Regional Economic Groupings

Burhani College of Commerce and Arts

Chapter 1. Regional Economic Groupings – Meaning Regional Economic Groups are the associations of countries situated in a particular region whereby they come to a common understanding regarding rules and regulations to be followed while exporting and importing goods among them. Such groups have liberal rules for member countries while a separate set of rules is laid for non-members. For example, the European Union (EU), the Association of South-east Asian Nations (ASEAN). These groups are popularly known as Trading Blocs. Economic regionalisation can be viewed as one of the major instruments of promoting international trade activities among countries through removal of barriers to mutual trade in goods and services by means of free trade areas, customs union and other preferential trade arrangements. Further, linkages may be stimulated through freer international exchanges of capital and labour. When two or more countries come together to form a regional trade grouping, that will have two types of effects. The first is the trade creating effect, which will increase the national income in the participating countries. The second will be the trade diversion effect, meaning a resulting change in the direction of trade activities in favour of the member countries and against non-members. This actually implies disadvantages and losses on the part of the non-member countries. For this reason, the formation of trading bloc is very important issue not only for the signatory countries but also for the non-member countries. Economic Grouping of the countries of the same region or areas increases the size of market, aggregate demand for products and services, overall, productivity, employment and ultimately economic activity of the region. At the same time, people of the region get a variety of products at comparatively lower prices. The number of regional groups has grown rapidly in recent decades. More than one-third of world trade now takes place within such groups. Within the framework of the globalisation efforts conducted under, first, the General Agreement on Tariffs and Trade (GATT) and second, the World Trade Organisation (WTO), the utmost importance was given to the principle of non-discrimination at the international and national levels. The first principle is known as the most-favoured nation (MFN) clause and requires that any trade concession extended to a country must be automatically and immediately applied to all other GATT/WTO members. The second

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Economics of Global Trade & Finance

principle requires all the members to treat imported goods in the same manner as domestic products. Additionally, custom duties must be the only tools to protect domestic goods. Although, these two very basic principles were agreed under the GATT/WTO, there are, indeed, some effective exceptions to these rules. One exemption from the mostfavoured nation clause is the case of free trade areas and customs union. Only in these economic groupings is ‘discrimination’ made permissible against the non-member countries. Another exception to the principle of non-discrimination is the special status of the developing countries. Trade preferences extended to the developing are also excluded from the MFN Clause. In other words, preferential treatment extended to the developing countries will not be granted compulsorily to the other countries. Although trade liberalisation efforts at the global level are accelerating even day by day, regional economic groupings or regional trade blocs are also gaining momentum as indispensable forms of increasing trade amongst the countries, developed or developing, to satisfy, their growth and development aspirants. At the level of developed countries, the European Union (EU), the North American Free Trade Agreeement (NAFTA) and the Asia Pacific Economic Co-operation (APEC) have created huge economic blocs. These three blocs are very important in terms of both their weights in the world trade and economy and their inherent tendencies towards further enlargement and deepening.

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Chapter 2. Types of Regional Economic Groups Regional Economic Groupings aim at creating a larger economic unit from smaller national economies. For this purpose, they aim to remove trade barriers and establish closer co-ordination and co-operation among the countries involved. Regional Economic Groups can be classified on the basis of the degree of integration among different economies: (a)

Preferential Trade Area: A preferential trade area is the weakest form of economic grouping. The member countries reduce custom tariffs in some product categories. They apply a preferential treatment to some groups of goods from the member countries as compared to the rest of the world. Higher tariffs would remain in place for all remaining product categories. A Preferential Trade area can be established through a trade pact. It is the first stage of economic integration. The line between a Preferential Trade Area and a Free trade area (FTA) may be blurred, as almost any PTA has a main goal of becoming a FTA in accordance with the General Agreement on Tariffs and Trade.

(b)

Free Trade Area: This is the simplest form of economic integration which provides for internal free trade between member countries. Each member is allowed to determine its’ own commercial policy with respect to non-members. For example, Latin American Free Trade Association (LAFTA). In free trade areas, participants aim mainly to expand trade activities among themselves. For this purpose, they eliminate customs tariffs on the products they produce themselves. However, they maintain their own external tariff on imports from third parties. For this reason, free trade areas are criticised on the ground that import products from third countries may penetrate into the grouping through the customs of the member state with the lowest tariff and may then be re-exported to the other participants. In order to prevent such trade, free trade areas generally develop very elaborate rules of origin.

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(c)

Customs Union: A customs union is a more advanced form of economic integration which not only provides for internal free trade between member countries but also adopts a uniform commercial policy against non-members. For example, European Economic Community (EEC). In a customs union, the participants not only agree to abolish or reduce tariffs between themselves, they also set a common external tariff policy against third parties. In this manner, the member countries, on the one hand, secure the free or privileged flow of tradable goods amongst themselves and on the other hand, they form a discriminatory trade bloc against the non-member countries. In this case, the main concern becomes the coordination of the trade policies amongst the member countries instead of developing elaborate rules of origin.

(d)

Common Market: A common market allows free movement of labour and capital within the common market in addition to having free movement of goods between the member countries. The member countries of common market also adopt a common commercial policy with respect to non-members. However, such a scheme necessitates the co-ordination of commercial and industrial policies. Citizens of a common market can work and invest in any member country without any restriction.

(e)

Economic Union: In the case of economic union, the member countries have the same economic policies, including monetary and fiscal policy, in addition to the features of common market. Additionally, they also agree to harmonise their national economic policies and act as single economic unit. For example, the European Union introduced a common currency Euro 2000 for its member countries.

(f)

Political Union: Political union is the ultimate type of economic integration whereby member countries achieve not only monetary and fiscal integration but also political integration. For example, EU is moving towards a political union similar to the one created by 52 states of America.

