Regional Trading Agreements

Regional trading agreements have become a prominent feature of the world trading system today. Though existing in different forms for years, post 1990, there has been a considerable surge in them between different groups of countries not only geographically spread but also at different stages of economic development. 489 Regional Trading Agreements notified by The World Trade Organisation (WTO) are operating today in addition to several others not notified and entered by the nations on a bilateral basis. The World Trade body in its latest world trade report observed that all its member countries (153) barring Mongolia are engaged in one RTA or another with an average engagement of thirteen per nation. The phenomenal growth of RTAs coinciding with the establishment of WTO in 1995 as a mechanism to achieve multilateralism in the global trade is now recognised by the organisation itself as an important tool in promoting liberalisation and expansion of trade. With more than half of international trade now being routed through the RTAs and new agreements going beyond the traditional tariff cutting exercises to cover services, investment, intellectual property rights, technical barriers to trade and dispute settlement, RTAs are being hailed by their proponents as a major step towards achieving the eventual multilateralism in the world trade.

What are RTAs

A Regional Trading Agreement is essentially a kind of economic integration between two or more nations under which they agree to reduce tariff and non-tariff barriers between them to accelerate trade and investment. Depending upon the level of economic engagement between participating countries different nomenclatures have been used to describe different types of RTAs.The weakest form of economic engagement under RTAs is the Preferential trading agreement-giving preferential access to certain products from certain countries through reduction of tariffs but not necessarily their elimination. Next in order of integration and so far forming the most widespread form of RTA covering around 84 percent of total trading agreements is a Free Trade Area. Under an FTA, member countries eliminate or reduce internal tariff and non-tariff trade barriers among members while members are free to maintain their individual tariffs and non-tariffs against non participants in the agreement. Some of the most widely known trading agreements like North American Free Trade Agreement (NAFTA), European Free Trade Association (EFTA) and South Asian Free Trade Area (SAFTA) come under FTAs. One step ahead of FTA is a Custom Union under which members of the RTA agree for a common external tariff rate on imports from the non-member countries. Examples of Custom Union include South American Customs Union, East African Community and Gulf Cooperation Council. Common Markets, carrying all the features of a Custom Union also allow for free movements of capital and labour across the national boundaries in addition to the flow of goods and services. The most comprehensive form of regional integration is achieved by the members under an Economic and Monetary Union under which members agree to remove all internal trade barriers, permit for free movement of capital and labour, erect common external trade barriers against non participants and agree to unify their monetary and fiscal policies. The European Union existing in its present form after entering into force of the Maastricht treaty in 1993 forms the classic example of an Economic Union under which member countries have agreed to remove all barriers to internal trade and movement of factors of production. They have also agreed to share a common currency and synchronize their macroeconomic policies.

Evolution of RTAs

History of preferential trading arrangements is conterminous with the growth of modern world trade. Throughout modern history, nations have consolidated their trading positions through various arrangements like colonial preferences, bilateral commercial treaties and broader regional agreements. Post Second World War attempts to create a multilateral trading regime was started with the signing of General Agreement on Trade and Tariffs (GATTs) in 1947. The Most Favoured Nation principle involving non-discrimination between trading partners formed the central clause over which trade relations were negotiated between participating nations. However, limited number of participants in the agreement supplemented by diverse positions taken by the members over trade liberalisation lead to simultaneous acceptance of a multilateral-bilateral trading framework by them. Trade theories advocated during the period for developing countries also supported greater engagements with nations at similar level of economic developments in order to derive benefits from international trade. Attempts by European nations in 1957 to achieve economic integration under European Economic Community (EEC) provided the initial impetus towards regional integration. The EEC model was soon adopted by developing countries in Africa, Caribbean, Central and South America to take advantage of regional trading arrangements. After advocating multilateralism for forty years, USA shifted its trade strategies to regionalism with the conclusion of preferential trading agreements with Israel and later marched on to conclude North American Free Trade Area (NAFTA) with Mexico and Canada in 1990.

