Relative Importance of North-South and South-South Trade Bipul Chatterjee

1. Relative Importance of North-South and South-South Trade Bipul Chatterjee Deputy Executive Director, CUTS International (www.cuts-international.org) & Director, CUTS Centre for International Trade, Economics & Environment (www.cuts-citee.org) Presented at the OECD Global Forum on Trade A Trade Policy Dialogue on the Multiple Dimensions of Market Access and Development Organised by OECD Trade Directorate, World Bank and the Government of Mexico Mexico City, 23-24 October 2006

2. Introduction • Currently there is more trade between North and South (N-S), but South-South (S-S) trade is rising – though it is lopsided • There is a growing realisation in the South to enhance cooperation among themselves (through bilateral preferential trade agreements (PTAs) and regional integration) • Political and macroeconomic structure of many developing countries do not permit “deep integration” free trade agreements (FTAs) and/or comprehensive economic cooperation agreements (CECAs) – strong political will and institutional apparatus for policy-making and implementation are required

3. South-South Cooperation • PTAs are mostly focusing on increasing merchandise trade by minimising exclusions, adopting less restrictive rules of origin provisions and trade facilitation at the border • However, many of these countries suffer from their small market size and similar economic conditions rarely provides incentives for more trade • Monitoring mechanism (impact assessment) are often inadequate and do not receive sustained, high-level political attention • The effectiveness is severally constrained by negative list, complicated rules of origin provisions, inverted duty structure, less awareness among consumers, etc (other than high tariffs) • Services: cross-border projects help deeper cooperation (e.g. Highway Project in the GMS Region) – requires huge political will

4. North-South Cooperation • These agreements are expected to score better on implementation • They can integrate economies with different technological capabilities and different factor endowments • However, tighter rules of origin, more restrictive exclusion of particular sectors can reduce benefits – especially for Southern producers and Northern consumers • Many developing countries feel that such cooperation will bring increased investment in their economies, but empirical evidence is unconvincing – investment (especially FDI) is a different game

5. Domestic Preparedness • Negotiations and implementation of initiatives like India-Sri Lanka, India-Thailand FTAs show inadequate preparation on issues like rules of origin, negative list of products • Protection through the so-called “negative list” needs to be reduced – significant scope for rent-seeking • Vulnerability of specific sectors are to be factored into the process of negotiations through sustainability impact assessment (economic, social, environmental and political sustainability of PTAs, including sectoral studies) before an agreement is entered into force and also during the process of implementation (for taking appropriate measures for changes through renegotiations – as an in-built mechanism) – systematic collection, storage and analysis of data is required, so that there is less scope for rhetoric

6. Options for Developing Counties • Promote multilateral trade liberalisation • Promote policy coherence – trade ministry should have a separate unit on “policy coherence” • Promote regional trade integration by harmonising rules and procedures with concomitant reduction of MFN tariffs – regional economic communities should be institutionally strengthened and involve local communities • Promote awareness among the actors involved in cross-border informal trade – formalisation of informal trade will be a win-win situation for those engaged and the governments • Relatively more flexible attitude (greater political will) at national and regional level is required for services liberalisation – focus on those sectors, which benefit the poor most

7. Conclusions • Whether PTAs/FTAs between North-South and/or South-South contribute or undermine the MTS depends on specific content of each agreement – should be made WTO-compatible before an agreement comes into force • The original motive for economic cooperation between countries (whether N-S and/or S-S) was political (and will remain so) and these agreements have become a tool to pursue some significant political strategies by some major players, including a developing country like India • Large developing countries should provide duty-free, quota-free access to products from least developed countries – with a minimum number of items in the “negative list” – operationalising South-South trade cooperation

8. Trade liberalisation should be benchmarked with domestic preparedness (a dynamic process) – relationship between trade liberalisation and domestic regulatory reforms should be looked at closely (policy coherence) • Liberalisation of services should be done first at the regional level – for instance, there is a huge scope for cooperation in transport and logistic services, energy services in South Asia – largely untapped and could be a significant source of pro-poor growth in future – involve civil society with the process of liberalisation so as to have a better political buy-in, especially at the local level