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Chapter 3. Positive Implications of Regional Economic Groups As we have mentioned earlier, when countries form a regional economic grouping, two types of effect may arise: trade diversion and trade creation. Trade diversion is the resulting shift in the direction of trade in favour of the member countries and against third parties. On the other hand, trade creation will induce economic activity in the region and give an impetus to income creation. Formation of a regional economic integration will, first of all, enlarge the volume of demand for commodities produced in the region. As a result, when any investment decision is to be taken, entrepreneurs will consider the whole region and invest in large scale production units. This fact will have two effects. First, it may increase efficiency and competitiveness through economies of scale in production of goods already being produced in the region. Secondly, it may also make possible the production of new commodities within the region. These two results are the direct effects of economic groupings. These will bring about more income creation within the region. Due to the expansion of market, trade and income creation will result in increased exports, increased trade exchanges, more investment, more output, higher rate of employment, new business opportunities, new goods produced in the region. Foreign trade structure and production possibilities will change. Expanded exports will improve the balance of payments, and in turn, may decrease the debt burden on the economies. A greater market may induce foreign capital from third parties. Structural changes will improve the quality and quantity of the products in the region. Specialisation and better division of labour would increase production, productivity and economic growth. Larger markets for commodities and factors of production will give an impetus to technological changes. The overall benefits will be reflected on the increased output, income and welfare of the people. The main objective of regional economic groups is to promote trade between different countries located in the same region. Some people view world trade as consisting broadly of intra-regional trade and inter-regional trade. The regionalism offers certain advantages and poses certain threats. Some of the advantages of such groups are: (a) Increased Trade in the Region: Proponents of regional economic groups strongly advocate that such groups result in considerable increase in trade within the region

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due to the elimination of trade barriers and other restrictions. This promotes prosperity in the region and improves general standard of living. (b) Promotes Efficient Firms: Elimination of trade barriers within the region encourages the efficient firms to expand their business activities in the region. At the same time, healthy competition within the region helps the less efficient firms in acquiring competencies in order to challenge the efficient firms. (c) Improves Performance: Competition between firms from different countries in the region leads to improvement in the overall business performance in terms of productivity, quality, price, delivery and customer service. Consumers get better quality goods and services at the competitive price. (d) Reduction in Transaction Costs: Elimination of trade barriers reduces transaction costs involved in conversion of currencies. This also eliminates the risks involved in international transactions due to fluctuation in currency rates. This gives boost to tourism and other related sectors in the region. (e) Price Transparency: Free trade among countries in the region also promotes price transparency. Price transparency means more or less same price prevails in all the countries in the region. As a result, customers need not wreck their brains trying to calculate what price a commodity is in their currency. (f) Promotes Investment: Many firms become wary when investing in other countries due to uncertainty caused by the fluctuating currencies. Regional grouping prevents such uncertainty and promotes investment in the region due to universal currency and elimination of risks due to fluctuations in currency. (g) Reduces Dependence: Economic regional grouping reduces dependence of member countries on the other countries of the world. This is because most of the requirements of the member nations can be met within the group. This helps the member countries become self-reliant in the long run. (h) Promotes International Peace: Regional groups are more of political unions rather than just economic unions. This is because it is the political will of the countries that compels them to come together for their common benefits. This prevents friction between them and promotes international peace. (i) Optimum Use of Resources: Integration of nations would promote smooth flow of resources and technology among the member nations. This would lead to better

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utilisation of natural and human resources in the member countries and would improve general standard of living in the region.

Chapter 4. Negative Implications of Regional Economic Groups There are certain negative implications of the Regional Economic Groups: (a)

Over-estimation of Trade Benefits: Some economists argue that the trade and cost advantages of regional economic groups have been grossly over estimated. They simply transfer business from inefficient and protected firms in underdeveloped member countries to the efficient firms in the developed countries in the region.

(b)

Loss of Sovereignty: On the political side, it is argued that individual member countries of regional groups lose their political sovereignty. The national policies of the member nations would no longer be guided by popularly elected governments of the nations but would be forced upon them externally by the dominating members of the regional group.

(c)

Threat to Infant Industries: Removal of barriers provides easy opportunity to the efficient firms to penetrate in the markets of the underdeveloped members nations. This endangers the existence and survival of the new and less efficient firms. Hence, the less developed countries mostly become consumption centres and the advanced countries the production centres.

(d)

Overexploitation of Resources of Underdeveloped Member Nations: The resources of the less efficient countries are exploited by the firms from the advanced countries of the region for their own economic benefits. As a result, the less developed countries become poorer whereas the advanced countries of the region become richer.

(e)

Restricts International Trade: The most discouraging effect of the regional economic grouping is the restriction of international trade. Regional economic groups encourage trade among its member countries while the trade with non-members is discouraged through stringent rules and trade barriers. This affects the flow of international trade.

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Chapter 5. European Union (EU) The EU traces its origins from the European Coal and Steel Community (ECSC) formed among six countries, the then West Germany, France, Italy, Belgium, Netherlands and Luxemburg, in 1951 and the Treaty of Rome formed in 1957 by the same states. Since then, the EU has grown in size through enlargements and in power through the addition of policy areas to its remit. The European Union (EU) is an economic union of 27 member countries located primarily in Europe. From an original membership of six states, there have been six successive enlargements, the largest occurring on 1st May 2004, when ten states joined. The EU is currently composed of twenty republics, six kingdoms and one duchy. The EU was established by the Treaty of Maastricht on 1 st November 1993 upon the foundations of the European Communities. With over 500 million citizens, the EU combined generates an estimated 28% share (US$ 16.45 trillion in 2009) of the Nominal gross World Product and about 21.3% (US$14.8 trillion in 2009) of the PPP gross World Product. The EU has developed a single market through a standardised system of laws which apply in all member states, ensuring the free movement of people, goods, services and capital. It maintains common policies on trade, agriculture, fisheries and regional development. Of these 27 member countries, 16 countries have adopted a common currency, the Euro, constituting the Eurozone. As an international organisation, the EU operates through a hybrid system of supranationalism and intergovernmentalism. In certain areas, decisions are made through negotiation between member states, while in others, independent supranational institutions are responsible for the same. Some of the important institutions of the EU are: (a)

The European Parliament (representing the people of Europe).

(b)

The Council of the European Union (representing national governments).

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(c)

The European Commission (representing the common EU interest).

(d)

Council of Justice of the European Union.

(e)

European Central Bank.

The European Parliament is elected every five years by member states' citizens, to whom the citizenship of the European Union is guaranteed.

•

Member Countries of European Union (EU)

The European Union is composed of 27 sovereign Member States: Austria, Belgium, Bulgaria, Cyprus, the Czech Republic, Denmark, Estonia, Finland, France, Germany, Greece, Hungary, Ireland, Italy, Latvia, Lithuania, Luxembourg, Malta, the Netherlands, Poland, Portugal, Romania, Slovak Republic, Slovenia, Spain, Sweden, and the United Kingdom.

