RTAs and WTORTAs and WTO

Dr. (Mrs.) Vijaya Katti

Professor and Chairperson (MDPs)

IIFT, New Delhi

Regional Trade Agreements (RTAs)

Conceptual Economic Issues

Recent Trends in RTAs

Implications for India

Relationship with Multilateral Trading System

Recent Trends in RTAs Growth in Number of RTAs Intra-Regional Trade of Major RTAs Types of RTAs

RTA Share of intra-regional exports in total exports: 2002 (%)

EU (15) 61.6

NAFTA (3) 56.5

AFTA (10) 24.0

CEFTA (7) 12.2

MERCOSUR (4) 11.5

ANDEAN (5) 10.2

Implications for India

India’s Recent Regional Trading Engagements

• Bilateral: India-Nepal, India-Bhutan, India-Sri Lanka, India-Thailand, India-ASEAN, India-MERCOSUR, India-Singapore, India-China

• Sub Regional: BIMSTEC, BBIN, Bangkok Agreement

• Regional: SAPTA, SAFTA

Economic Implications: Trade, Investment, Static & Dynamic Gains

• Trade Gains: Goods and Services (Banking, Tourism, Infrastructure, Professional etc.)

• Potentials for Investment flows : Industrial Restructuring

• Technology Exchange

• Human Resource Development

Relationship with Multilateral Trading System

Stepping Stone towards Multilateralism GATT Article XXIV, Enabling Clause,

GATS Article V Three Criteria

• Transparency

• Deep Intra-regional Trade Liberalization

• Neutrality vis-à-vis non-parties’ Trade

Cont…

Other Issues: • Services• Investment• IPRs• Competition Policy• Technical Standards• Government Procurement

Problems• Inconsistency • Interpretational• Institutional

Harmonious Relationship between RTAs and WTO Desired

BASIC GATT PRINCIPLES

MFN (Most Favoured Nation Treatment)

TRADE TO BE REGULATED BY CUSTOMS DUTY ONLY

DUTIES TO BE BOUND NATIONAL TREATMENT

WTO RULES

Permitted under Article XXIV of GATT 1994.

Exception to MFN treatment within the Rules subject to fulfillment of conditions:• items on which there is substantial trade to be

covered

• the phase out of duties should be within a reasonable period of time

• it should not have trade distorting effect

M.F.N. EXCEPTIONS

Exception to MFN is also available under the “Enabling Clause Decision” of 1979 wherein the WTO members may accord differential and more favourable treatment to developing countries, without according such treatment to other Contracting Parties.

The Global ContextRegional Trading Arrangements

RTAs are viewed by most countries as building blocks towards eventual global free trade.

More than 200 RTAs have been notified to GATT/WTO.

150 of these are still in force. 250 RTAs are expected by 2005.

PTAPTA

ECONOMIC ECONOMIC COOPERATIONCOOPERATION

MONETARY MONETARY UNIONUNION

COMMON COMMON EXTERNAL EXTERNAL

TARIFF (CET)TARIFF (CET)

FTAFTA

STAGES OF ECONOMIC DEVELOPMENTSTAGES OF ECONOMIC DEVELOPMENT

Regional Trading Arrangements

RTAs can be used as a tool for –

Material management

Cheaper imports – domestic prices in control

Better quality products at competitive price

Better market access

Investments flow - JVs

Coverage of Services

Mutual recognition of standards & laboratories

Trade facilitation, Harmonisation of Customs procedures etc.

Rules of Origin

Objectives:to prevent trade diversionenhance intra-regional trade

Components:local content / value addition manufacturing processtransformation

Free Trade Areas

To eliminate completely quantitative trade restrictions and customs tariffs against each other’s goods

Member countries retain the sovereign power to decide the trade policies to be imposed on non-members

Customs Union

Similar to free trade area Adopt uniform import tariffs and common

quota restrictions to non-members Weakened the ability of member

countries to determine national trade policies independently

Common Markets

Similar to customs union Plus free movement of factors of production A significant reduction of national sovereignty An example of a common market is the EEC

which is composed of Belgium, Denmark, France, Germany, Ireland , Italy, Luxemburg, Neitherlands and the UK.

Economic Unions

Similar to common markets Harmonization of monetary, fiscal and social

policies A single common policy as an essential

prerequisite for the effective functioning of the union

An example of an economic union is the Benelux which is the economic union formed by Belgium, the Netherlands and Luxembourg.

Infact Belgium, Netherlands and Luxemburg formed a customs union in as early as 1948 and they became an economic union in 1960.

The different forms of RTAs Represent different degrees of Economic integration.They start from the lowest degree Of economic integration (i.e. a Preferential trading club ) and go Through progressively higher degrees until the most complete Form

of economic integration (i.e.economic union).

The theory of Customs Union Basically deals with two concepts 1. Trade Creation2. Trade DiversionThese two concepts were first put forth by

Jacob Viner in early 1950’s .