Growth Post 1990s

The most ambitious attempt at achieving multilateralism as the guiding principle not only in trade in goods but also to extend them to cover services, investment, intellectual property rights and sensitive sectors like agriculture and textiles was launched with the eighth round of GATT talks in Uruguay in 1986. The final draft accepted by the participating countries led to the establishment of WTO in 1995 as the watchdog for multilateralism in world trading relations.However, the formation of the organisation also witnessed resurgence in the formation of regional trading blocs and bilateral trade agreements across the globe. Realisation on part of developing nation’s vis-à-vis developed nations to have not benefitted much after the trade liberalisation has been an important factor for them in going for trade agreements with nations at similar level of development. Slow progress of trade talks especially after contentious Doha round in 2001; have also forced countries to settle trade agreements at local level. Nations often find it easier to reach agreement with a smaller number of participants having similar view point’s over contentious issues. Interests shown by big trading nations like USA, EU and China have also propelled smaller countries to go for RTAs with them for the fear of being left out of their big export markets by their competitors. Countries are also finding RTAs an easier mean to attract Foreign Direct Investment, technology and other benefits associated with preferential access to developed competitive markets.

India and RTAs

India has been a traditional votary to multilateralism in world trading relations since independence. However policy hurdles achieved in establishing a multilateral world trading other forced it to look at regionalism as a policy alternative. Economic policy reforms in 1991 aimed at increasing industrial and trade competitiveness of the country views RTAs as an alternative route for faster and deeper trade liberalisation amongst groups of countries. Realising the growing importance of RTAs in future world trading relations, India has started engaging with its trading partners and blocks on bilateral basis with the intention of expanding its export market and concluding technology and investment agreements. The country has also concluded various Comprehensive Economic Cooperation Agreements (CECAs) which cover Free Trade Agreement (FTA) in goods, services, investments and identified areas of economic cooperation. Starting with the signing of Free Trade Agreement with Sri Lanka in 1998, India is now engaged in 33 Free Trade Agreements at different stages of development including eleven put into operations. Below we take a look at some of the important regional trading agreements concluded by India.

South Asian Free Trade Area

Regional Trading Agreements have traditionally meant nations sharing common geographic locations organising into trading blocks to take advantages of their geographical proximities. Attempts by nations in South Asia to achieve economic integration resulted in coming into force of the South Asian Free Trade Agreement (SAFTA) in 2006. SAFTA aims at promoting and enhancing mutual trade and economic cooperation among the seven countries located in South Asia through elimination of barriers to trade, facilitation of cross border movement of goods, ensuring fair competition in the trade market with special emphasis on trading needs of countries at lower stages of development. A phased tariff liberalisation programme is visualised in SAFTA under which relatively developed members of the grouping-India, Pakistan and Sri Lanka will bring down tariffs to 20 percent in two years while non-developed partners will bring them down to 30 percent. SAFTA also carries a sensitive list of commodities which nations can notify as not subjected to trade. However, as a mechanism to promote intra-regional trade in the South Asian region SAFTA has not been very successful. The total intra-regional trade between SAFTA members between its inceptions in 2006 to 2010 stood at $823.83 million, less than 10 percent of total foreign trade undertaken by the participating members. Similar nature of comparative advantages in trade shared by the participating countries, large number of commodities in the sensitive list along with large tariff and non-tariff barriers are the major reasons for the low level of intra-regional trade. More worrisome in the context of SAFTA is the political rivalry between its two biggest members- India and Pakistan. Pakistan has refused to reduce its tariff barriers stipulated in SAFTA agreement and continues to maintain a positive list of commodities permissible to trading with India. It has also failed to reciprocate the Most Favouring Nation status granted by India.