•

Objectives of the European Union (EU)

The main objectives of the Union are now to promote peace, the Union's values and the well-being of its peoples. These general objectives are supplemented by a list of more detailed objectives: (a)

To create an area of freedom, security and justice without internal frontiers;

(b)

To establish an internal market where competition is free and undistorted;

(c)

To strive for sustainable development, based on balanced economic growth and price stability;

(d)

To establish a highly competitive social market economy, aiming at full employment and social progress;

(e)

To achieve a high level of protection and improvement of the quality of the environment;

(f)

To promote social justice and protection, equality between women and men, solidarity between generations and protecte the rights of the child;

(g)

To promote economic, social and territorial cohesion and solidarity among the Member States.

(h)

To promote scientific and technological advancement;

(i)

To combat social exclusion and discrimination;

In addition, the Union respects cultural and linguistic diversity and ensures that Europe's cultural heritage is safeguarded and enhanced.

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India-European Union (EU) Relations:

India-EU relations go back to the early 1960s. India was among the first countries to establish diplomatic relations with the then European Economic Community (EEC). The 1994 cooperation agreement signed between EU and India took bilateral relations well beyond trade and economic cooperation. The 5th India-EU Summit at The Hague in 2004 endorsed the EU’s proposal to upgrade its relationship with India to a ‘Strategic Partnership’. The two sides also adopted a Joint Action Plan in 2005 which provides for: (a)

Strengthening Dialogue and Consultation mechanisms;

(b)

Deepening political dialogue and cooperation;

(c)

Bringing together People and Cultures;

(d)

Enhancing Economic Policy Dialogue and Cooperation; and

(e)

Developing Trade and Investment.

•

Political Dialogue:

India and the EU have held ten annual Summits to date. The 10 th India-EU Summit was held in New Delhi on 6 November 2009. India was represented by Prime Minister Dr. Manmohan Singh and the EU was represented by Mr. Fredrik Reinfeldt, Prime Minister of Sweden and European Commission President Jose Manuel Durao Barroso. Some of the important outcomes of the Summit are: (a)

It reviewed India-EU Relations and exchanged views on developments in India and EU;

(b)

It agreed to work towards early conclusion of the Broad-based Trade and Investment Agreement and the Maritime Agreement.

(c)

It recognized the need to pursue the reform of the principal UN bodies with a view to enhance the representativeness, transparency and effectiveness of the system;

(d)

It took note of the signing of the India-EU Agreement in the field of nuclear fusion energy research underlining the importance of energy security and clean energy;

(e)

It resolved to jointly fight terrorism in all its forms and manifestation;

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The leaders also identified trade and investment, energy, counter-terrorism, science and technology, climate change, and movement of peoples as priority areas of co-operation. There is a regular mechanism of Senior Officials Meeting (SOM) between India and the EU. Eighteen SOMs have been held till date.

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India-EU Business Links:

The EU, as a bloc of 27 countries, is India’s largest trading partner while India was EU’s 9th largest trading partner in 2008.

(a)

EU-India trade has been growing steadily reaching € 60.9 billion in 2008 (1.9% of EU’s total trade). In 2008, India was the 11th largest exporter to the EU and had a share of 1.9% in

(b)

the total EU imports. On the other hand, India was the 9 th largest importer of EU’s products and had a

(c)

share of 2.4 % in the EU’s global exports. (d)

In 2008, India exported services worth 7.94 billion euros whereas total Indian imports from the EU was worth 8.56 billion euros.

(e)

In the first half of 2009, India’s exports to EU was 12.9 billion euros while India’s imports was 12.7 billion euros.

The EU is one of the largest sources of FDI for India. However, the FDI inflows from the EU to India declined from Euro 4.019 billion in 2007 to Euro 3.27 billion in 2008. India has also emerged as a major investor in the EU countries with total investment from India increasing from Euro 1.003 billion in the year 2007 to Euro 3.69 billion in 2008.

•

Institutional Interactions:

India and the EU have held eight rounds of negotiations for a bilateral Broad-based Trade and Investment Agreement. Negotiations commenced in 2007 and cover Trade in goods,

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Sanitary & Phyto-sanitary Measures and Technical Barriers to Trade, Trade in services, Investment, Intellectual Property Rights and Geographical Indications, Competition Policy, Customs and Trade Facilitation, Trade Defence and Dispute Settlement.

The India-EU Joint Commission with its three sub-commission on trade, economic cooperation and development cooperation meets annually. India and EU have Joint Working Groups on Counter Terrorism, Consular Issues, Agriculture and Marine Products, Energy, Environment, Technical Barriers to Trade and Sanitary

and

Phytosanitary

Issues,

Textiles,

Steel,

Information

Technology

&

Communications, Pharmaceuticals & Biotechnology, Food Processing Industries and Customs Cooperation. Both sides also have regular dialogues on Security, Human Rights, Macro Economy and Science and Technology.

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Bilateral Agreements:

India and the EU have signed bilateral agreements which includes cooperation in the field of Science & Technology in 2001 which was renewed in 2007; Joint Vision Statement for promoting cooperation in the field of information and communications technology in 2001; customs cooperation agreement in 2004; Memorandum of Understanding on Cooperation on Employment and Social Affairs in November 2006; Horizontal Civil Aviation Agreement in 2008; Joint Declaration in field of Education in 2008; Joint Declaration on Multilingualism in March 2009 and Agreement in the field of nuclear fusion energy research in November 2009.

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Chapter 6. North American Free Trade Agreement (NAFTA) North American Free Trade Agreement (NAFTA) came into being on 1 st January 1994. The most affluent nations of the world, i.e., USA and Canada along with Mexico - a developing country joined together to form a trade bloc. A free trade agreement was signed by the USA and Canada in 1989. This was extended to Mexico in 1994. As per the provisions of the legal text, all tariffs and other quantitative restrictions were eliminated, as scheduled, on January 1, 2008. NAFTA created the world's largest free trade area, which now links 444 million people producing $17 trillion worth of goods and services.

•

Objectives of NAFTA

The objectives of NAFTA, as elaborated more specifically through its principles and rules including national treatment, most favoured nations treatment and transparency are: (a) To eliminate the barriers to trade and facilitate the cross border movement of goods and services among the member countries. (b) To increase substantially investment opportunities among the member countries. (c) To enhance the competitive advantage of the companies operating in the USA, Canada and Mexico in wider international markets. (d) To provide adequate and effective protection and enforcement of intellectual property rights in each member country. (e) To create effective procedures for the implementation and application of this agreement, for its joint administration and for the resolution of disputes.

