New mantras of regional economic co-operation

Financial Express, Dhaka

New mantras of regional economic co-operation

NC Pahariya

4/21/2006

INDIA has, of late, engaged itself in forming bilateral/regional economic cooperation in a variety of forms. Prompted by the global wave of preferential trading arrangements (PTAs) and extremely slow pace of progress of the multilateral negotiations under the aegis of the World Trade Organisation (WTO) there is hardly any country in the world today which is not dwelling upon working out any such arrangement. There are over 200 regional trade agreements currently in operation - more than the number of countries - and it is estimated that 60-70 per cent of global trade will take place via such pacts in the future. Some of these PTAs are on the "Hub-and-Spoke" pattern of North America Free Trade Agreement (NAFTA), while many others with multiple PTA membership manifest a "Spaghetti Bowl" phenomenon.

In the past, India had adopted a very cautious approach to regionalism, and was engaged in only a few bilateral/regional initiatives, mainly through PTAs. Recognising that PTAs would continue to feature in world trade for a long time, and with the intention of expanding its export market, India began concluding in principle agreements as a possible step towards Comprehensive Economic Cooperation Agreements (CECAs), which cover Free Trade Accord (FTA) in goods (zero custom duty regime within a fixed time frame on items covering substantial trade, and a relatively small negative list of sensitive items with no or limited duty concessions), services, investment and identified areas of economic cooperation.

The trade agreements are new pillars in India’s economic diplomacy. Having realised that free trade pacts are a sine qua non for the country’s economic development, India has drawn an ambitious agenda for negotiating trade and economic cooperation agreements from countries in the Far East to those in Latin America and the European Union (EU). The pacts will not only cover every country in the region spanning the Persian Gulf to the Malacca Straits but also Mauritius, Israel, Russia, Mongolia, Japan, China, South Korea, Afghanistan, Egypt, Chile, South Asian Custom Union (SACU), the African Union (AU), the Mercosur, the European Union (EU) and the Association of South-East Asian Nations (ASEAN).

The recently concluded CECA with Singapore was implemented from August 01, 2005. The Agreement on South Asia Free Trade Area (SAFTA) was signed by the South Asian Association for Regional Cooperation (SAARC) member countries in January 2004. Negotiations on all aspects of SAFTA was concluded recently and the tariff liberalisation programme is scheduled to be implemented from July 1, 2006. Framework Agreement on Comprehensive Economic Cooperation between ASEAN and India, Framework Agreement for Bangladesh, India, Myanmar, Sri Lanka and Thailand Economic Cooperation (BIMSTEC) FTA on goods, services and investment are under negotiation and India-Thailand Framework Agreement have also been signed. India-China, India- Japan, and India-South Korea joint study groups have also been set-up.

Both developed and developing countries look to regional economic integration as a means of strengthening their international competitiveness and as an engine of economic growth in recent years. In a lecture in November, the Indian Prime Minister said, "The new-found interest in regional arrangements is based not just on trade promotion but on exploiting the potential of efficiency-seeking restructuring of industry on a pan-regional basis".

Preferential trade pacts, preferential trade agreements and regional unions now account for over 50 per cent of the world trade. In the NAFTA, for example, trade among member countries jumped from $289bn in 1993 to $689bn in 2004. Experts also argue that India’s share in world trade, although growing, still languishes at 0.8-0.9 per cent, while countries like South Korea and Singapore that are engaged in some form of regional grouping have a share of over two percent.

Looking at our own situation one finds that India’s free trade agreement with Sri Lanka saw its exports to the island nation jump from $500mn in 2000-01 to $1.3bn in 2003-04. Similarly, India has emerged as the third largest source of foreign capital for Sri Lanka as against a negligible share a few years ago. A similar agreement with Thailand provides for a free trade area in goods by 2010 and negotiations are currently on to add more items to the list of 82 that have already been identified for tariff reduction in a phased manner.

"The India-Thailand free trade agreement should lead to a 20 per cent jump in exports to India, which is a big market for us," said Uraiwan Anukul, director of Thailand’s Export Trade Centre. "So far, we have been focusing on countries like Japan and the US and the EU. Now we are encouraging Thai companies to look to new markets in China, India, Africa and the Middle East," said Anukul, reflecting a similar mood among the Indian policy-makers. The Indian Commerce Minister, Kamal Nath has been reported as saying, "Economic cooperation agreements will be building blocks and drivers of global trade. The multilateral system cannot drive south-south trade".

Among the first regional trade agreements being pushed by India are a South Asian Free Trade Area (SAFTA) - comprising Pakistan, Nepal, Bhutan, Bangladesh, Sri Lanka and the Maldives, besides India. "By removing trade policy barriers, SAFTA would lead to an estimated trebling of intra-regional trade on a conservative estimate," Manmohan Singh said recently, adding that India will ensure smaller countries also benefit from the integration. This would make South Asian internal trade much more respectable compared to a four-five percent share now. By making it possible to trade directly rather than through third countries, it would lead to cost savings for the region.

Economic commentators say, a common market in South Asia with complete withdrawal of trade barriers is key to the region’s development, since poverty is a common denominator here.

Proliferation of PTAs is the clearest evidence of Asian countries’ desire to forge closer economic relationships. The growing importance of CECAs indicates that such agreements are becoming deeper, extending to areas beyond just tariff reduction; intra-regional trade and investment require building up of shared infrastructure.

Many Asian countries have joined together to develop cross-border infrastructure to lay the foundations for closer trading relationships and increased connectivity among countries. The Greater Mekong Sub region is quite advanced in the endeavour. Similar initiatives are underway in South Asia and in Central Asia, with exciting prospects for future development. The spirit of enhanced monetary cooperation in Asia is evidence from initiatives like the Chiang Mai Initiative and the Asian Bond Fund having major potential for financing regional investments.

The writer is Fellow of CUTS International, a research, advocacy and networking group, based in Jaipur, India

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