Regional Trade Agreements A Global Perspective

1. Regional Trade AgreementsA Global Perspective Shri T.C. VENKAT SUBRAMANIAN Chairman & Managing Director Exim Bank of India Chennai, February 19, 2005

2. Global Trade : Developed vs Developing Increasing Importance of Developing Countries …but only in Merchandise Trade Source: ITS 2004, WTO

3. Global Trade : Major Countries Top 10 Global Merchandise Exporters and Importers (2003) US$ billion Total Exports : US$ 7503 bn (incl. re-exports) Total Imports : US$ 7778 bn (incl. Imports for re-export) EXPORTS IMPORTS Source: ITS 2004, WTO

4. World Trade Organisation (WTO) … superset of all RTAs • The WTO is ‘member-driven’, with decisions taken by consensus among all member governments • Any state or customs territory having full autonomy in the conduct of its trade policies may join (“accede to”) the WTO. The following process is involved : • Commencement of the accessions process • Working party and the fact-finding process • Bilateral negotiations • Report, Protocol of Accession and Entry into Force • As on December 2004, there were 148 WTO members • 26 Countries negotiating membership (WTO “observers”) including Russia, Vietnam, Algeria, Saudi Arabia, Bhutan and Sudan

5. Regional Trade Agreements Liberalising trade on a reciprocal & preferential basis • RTA encompasses both reciprocal bilateral free trade or customs areas and multi-country (plurilateral) agreements • Regional and bilateral trade agreements provide for one type of trade liberalization • While programs such as the U.S. African Growth and Opportunity Act (AGOA) and the EU’s Everything But Arms (EBA) also liberalize trade preferentially, the United States and EU extend these preferences unilaterally rather than reciprocally • Countries often lower trade barriers in a nondiscriminatory fashion for all trade partners either multilaterally through GATT/WTO negotiating rounds or autonomously

6. Regional Trade Agreements Classification of liberalisation methods

7. RTAs & Types of Liberalisation RTAs : Four Major Levels of Integration • RTAs divided into several basic categories according to the degree of economic integration they provide: • Free Trade Area: members eliminate barriers to trade in goods (and increasingly services) among members, but each member is free to maintain different MFN barriers on nonmembers • Customs Union: moves beyond a free trade area by establishing a common external tariff on all trade between members and nonmembers • Common Market: deepens a customs union by providing for the free flow of factors of production (labor and capital) in addition to the free flow of outputs • Economic & Monetary Union: members share a common currency and macroeconomic policies

8. Regional Trading Arrangements RTAs: Increasing Proliferation… • Sharp proliferation in Regional Trading Agreements (RTAs) in recent years • The number of these agreements has more than quadrupled since 1990, rising to around 230 by late 2004 • Nearly all countries belong to at least one RTA • As of July 2003, only 3 WTO members, viz. Macau China, Mongolia and Chinese Taipei were not party to any RTA • Trade between RTA partners now makes up nearly 40% of total global trade • Members of RTAs liberalize trade on a reciprocal and preferential basis • RTAs can create trade and bring other benefits for members … but results are not automatic and depend critically on design Contd…

9. Regional Trading Arrangements … Particularly in the Last Decade Annual number Total in force Cumulative in force (right axis) Not Notified to WTO Notified to WTO Source: Global Economic Prospects 2005, World Bank

10. Regional Trading Arrangements Most countries belong to more than one RTA Note: Bilateral agreements are defined as an RTA with two members. * North is OECD 24 plus Liechtenstein and South is all other countries

11. South-South South-South USA USA European Union European Union Regional Trading Arrangements South-South RTAs predominate in number… …but not in trade covered Number of RTAs Percent of World Trade Covered Source: Global Economic Prospects 2005, World Bank

12. Regional Trading Arrangements Intra-Regional Trade of Major RTAs, 1995, 2000 & 2003 Source: International Trade Statistics, 2004, WTO