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(f) To establish a framework for further trilateral, regional and multilateral cooperation to expand and enhance the benefits of this Agreement (g) To promote conditions of fair competition in the free trade area.

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Critical Appraisal

It was felt that the emergence of NAFTA would enable further development of the USA and Canada and the significant development of Mexico. Further, the free flow of capital and human resources would enable countries in achieving balanced regional development. However, the formation of NAFTA is criticised on the following grounds: (a)

Most of the US industries will shift to Mexico as Mexico has less stringent environmental protection and health and safety legislations than the USA.

(b)

NAFTA agreement has been implemented without prior preparations. Therefore, the Mexican economy may face the problem of adjustment and assimilation with the USA and Canada.

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Chapter 7. Association of South East Asian Nations (ASEAN) Association of Southeast Asian Nations (ASEAN) was established on 8 th August 1967 in Bangkok, Thailand, with the signing of the ASEAN Declaration (Bangkok Declaration) by the Founding Fathers of ASEAN, namely Indonesia, Malaysia, Philippines, Singapore and Thailand. Brunei Darussalam then joined on 8th January 1984, Viet Nam on 28 th July 1995, Lao PDR and Myanmar on 23 rd July 1997, and Cambodia on 30 th April 1999, making up what is today the ten Member States of ASEAN. The ASEAN region has a population of about 500 million, a total area of 4.5 million square kilometres, a combined gross domestic product of US$ 737 billion and a total trade of US$ 720 billion.

•

ASEAN Charter:

The ASEAN Charter serves as a firm foundation in achieving the ASEAN Community by providing legal status and institutional framework for ASEAN. It also codifies ASEAN norms, rules and values; sets clear targets for ASEAN; and presents accountability and compliance. The ASEAN Charter came into force on 15th December 2008. A gathering of the ASEAN Foreign Ministers was held at the ASEAN Secretariat in Jakarta to mark this very historic occasion for ASEAN. In effect, the ASEAN Charter has become a legally binding agreement among the 10 ASEAN Member States.

•

ASEAN Community:

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The ASEAN Vision 2020, adopted by the ASEAN Leaders on the 30 th Anniversary of ASEAN, agreed on a shared vision of ASEAN as a concert of Southeast Asian nations, outward looking, living in peace, stability and prosperity, bonded together in partnership in dynamic development and in a community of caring societies. At the 9th ASEAN Summit in 2003, the ASEAN Leaders resolved that an ASEAN Community shall be established. At the 12th ASEAN Summit in January 2007, the Leaders affirmed their strong commitment to accelerate the establishment of an ASEAN Community by 2015 and signed the Cebu Declaration on the Acceleration of the Establishment of an ASEAN Community by 2015. The ASEAN Community is comprised of three pillars, namely: (a)

ASEAN Political-Security Community,

(b)

ASEAN Economic Community.

(c)

ASEAN Socio-Cultural Community.

•

Principles of ASEAN:

In pursuit of the Purposes stated in Article 1, ASEAN and its Member States reaffirm and adhere to the fundamental principles contained in the declarations, agreements, conventions, concords, treaties and other instruments of ASEAN. ASEAN and its Member States shall act in accordance with the following Principles: (a)

Respect for the independence, sovereignty, equality, territorial integrity and national identity of all ASEAN Member States;

(b)

Shared commitment and collective responsibility in enhancing regional peace, security and prosperity;

(c)

Renunciation of aggression and of the threat or use of force or other actions in any manner inconsistent with international law;

(d)

Respect for the right of every Member State to lead its national existence free from external interference, subversion and coercion;

(e)

Enhanced consultations on matters seriously affecting the common interest of ASEAN and reliance on peaceful settlement of disputes;

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(f)

Adherence to the rule of law, good governance, the principles of democracy and constitutional government;

(g)

Respect for fundamental freedoms, the promotion and protection of human rights, and the promotion of social justice;

(h)

Upholding the United Nations Charter and international law, including international humanitarian law, subscribed to by ASEAN Member States;

(i)

Respect for different cultures, languages and religions of the peoples of ASEAN, while emphasising their common values in the spirit of unity in diversity;

(j)

Adherence to multilateral trade rules for effective implementation of economic commitments and progressive reduction towards elimination of all barriers to regional economic integration, in a market-driven economy.

•

Objectives of ASEAN:

As per the ASEAN Charter the aims and purposes of the Association are as under: (a)

Fundamental Objective: The fundamental objective of ASEAN is to maintain and enhance peace, security and stability and further strengthen peace-oriented values in the region.

(b)

To enhance regional resilience: The Association also endeavours to enhance regional resilience by promoting greater political, security, economic and socio-cultural cooperation;

(c)

To create weapon free region: The Association also aims to preserve Southeast Asia as a Nuclear Weapon-Free Zone and free of all other weapons of mass destruction;

(d)

To promote peace in the region: The Association shall ensure that the peoples and Member States of ASEAN live in peace with the world at large in a just, democratic and harmonious environment;

(e)

To create a single market: The Association also aims to create a single market and production base that promotes free flow of goods, services, investment, business persons, professionals, talents and labour.

(f)

To alleviate poverty: The Association aims to alleviate poverty in the region and narrow the development gap within ASEAN through mutual assistance and cooperation.

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(g)

To strengthen democracy: The Association shall endeavour to strengthen democracy, enhance good governance and the rule of law and to promote and protect human rights and fundamental freedoms.

(h)

To ensure collective security: The Association shall respond effectively, in accordance with the principle of comprehensive security, to all forms of threats, transnational crimes and trans-boundary challenges.

(i)

To promote sustainable development: It shall promote sustainable development so as to ensure the protection of the region’s environment, its natural resources, cultural heritage and the quality of human life.

(j)

To develop human resource: It shall develop human resources through closer co-operation in education and life-long learning and in science and technology, for the empowerment of the peoples of ASEAN.