Trade Creation

The formation of a customs Union Causes some products which were formally produced domesticallyto be imported from other partner countries-the tariffs on such imports are eliminated. Since there is pro-duction shift from a high cost domestic producer to a lower cost producer in a partner country-it is trade Creation.

Trade Diversion

Customs Union also causes some Products which were formerly imported from the rest of the world toImported from the partner country-Thanks to the newly formed geographical tariff discrimination. Here the Shift in production is from a lower Cost producer in the rest of the worldTo a higher cost producer in a partnerCountry-trade diversion.

The fundamental notion behind theseConcepts is that trade transfers goodsFrom a high cost region to a lowCost region. Thus trade increases Welfare by reducing costs or alternatively by increasing world income.It is in this sense trade creation is Conceived to be beneficial and tradeCreation detrimental.

Motivations for RTAs

Market factors:

1. To maintain market access

2. To open new markets

3. To attract foreign direct investments (FDI)

4. To benefit from economies of scale

Cont…

Political factors:

1. To act as a counterbalance to other RTAs

2. To act as a commitment to internal reform

3. Inspired by previous successful examples

4. To increase bargaining power

5. To maintain intraregional security

Costs of RTAs

For member countries:

1. Increase in competition

2. Loss of national sovereignty

3. Increase in unemployment in some sectors

4. Loss of tax revenues due to the relocation of companies to low-cost areas

Cont…

For non-member countries:

1. Trade diversion

2. Deterioration in the terms-of-trade due

to a fall in export demand

3. The risk of being isolated if trade war occurs

The View of WTO

In the conclusion of a 1995 study by the WTO Secretariat

“... To a much greater extent than is often acknowledged, regional and multilateral integration initiatives are complements rather than alternatives in the pursuit of more open trade.”

GATT Article XXIV

The agreement must eliminate substantially all barriers and discrimination to trade between the parties

The agreement must cover substantially all trade between the parties .

The terms of access for non-members must not be worse than before the agreement went into effect

Committee on Regional Trade Agreements (CRTA)

Established in 1996 To centralize the effort of working parties

in one body To examine in detail future regional trade

agreements notified to the WTO To provide a common platform to discuss

ways of dealing with the issue of regionalism in the WTO

Open Regionalism

The criteria

1. Trade barriers against nonmembers

should not be raised

2. Nonmember countries are eligible to

join the group on the basis of clear and

reasonable criteria for accession

Cont…

Regionalism that is consistent with globalism The way for regionalism to conform to the

multilateral trading system Still difficult to achieve

1. Discriminatory benefit offered is the

source of incentive to join the RTA

2. Open accession is not welcomed by all

members due to different reasons

Conclusion Too early to draw a conclusion? A clear trend towards regionalism Inherent difficulties in building the

multilateral trading system Depends on the future development of

major RTAs Few major regional trading blocs may

replace the multilateral trading system Wait and see

The Regional Context

• South Asian countries are exchanging tariff preferences under SAPTA.

• India, Sri Lanka and Bangladesh are members of the Bangkok Agreement.

• South Asian countries are also exchanging preferences under GSTP (Global System of Trade Preferences).

• India, Sri Lanka and Bangladesh are also members of other economic groupings like BIMST-EC, IOR-ARC.

South Asian Regional Co operation

SAARC was set up as a forum for regional cooperation by adoption of its Charter in its first Summit in Dhaka in December 1985.

SAPTA was signed in 1993 and entered into force in December 1995.

SAPTA covers areas of tariff, para tariff, non tariff and direct trade measures.

SAPTA

It provides special and favourable treatment to the LDCs.

The First Round was largely symbolic. In the Second Round a combination of

Sectoral and product by product approach was adopted.

In all India gave tariff concessions on 997 tariff lines during the two Rounds.

The SAPTA negotiations

Three Rounds of trade negotiations under SAPTA have been completed. However, the results are fairly modest.

Upto the Third Round, which concluded in November 1998, India has granted concessions on 2565 tariff lines (6 digit HS) to the other countries. However, most of these concessions are to the LDCs.

Exchange of concessions with Sri Lanka and Pakistan was limited to a few items.

Fourth Round of negotiations has started.

Free Trade in South Asia

The Male Summit in May 1997 called for achievement of the South Asian Free Trade Area (SAFTA) by 2001 AD.

This was modified to signing of the SAFTA Agreement by 2001 AD in the Colombo Summit in July 1998.

At the 11th SAARC Summit, the Heads of Nations agreed to revise the date for putting the SAFTA Treaty in place by end of 2002.

Cont…

The first meeting of Committee of Experts was held in Kathmandu in July, 1999 wherein the Terms of Reference for the drafting of the SAFTA treaty were finalised.

While the SAFTA Treaty is to be put in place by 2001, no time frame has yet been established for achieving SAFTA.

Thus achievement of a Free Trade Area remains an open ended objective.

BANGKOK AGREEMENT (BA)

The Bangkok Agreement was signed in July 1975 for contributing to expansion in trade through exchange of tariff concessions among developing country members of the ESCAP region.