India-ASEAN Free Trade Agreement

The look east policy initiated by the government in 1991 called for greater engagements with Association of South East Asian Nations (ASEAN) a regional grouping of 10 countries in South East Asia established in 1967.Negotiations started in 2003 to establish a FTA in goods,services,investment and other areas of economic cooperation. The final agreement related to the establishment of FTA in goods was signed in 2009 and the FTA came into effect from January1, 2010. The signing of the ASEAN-India Trade in Goods Agreement paves the way for the creation of one of the world’s largest FTAs – a market of almost 1.8 billion people with a combined GDP of US$ 2.8 trillion. The ASEAN-India FTA will see tariff liberalisation of over 90 percent of products traded between the two dynamic regions of the world. The bilateral trade volumes between India and ASEAN have been estimated at $70 billion. Addressing concern of small domestic farmers and manufacturers 489 items have been put by India in the negative list, not subjected to tariff reductions. The FTA is expected to be beneficial for India’s chemical, pharmaceutical, textiles and handicrafts sector while ASEAN members will gain in the trade of electronic goods and machineries. They have also agreed for an early conclusion of FTA in services which is expected to be more beneficial for India.

Comprehensive Economic Cooperation Agreements

Comprehensive Economic Partnership agreements cover wider areas of economic cooperation than those undertaken in FTAs.The CECA envisages liberalisation of trade in goods, services, investment, intellectual property rights and other areas of economic cooperation under a single undertaking. With coming into effect of the CECA with Malaysia on July 1, 2011 India has completed for such agreements including Singapore, Japan and South Korea among others. CECAs involve deeper cut in tariff rates often leading to elimination of them on more than 90 percent of product lines. They also provide facilitation for trade in services and easier regime for bilateral investments. These agreements also provide for temporary movement of business people including movement of contractual service suppliers and independent professionals expected to be very beneficial for India. In one of the most ambitious attempt to achieve regional integration, India started a FTA negotiation with the biggest trading block in the world-the European Union (EU) in 2007. The deal also called the Broad-based Trade and Investment Agreement (BTIA) intends to cover almost 90 percent of the bilateral trade in goods and services besides relaxing mutual policy and investment rules. Besides these agreements Indian government is actively engaged in other preferential trading agreements across the globe.BIMSTEC (Bay of Bengal initiative for Multi Sectoral Technical and Economic Cooperation) aims at achieving regional integration among five SAARC members (India, Bangladesh Nepal,Sri Lanka and Bhutan) and two ASEAN countries (Myanmar and Thailand) and members are working out modalities to create a FTA.India has also chartered PTAs with Mercosur a regional grouping of four Latin American states-Brazil,Argentina,Uruguwy and Paraguay,Thailand,Chile,Mauritus, Afghanistan among others.

The Way Ahead

Global experience in the past two decades shows that promotion of multilateralism under WTO has not abated nation’s interest in regional trading agreements. Developing countries like India need to be very pragmatic in carrying out RTAs taking into account its level of economic development, strategic interests, impact on people to be affected by the liberalisations and long term implications of these agreements on growth potential. The country has been relatively a late starter in joining the PTAs bandwagon and there is an urgent need to speed up the efforts towards trading agreements and curtail the time durations involved in negotiations. With non-tariff barriers emerging as major impediments in international trade for developing nations, bilateral trade deals should effectively address them besides reducing the tariff barriers. FTAs signed with the trading partners shall be made comprehensive to include trade not only in goods but also to include trade in services, bilateral investments, intellectual property rights etc. The country is expected to gain more by the liberalisation of trade in services in which it has a large comparative advantage. However, the increased emphasis on regionalism by India shall not hinder its endeavour to achieve multilateralism under the WTO framework. These regional agreements often require deeper liberalisation commitments than those envisaged under WTO by developing countries opposite developed nations thus adversely affecting their growth potentials. With all the major trading countries and blocks going into similar agreements with all others gains for individual countries have also become restricted from PTAs for individual members. PTAs, as economists call it represent only the ‘second best solution’ in world trading relation. A multilateral trading framework created under WTO with adequate safeguards for the interests of weak and developing nations holds the key to most efficient utilisation of world resources. Regionalism and multilateralism in trading relations are not mutually incompatible and trade liberalisation taken by nations under PTAs shall work as a building block in achieving a multilateral trading order.