(k)

To promote inclusive growth: Finally, it aims to promote a people-oriented ASEAN in which all sectors of society are encouraged to participate in, and benefit from, the process of ASEAN integration and community building;

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Chapter 8. South Asian Association for Regional Cooperation (SAARC) The successful performance of EEC, NAFTA and other trade blocs in the economic development of the member countries and in improving the employment opportunities, incomes and living standards of the people of the region gave impetus for the formation of South Asian Association for Regional Cooperation (SAARC). The South Asian Association for Regional Cooperation (SAARC) is an economic and political organisation of eight countries in Southern Asia. In terms of population, its sphere of influence is the largest of any regional organisation -

almost 1.5 billion people. It was

th

established on 8 December, 1985 by Bangladesh, Bhutan, Maldives, Nepal, Pakistan, India and Sri Lanka. In April 2007, at the Association's 14 th Summit, Afghanistan became its eighth member.

•

Objectives of SAARC

(a) To improve the quality of life and welfare of the people of the SAARC member countries. (b) To enhance mutual assistance among member countries in the economic, social, cultural, scientific and technical fields. (c) To provide an opportunity to the people of the region to live with dignity and to exploit their potentialities. (d) To provide a conducive climate for creating and enhancing mutual trust, understanding and appreciation of one another’s problems.

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(e)

To promote and strengthen collective self-reliance among the countries of South Asia;

(f)

To strengthen cooperation among themselves in international forums on the matters of common interest; and

(g)

To co-operate with international and regional organisations with similar aims and purposes.

(h) To develop the region economically, socially and culturally. The SAARC countries are committed to a step-by-step trade liberalisation in such a manner that all countries in the region share the benefits of trade expansion equitably.

•

Major Development in SAARC:

The Declaration on South Asian Regional Cooperation was adopted by the Foreign Ministers in 1983 in New Delhi. During the meeting, the Ministers also launched the Integrated Programme of Action (IPA) in nine agreed areas, namely, Agriculture; Rural Development; Telecommunications; Meteorology; Health and Population Activities; Transport; Postal Services; Science and Technology; and Sports, Arts and Culture. The South Asian Association for Regional Cooperation (SAARC) was established when its Charter was formally adopted on 8 December 1985 by the Heads of State or Government of Bangladesh, Bhutan, Maldives, Nepal, Pakistan, India and Sri Lanka. In July, 1992, a decision was reached to draft an agreement for the South Asian Preferential Trading Agreement (SAPTA). The draft agreement was submitted to the SAARC Standing Committee in 1992 and signed by foreign ministers in Dhaka on 11 th April, 1993. It entered into force on 7 th December, 1995. The SAPTA aims to remove paratariff and non-tariff barriers to trade exchanges in the region, to deepen the tariff cuts and to expand the list of products to be included in intra SAARC preferential trade. Negotiations still continue to finalise schedules of concessions and to expand them further. SAPTA is considered to be a step to create a South Asian Free Trade Area (SAFTA), which is still at the discussion stage. Afghanistan was added to the regional grouping at the behest of India on 13 th November 2005, and became a member on 3rd April 2007. With the addition of Afghanistan, the total number of member states was raised to eight. In April 2006, the United States of America and South Korea made formal requests to be granted observer status. The European Union has also indicated interest in being given observer status, and made a formal request for the same to the SAARC Council of Ministers meeting in July 2006. On 2 nd

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August 2006 the foreign ministers of the SAARC countries agreed in principle to grant observer status to the US, South Korea and the European Union. On 4 March 2007, Iran requested observer status. Poverty alleviation is also one of the major issues addressed within the framework of SAARC. In 1991, the Sixth SAARC Summit held in Colombo decided to establish an Independent South Asian Commission on Poverty Alleviation (ISACPA).

• (a)

Future Membership: The People’s Republic of China has shown its interest in joining SAARC. While

Pakistan and Bangladesh support China's candidature, India is more reluctant about the prospect of Chinese membership, while Bhutan does not even have diplomatic relations with China. However, during the 2005 Dhaka summit, India agreed on granting observer status to the People’s Republic of China along with Japan. During the 14th summit, Nepal along with Pakistan and Bangladesh, announced their support for the membership of China. (b)

Indonesia intends to become an observer as well and is supported by Sri Lanka.

(c)

Iran, a state with borders to two SAARC members, has traditionally enjoyed strong cultural, economic and political relationships with Afghanistan, Pakistan, India and Bangladesh and has expressed its desire to become a member of the South Asian organization. On 3rd March 2007, Iran asked to join the SAARC as an observer.

(d)

Russia intends to become an observer as well, and is supported by India.

(e)

Myanmar has expressed an interest in joining as a full member. India is currently backing Myanmar. Myanmar’s military regime officially applied for full SAARC membership in May 2008. However, the application is still being considered and the government is currently restricted to observer status.

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Chapter 9. Agreement on South Asian Free Trade Area (SAFTA) The Agreement on South Asian Free Trade Area (SAFTA) was signed by all the member States of the South Asian Association for Regional Co-operation (SAARC) during the twelfth 'SAARC Summit' held in Islamabad on 4-6th January, 2004. As a result, SAFTA came into force from 1st January, 2006. The Agreement on South Asian Free Trade Area (SAFTA) came into force from 1 st January, 2006. India, Pakistan and Sri Lanka are categorized as Non-Least Developed Contracting States (NLDCS) and Bangladesh, Bhutan, Maldives and Nepal are categorized as Least Developed Contracting States (LDCS). Afghanistan which became the eighth member of SAARC during the 14th SAARC Summit held on 3-4 April 2007 in New Delhi is due to become a party to the SAFTA Agreement as an LDC member. The objectives of SAFTA are to promote and enhance mutual trade and economic cooperation among the 'Contracting States' by inter-alia: (a)

Eliminating barriers to trade in, and facilitating the cross-border movement of goods between the territories of the Contracting States;

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(b)

Promoting conditions of fair competition in the free trade area, and ensuring equitable benefits to all Contracting States;

(c)

Creating effective mechanism for the implementation and application of this Agreement, for its joint administration and for the resolution of disputes; and

(d)

Establishing a framework for further regional cooperation to expand and enhance the mutual benefits of this Agreement.

According to the agreement, SAFTA will be implemented through the following instruments: (a)

Trade Liberalisation Programme.

(b)

Rules of Origin.

(c)

Institutional Arrangements.

(d)

Consultations and Dispute Settlement Procedures.

(e)

Safeguard Measures.

(f)

Any other instrument that may be agreed upon.

Article 7 of the SAFTA Agreement provides for a phased tariff liberalization programme (TLP) under which, in two years, NLDCS would bring down tariffs to 20%, while LDCS will bring them down to 30%. Non-LDCS will then bring down tariffs from 20% to 0-5% in 5 years (Sri Lanka 6 years), while LDCS will do so in 8 years. NLDCs will reduce their tariffs for L.D.C. products to 0-5% in 3 years. This TLP would cover all tariff lines except those kept in the sensitive list (negative list) by the member states.