The Agreement is currently operational between Bangladesh, India, Republic of Korea and Sri Lanka.

China’s accession to the Bangkok Agreement was finalised in the meeting of the Standing Committee of the Bangkok Agreement in April 2000.

The Third Round of BA has begun. With the entry of China the B.A. will gain momentum as

now two major countries with huge population are the members, with a market size of more than 2.2 billion .

Generalised System Of Preferences

Unilateral and generalised tariff concessions given by the developed countries to the developing countries under the GSP Scheme.

Important to India are GSP given by USA, EU, Japan etc.

Rules of Origin to be fulfilled. Graduation process defined for no

concessions.

The Bilateral Context

India and Nepal Treaty on Transit and Trade

India Bhutan Trade treatyIndia Sri Lanka Free Trade

Agreement

INDO-NEPAL TREATY

On 2nd March, 2002, the validity of India-Nepal Treaty of Trade and Protocol was extended for a period of 5 years w.e.f. 6.3.2002.

Rules of Origin along with local content and substantial manufacturing clause introduced.

TRQ for Vanaspati, acrylic yarn, copper products and zinc oxide introduced.

INDO-BHUTAN TREATY

Agreement on Trade and Commerce between India and Bhutan signed on 28th February, 1995

Preferential market access allowed for products originating from respective countries

All exports and imports of Bhutan to and from countries other than India will be free from and not subject to customs duties and trade restrictions of the Government of India.

INDIA-SRI LANKA FTA

• PM Vajpayee offered to consider bilateral FTAs with our South-Asian neighbours in his address in the Colombo SAARC Summit.

• The FTA was signed by PM of India and President of Sri Lanka on 28th December 1998.

• The Agreement envisages phasing out of tariff on all products except for a limited number of items in the Negative List, over a period of time. While India would complete the process of tariff elimination over a period of 3 years, Sri Lanka would achieve this over 8 years.

CONT…

The FTA has been implemented with the issuance of Customs Notification by Sri Lanka on 15th February 2000 and by India on 1st March 2000.

Procedural modalities on import of Quota of tea and textile items have been finalised.

The first meeting of the Working Group on Customs was held on 14-15 September 2000 in Colombo.

The first meeting of the JMC was held on 6 – 7 June 2002 in New Delhi.

BIMST- EC

The Initiative was taken by Thailand in 1994 and with the admission of Myanmar in December 1997 it was named as “Bangladesh, India, Myanmar, Sri Lanka, Thailand Economic Cooperation” (BIMST-EC) to serve as a bridge linking ASEAN and SAARC.

6 areas of Trade and Investment, Technology, Transportation and Communication, Energy, Tourism and Fisheries were identified for cooperation

The Second Economic/ Trade Ministers meeting in April 2000 decided to constitute an Inter Governmental Group (IGG) to prepare a Concept Paper on possible approaches towards a PTA leading to an FTA.

Cont…

IGG’s recommendation was considered by the Ministers in their third meeting held in Yangon in 2001 and a Group of Experts was constituted to examine in detail the two approaches.

The GOE consists of the representatives of Government, Business and the Academia.

GOE has recommended to go for a ‘negative list approach’ for FTA in BIMST-EC.

A final decision will be taken in the next Trade and Economic Ministers Meeting, scheduled to be held in Sri Lanka.

INDIAN OCEAN RIM - ASSOCIATION FOR REGIONAL

COOPERATION (IOR - ARC)

IOR - ARC was founded in 1995 with the first meeting on Working Group held in Mauritius.

The focus for economic cooperation is in the areas of Trade Facilitation, Promotion and Liberalization, Promotion of Foreign Investment, Promotion of Scientific and Technological exchanges, Promotion of Tourism, Promotion of Movement of Natural persons and Service providers, Development of Infrastructure and Human Resources

STEPS AHEAD ……

Consider enlargement of products Deepening of concessions Remove non tariff barriers Include coverage of “Services,

Investments etc.” under the Agreements Regular interaction among the business

and academia Government to play more pro-active role

Future plans

Concentrate on ‘Trade facilitation measures’. Harmonisation of customs documents,

procedures and regulations Harmonisation of standards. Promotion of Joint ventures, technology

transfers Consider devising means for having industrial

linkages (backward-forward linkages) to promote intra-regional investments.

Cont…

Study the areas of complementarities, looking for global market

Organise workshops, seminars etc at regular intervals

Study and recommend the areas of JV, and enhancing intra regional investments.

Dissemination of information

NEW FTA PROPOSALS

We are also studying the feasibility of having PTAs/FTAs with the following countries:Bangladesh Egypt South AfricaOman Chile SingaporeMauritius Venezuela BrazilThailandArgentina Colombia USA EU Morocco Syria

THANK YOUTHANK YOU

Contact :

Dr. (Mrs.) Vijaya KattiProfessor and Chairperson (MDPs)

IIFT, New DelhiE-mail: vijayakatti@iift.ac.in; vckatti@yahoo.com