creation of 3 on 200 units and diversion of 4 on 90 units. Net effect?
7. A member pays 5.0bn and receives 6.2bn. Net position?
8. What does MFN mean?
9. Name two reasons agriculture is hard to liberalise.
10. Give one reason a bloc could be a stumbling block.

Answers

1. 100 × 1.25 = 125.
2. A customs union.
3. Landed 110 in A, 140 in B: a gain of 140 − 110 = 30.
4. 0.12 × 250 = 30.
5. 4 − 7 = −3%.
6. 3 × 200 = 600 gained; 4 × 90 = 360 lost; net +240 (a rough estimate that ignores tariff revenue).
7. 6.2 − 5.0 = a net receipt of 1.2bn.
8. A concession to one member must go to all members.
9. Political power of farm lobbies, and food security. Also differences between rich and poor members.
10. It discriminates and may reduce the pressure for a global deal.

Where marks are usually lost

• Giving a free trade area a shared outside tariff (a CET).
• Showing the diagram without naming the axes, curves and price lines.
• Counting transfers (tariff revenue) as net gains.
• Mixing up trade creation and diversion by comparing prices to the wrong benchmark.
• Listing advantages of the EU with no application to a member or time period.
• Treating the monetary union as good or bad without an asymmetric-shock argument.
• Describing the WTO as able to impose penalties on members.
• Ending with a summary rather than a justified judgement.

Official syllabus

OCR, A Level in Economics (H460), Version 3.0 (June 2026), for first assessment in 2021: The global context, Trade policies and negotiations.