23


Chapter 10. Global System of Trade Preferences among Developing Countries (GSTP) The Agreement on the Global System of Trade Preferences among Developing Countries (GSTP) was established in 1988 as a framework for the exchange of trade preferences among developing countries in order to promote intra-developing country trade. The idea received its first political expression at the 1976 ministerial meetings in Arusha (1979) and Caracas (1981). In 1982, the Ministers of Foreign Affairs of the Group of 77 in New York defined the basic components of the Agreement and established a framework for negotiations. In 1984, the G77 began preparatory work in Geneva on various aspects of a framework agreement. In 1955, the New Delhi ministerial meeting provided further impetus to the process negotiations in Geneva. The ministerial meeting in Brasilia in 1986 established the provisional framework for the Agreement and launched the first round of negotiations on preferential trade concessions. In 1988, the text of the Agreement was adopted and the first round of negotiations concluded in Belgrade. To date, 44 countries have ratified/acceded to the Agreement: Algeria, Argentina, Bangladesh, Benin, Bolivia, Brazil, Cameroon, Chile, Colombia, Cuba, Democratic People's Republic of Korea, Ecuador, Egypt, Ghana, Guinea, Guyana, India, Indonesia, Iran, Iraq, Libya, Malaysia, Mexico, Morocco, Mozambique, Myanmar, Nicaragua, Nigeria,

24


Pakistan, Peru, Philippines, Republic of Korea, Romania, Singapore, Sri Lanka, Sudan, Thailand, Trinidad and Tobago, Tunisia, Tanzania, Venezuela, Viet Nam and Zimbabwe. The GSTP received a further boost on 20 th October, 2006 with the accession of Mercosur, the Southern Common Market, comprising of Argentina, Brazil, Paraguay and Uruguay. Romania has verbally informed GSTP of its withdrawal in view of their accession to the European Union, scheduled for 1st January 2007.

•

Important Features of the GSTP Agreement:

As per the Article 2 of the Agreement on Global System of Trade Preferences among Developing Countries (GSTP) the aims of the GSTP is promote and sustain mutual trade and the development of economic co-operation among developing countries, through exchange of concessions in accordance with this Agreement. As per the Article 3 of the Agreement on Global System of Trade Preferences among Developing Countries (GSTP) the GSTP shall be established in accordance with the following principles: (a)

The GSTP shall be reserved for the exclusive participation of developing countries members of the Group of 77;

(b)

The benefits of the GSTP shall accrue to the developing countries members of the Group of 77 who are participants in accordance with article 1 (a);

(c)

The GSTP shall be based and applied on the principle of mutuality of advantages in such a way as to benefit equitably all participants, considering their respective levels of economic and industrial development, the pattern of their external trade and their trade policies and systems;

(d)

The GSTP shall be negotiated step by step, improved and extended in successive stages, with periodic reviews;

(e)

The GSTP shall not replace, but supplement and reinforce, present and future subregional, regional and interregional economic groupings of developing countries of the

25


Group of 77 and shall take into account the concerns and commitments of such economic groupings; (f)

The special needs of the least developed countries shall be clearly recognized and concrete preferential measures in favour of these countries should be agreed upon; the least developed countries will not be required to make concessions on a reciprocal basis;

(g)

The GSTP shall include all products, manufactures, and commodities in their raw, semi-processed and processed forms;

(h)

Inter-governmental sub-regional, regional

and inter-regional groupings for

economic co-operation among developing countries members of the Group of 77 may participate, fully as such, if and when they consider it desirable, in any or all phases of the work on the GSTP. As per the Article 4 of the Agreement on Global System of Trade Preferences among Developing Countries (GSTP) the GSTP may inter alia consist of the following components: (a)

Arrangements relating to tariffs;

(b)

Arrangements relating to para-tariffs;

(c)

Arrangements relating to non-tariff measures;

(d)

Arrangements relating to direct trade measures including medium and long-term contracts;

(e)

Arrangements relating to sectoral agreements. •

(a)

Benefits of GSTP Agreement: The agreement on GSTP, which was signed by 48 members of G-77 in 1988, was

the first instrument available to developing countries for promoting trade and economic cooperation among themselves. (b)

GSTP is a useful instrument for promoting South-South cooperation on a broad front.

(c)

GSTP Participants could increase their participation in the global economy and identify complementarities among their economies so as to open the tremendous potential for trade cooperation envisaged when they adopted the Agreement in 1988.

(d)

GSTP's importance lies in the fact that as developing countries become more comfortable with tariff reductions, much wider range of products and more substantial preferences can be offered under this instrument.

26


(e)

It could also be used to draw in countries that have so far benefited little from trade preferences. •

Role of India in GSTP:

India has been an active member of GSTP ever since its genesis. During the First Round India exchanged concessions with 14 countries. The number of tariff lines on which concessions were granted by India is 31 and in return India received tariff concessions on a wide range of products of its export interest from these 14 countries. In order to carry forward the exchange of concessions, the Second Round of GSTP Negotiations was launched in 1991. During the Second round, India held bilateral negotiations for exchange of concessions with 12 countries. These concessions have not been implemented so far. The Third Round of the GSTP was launched at a special ministerial session of UNCTAD XI meeting with the adoption of the Sao Paulo Declaration. Participants including India expressed strong support to revitalize the GSTP and to ensure the success of the third round of negotiations through broader and deeper exchange of tariff preferences among developing countries. India articulated its full support for the rejuvenation of GSTP keeping in mind that the broadening of trade and economic cooperation across the full breadth of developing countries would bring in the attendant benefits of increased investment flows, technology transfer and maximization of economic strengths of each country besides boosting southsouth trade. •

Current Scenario:

GSTP Agreements to date are not economically significant. The reduction of tariff barriers in developing countries has happened through unilateral action (often under the pressure of IMF and World Bank), and through multi-lateral and regional agreements. GSTP negotiations have suffered from the unwillingness of some members to make concessions in the hope that they could gain benefits for free. The effectiveness of GSTP in future depends on the political will of the members, and its capacity to recruit more participants. The GSTP needs to be strengthened and extended, both in terms of the number of countries and in scope so as to include investment, production and marketing.