13. Regional Trading Arrangements Why This Proliferation? HIGH-INCOME COUNTRIES SUCH AS US & EU • To support foreign policy goals, including development • Slow progress on multilateral agenda: “competitive liberalization” • Access to services markets, protection of intellectual property, and rules for investment DEVELOPING COUNTRIES • Secure access to markets, especially large markets • More FDI • Among neighbors, lowering trade cost at border • Framework for regional cooperation

14. Regional Trading Arrangements Major RTAs in Select Regions • High Income Countries • Asia Pacific Economic Cooperation (APEC) • European Union (EU) • North American Free Trade Agreement (NAFTA) • LAC Region • Andean Group • Central American Common Market (CACM) • Caribbean Community and Common Market (CARICOM) • Latin American Integration Association (LAIA) • Southern Cone Common Market (MERCOSUR)

15. Regional Trading Arrangements Major RTAs in Select Regions (contd…) • Africa • Common Market for Eastern & Southern Africa (COMESA) • Economic Community of West African States (ECOWAS) • Southern African Development Community (SADC) • West African Economic and Monetary Union (WAEMU) • Asia • Association of South-East Asian Nations Free Trade Area (AFTA) • Gulf Cooperation Council (GCC) • South Asian Free Trade Area (SAFTA)

16. Regional Trading Arrangements Many RTAs can complicate administrative procedures • Growing number of overlapping agree-ments • Emergence of “spaghetti bowl” due to proliferation of bilateral agreements • The associated myriad of rules strains institutions charged with administering trade agreements. Spaghetti Bowl of RTAs in the Americas and Asia-Pacific

17. Regional Trading Arrangements Effects on trade • RTAs can have positive or negative effects on trade depending on their design and implementation • Gains from a preferential trade agreement cannot be taken for granted • Even in agreements with positive impacts on average incomes, not all members are assured of increases • The policy question then is not whether RTAs are categorically good or bad, but what determines their success • Agreements that have been designed to complement a general program of economic reform have been most effective in raising trade • When RTAs have tended to be fruitless, it is often because of the lack of a coherent program of reform

18. Regional Trading Arrangements Making Regionalism Complementary to Multilateralism • RTAs can be a complement to multilateral reform, but they are not a substitute • From a development perspective, the WTO remains the best-available forum to discipline the use of trade-distorting policies • RTAs can complement the WTO efforts by cooperating on behind-the-border policies, especially on regulation-intensive issues such as services, trade facilitation, and the investment climate • Large developed countries may gain more from signing individual bilateral agreements than they would from a multilateral accord • They can use preferential access to extract concessions in non-trade areas from developing country partners that would be resisted in the WTO negotiating framework

19. Regional Trading Arrangements Bilateral Agreements vs. Global Trade Reform (change in real income in 2015 compared to 2001) • Most development friendly outcome is associated with global reform Source: World Bank Simulations

20. Regional Trading Arrangements Regional Trade Agreements : India’s Initiatives • Framework Agreement on Comprehensive Economic Cooperation with ASEAN • Bay of Bengal Initiative for Multi-Sectoral Technical and Economic Cooperation (BIMSTEC) FTA • India – Singapore Comprehensive Economic Cooperation Agreement • Framework Agreement for establishing Free Trade between India and Thailand • India – Sri Lanka Bilateral Free Trade Area • Agreement on South Asian Free Trade Area (SAFTA) • India – Mercosur PTA • India – Southern African Customs Union (SACU) Framework Agreement • India – Gulf Cooperation Council (GCC) Framework Agreement

21. Regional Trading Arrangements RTAs : India’s Initiatives (contd…) • The government has decided to convert all preferential/free trade agreements into Comprehensive Economic Cooperation Agreements (CECA). • PTAs/FTAs usually involve structured reduction in tariffs between two countries. • CECAs would cover preferential relaxation of FDI rules vis-à-vis the partner country, tax holidays on investment and income, easing of visa restrictions, trade in services. • The proposed FTAs/PTAs with Thailand, Mercosur & ASEAN to be made CECAs • This has already been done with Sri Lanka. • PTA with the SACU would be merged with a new CECA with South Africa • The agreements with Singapore and GCC is also envisaged to be a CECA • Other proposed alliances with Russia, China and Israel would also be CECAs, rather than mere FTAs

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