27


Chapter 11. World Trade Organisation (WTO) The Uruguay Round negotiations concluded on 15 th April 1994 at Marrakech, Morocco. According to the Marrakech declaration, the results of the Uruguay Round would strengthen the world economy and would lead to more trade, investment, employment and income growth throughout the world. In order to implement the final act of Uruguay Round agreement of GATT, the World Trade Organisation (WTO) was established on 1 st January 1995. The organisation deals with regulation of trade between participating countries; it provides a framework for negotiating and formalising trade agreements and a dispute resolution process aimed at enforcing participants' adherence to WTO agreements which are

signed

by

representatives

of

member

governments

and

ratified

by

their parliaments. Most of the issues that the WTO focuses on, derive from previous trade negotiations, especially from the Uruguay Round (1986–1994). The main objectives of the WTO are as follows: (a) Trade Liberalisation: The broad aim of WTO is to reduce trade restrictions put up by individual nations for their narrow national interests. The goal is to be achieved through multilateral negotiations between the member nations and settlement of trade disputes through a set of rules evolved by the WTO.

28


(b) Non-discrimination: Non-discrimination is one of the most important principles of the WTO. This principle requires that no member country shall discriminate between the members of WTO in the conduct of international trade. This principle is known as the Most Favoured Nations (MFN) Clause. (c) Raising Standards of Living: The WTO Agreement aims to raise the standards of living and the progressive development of the economies of all contracting parties. It also ensures that the attainment of these objectives is particularly urgent for lessdeveloped contracting parties. (d) Ensuring Optimum Use of World Resources: The WTO Agreement endeavours to allow for the optimal use of the world's resources in accordance with the objective of sustainable development and thereby expanding production of goods and services and international trade. (e) Environmental Concern: The Preamble to the WTO Agreement includes direct references to the objective of sustainable development and to the need to protect and preserve the environment. (f) Development of Less Developed Countries: The WTO Agreement ensures that developing countries should secure a share in the growth in global trade commensurate with the needs of their economic development. (g) Full Employment: The WTO Agreement aims to ensure full employment of world resources, both natural as well as human, and a large and steadily growing volume of real income and effective demand in the member nations. (h) Multilateral Trading System: The ultimate aim of the WTO Agreement is to develop an integrated, more viable and durable multilateral trading system through mutual consultation and negotiations.

•

Functions of WTO:

The main functions of the WTO as set out in Article III are: (a)

Administering WTO Trade Agreements: The main function of the WTO is to facilitate the implementation, administration and operation of the Multilateral Trade Agreement and the Plurilateral Trade Agreements signed at the various Rounds of the GATT/WTO negotiations.

29


(b)

Reduction of Trade Barriers: The fundamental objective of the WTO is to remove all types of hurdles to the free flow of international trade. It secures implementation of the significant tariff cuts and also reduction of non-tariff measures agreed in the trade negotiations.

(c)

Settlement of International Trade Disputes: The Dispute Settlement Body provides a mechanism for the settlement of trade disputes which could not be solved through bilateral talks. It has now been mandatory to settle a dispute within 18 months and the verdict of the Disputes Settlement Panels is final and binding on all parties.

(d)

Co-operation with Other International Organizations: WTO co-operates with other international institutions like the International Monetary Fund (IMF) and the International Bank for Reconstruction and Development (IBRD) and its affiliated agencies to achieve greater coherence in global economic policy making.

(e)

Forum for Trade Negotiations: WTO provides a forum for negotiations among its members concerning their multilateral trade relations in matters dealt with under the agreements of the WTO. It also provides a framework for the implementation of the results of such negotiations.

(f)

Trade Policy Review Mechanism: WTO acts as a watchdog of national trade policies of its member countries. The General Council of the WTO convenes Trade Policy Review Body in order to frame such rules, which are necessary in order to keep a close watch over the trade policies of different member countries.

(g)

Consultancy Services: In order to achieve its objective of trade liberalisation, the WTO acts as a management consultant for its member countries. It also helps underdeveloped and developing economies to promote their external trade by providing them with technical assistance and training.

•

Principles of the Trading System:

The WTO establishes a framework for trade policies; it does not define or specify outcomes. That is, it is concerned with setting the rules of the trade policy games. Five principles are of particular importance in understanding both the pre-1994 GATT and the WTO:

30


(a)

Non-discrimination:

It

has

two

major

components:

the most

favoured

nation (MFN) rule and the national treatment policy. Both are embedded in the main WTO rules on goods, services and intellectual property, but their precise scope and nature differ across these areas. The MFN rule requires that a WTO member must apply the same conditions on all trade with other WTO members, i.e. a WTO member has to grant the most favourable conditions under which it allows trade in a certain product type to all other WTO members. Grant someone a special favour and you have to do the same for all other WTO members”. National treatment means that imported goods should be treated no less favourably than domestically produced goods (at least after the foreign goods have entered the market) and was introduced to tackle non-tariff barriers to trade (e.g. technical standards, security standards et al. discriminating against imported goods).

(b)

Reciprocity. It reflects both a desire to limit the scope of free-riding that may arise because of the MFN rule, and a desire to obtain better access to foreign markets. A related point is that for a nation to negotiate, it is necessary that the gain from doing so be greater than the gain available from unilateral liberalization; reciprocal concessions intend to ensure that such gains will materialise.

(c)

Binding and enforceable commitments. The tariff commitments made by WTO members in a multilateral trade negotiation and on accession are enumerated in a schedule (list) of concessions. These schedules establish "ceiling bindings": a country can change its bindings, but only after negotiating with its trading partners, which could mean compensating them for loss of trade. If satisfaction is not obtained, the complaining country may invoke the WTO dispute settlement procedures.

(d)

Transparency. The WTO members are required to publish their trade regulations, to maintain institutions allowing for the review of administrative decisions affecting trade, to respond to requests for information by other members, and to notify changes in trade policies to the WTO. These internal transparency requirements are supplemented and facilitated by periodic country-specific reports (trade policy reviews) through the Trade Policy Review Mechanism (TPRM). The WTO system tries also to improve predictability and stability, discouraging the use of quotas and other measures used to set limits on quantities of imports.

31


(e)

Safety valves. In specific circumstances, Governments are able to restrict trade. The WTO’s agreements permit members to take measures to protect not only the environment but also public health, animal health and plant health. There are three types of provision in this direction:



Articles allowing for the use of trade measures to attain non-economic objectives;



Articles aimed at ensuring "fair competition"; members must not use environmental protection measures as a means of disguising protectionist policies.



Provisions permitting intervention in trade for economic reasons.

Exceptions to the MFN principle also allow for preferential treatment of developing countries, regional free trade areas and customs unions.

Membership of WTO with date of Accession: Country

Date of Accession 8 September 2000

Albania Angola Antigua and Barbuda Argentina Armenia Australia Austria Bahrain Bangladesh Barbados Belgium Belize Benin Bolivia Botswana Brazil Brunei Darussalam Bulgaria Burkina Faso Burundi Cambodia Cameroon

23 November 1996 1 January 1995 1 January 1995 5 February 2003 1 January 1995 1 January 1995 1 January 1995 1 January 1995 1 January 1995 1 January 1995 1 January 1995 22 February 1996 12 September 1995 31 May 1995 1 January 1995 1 January 1995 1 December 1996 3 June 1995 23 July 1995 13 October 2004 13 December 1995

32


Country

Date of Accession 1 January 1995 23 July 2008 31 May 1995 19 October 1996 1 January 1995 30 April 1995 1 January 1995 30 November 2000 20 April 1995 30 July 1995 1 January 1995 1 January 1995

Canada Cape Verde Central African Republic Chad Chile Colombia Costa Rica Croatia Cuba Cyprus Czech Republic Côte d'Ivoire Democratic Republic of the Congo

1 January 1997

Denmark Djibouti Dominica Dominican Republic Ecuador Egypt El Salvador Estonia European Union Fiji Finland France

1 January 1995 31 May 1995 1 January 1995 9 March 1995 21 January 1996 30 June 1995 7 May 1995 13 November 1999 1 January 1995 14 January 1996 1 January 1995 1 January 1995 1 January 1995

Gabon Gambia Georgia Germany Ghana Greece Grenada Guatemala Guinea Guinea-Bissau Guyana Haiti Honduras Hong Kong, China Hungary

23 October 1996 14 June 2000 1 January 1995 1 January 1995 1 January 1995 22 February 1996 21 July 1995 25 October 1995 31 May 1995 1 January 1995 30 January 1996 1 January 1995 1 January 1995 1 January 1995 1 January 1995

Iceland India Indonesia Ireland

1 January 1995 1 January 1995 1 January 1995 21 April 1995

Israel

33


Country

Date of Accession 1 January 1995 9 March 1995 1 January 1995 11 April 2000 1 January 1995 1 January 1995 20 December 1998 10 February 1999 31 May 1995 1 September 1995 31 May 2001 1 January 1995 1 January 1995 17 November 1995 31 May 1995 1 January 1995 31 May 1995 31 May 1995 1 January 1995 31 May 1995 1 January 1995 1 January 1995 26 July 2001 29 January 1997 29 April 2012 1 January 1995 26 August 1995 1 January 1995 1 January 1995

Italy Jamaica Japan Jordan Kenya Kuwait Kyrgyzstan Latvia Lesotho Liechtenstein Lithuania Luxembourg Macau, China Madagascar Malawi Malaysia Maldives Mali Malta Mauritania Mauritius Mexico Moldova Mongolia Montenegro Morocco Mozambique Myanmar Namibia

23 April 2004

Nepal Netherlands New Zealand Nicaragua

1 January 1995 1 January 1995 3 September 1995 13 December 1996

Niger Nigeria Norway Oman Pakistan Panama

1 January 1995 1 January 1995 9 November 2000 1 January 1995 6 September 1997

Papua New Guinea Paraguay People's Republic of China Peru

9 June 1996 1 January 1995 11 December 2001 1 January 1995

34


Country Philippines Poland Portugal Qatar Republic of Korea Republic of Macedonia Republic of the Congo Romania Russia Rwanda Saint Kitts and Nevis Saint Lucia Saint Vincent and the Grenadines Samoa Saudi Arabia Senegal Separate Customs Territory of Taiwan, Penghu, Kinmen & Matsu Sierra Leone Singapore Slovakia Slovenia Solomon Islands South Africa Spain Sri Lanka Suriname Swaziland Sweden

Date of Accession 1 January 1995 1 July 1995 1 January 1995 13 January 1996 1 January 1995 4 April 2003 27 March 1997 1 January 1995 22 August 2012 22 May 1996 21 February 1996 1 January 1995 1 January 1995 10 May 2012 11 December 2005 1 January 1995 1 January 2002 23 July 1995 1 January 1995 1 January 1995 30 July 1995 26 July 1996 1 January 1995 1 January 1995 1 January 1995 1 January 1995 1 January 1995 1 January 1995 1 July 1995

Switzerland Tanzania Thailand Togo Tonga Trinidad and Tobago Tunisia Turkey Uganda Ukraine United Arab Emirates United Kingdom United States Uruguay Vanuatu

1 January 1995 1 January 1995 31 May 1995 27 July 2007 1 March 1995 29 March 1995 26 March 1995 1 January 1995 16 May 2008 10 April 1996 1 January 1995 1 January 1995 1 January 1995 24 August 2012

35


Country

Date of Accession 1 January 1995 11 January 2007 1 January 1995 5 March 1995

Venezuela Vietnam Zambia Zimbabwe

Chapter 12. References 1. C. Wilcox, A Charter for World Trade, 1949. 2. Shand, Ric. 1998. “Economic Liberalisation in South Asia Performance and Prospects”, Research and Information System for the Non-Aligned and other Developing Countries, New Delhi. 3. Shome, Parthasarathi (ed.), 2001, “India & Economic Cooperation in South Asia”, Indian Council for Research on International Economic Relations, New Delhi. 4. Balassa, В, ‘Trade Creation and Trade Diversion in the European Common Market’, The Economic Journal, vol. 77, 1967, pp. 1–21. 5. Johnson, H, ‘An Economic Theory of Protection, Tariff Bargaining and the Formation of Customs Unions’, Journal of Political Economy, 1965, vol. 73, pp. 256–283.

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6. Dr D.M. Mithani, ‘Economics of Global Trade and Finance’, 2009, Himalaya Publishing House. 7. Arun Kumar Trivedi and Tarsem Singh Bhogal, ‘International Trade Finance – A Pragmatic Approach’. 8. Jagdish N. Bhagwati, ‘Lectures on International Trade’, 2nd edition.

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Regional Economic Groupings

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