Debatable Essay on Regionalism versus Multilateralism

As per UNCTAD Report on Trade and Development 2007, the number of trade agreements notified to GATTAVTO increased exponentially from 20 in 1990 to 300 in 2005 to 400 today. More than 50% of these are between developing countries including the so-called transition economies.

If we exclude RTAs involving countries that have close to zero most-favoured nation tariffs, the share of world trade in RTAs falls from 33% to about 20%.

Of all the RTAs, 85% of them are FTAs, rather than Custom Unions. Virtually all the WTO members are partners in at least one regional trade agreement and with several being part of two or more. Until 1990s plurilateral agreements dominated, but subsequent agreements have been mainly bilateral and the most are FTAs rather than customs unions.

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The agreements concluded over past 20 years have been mainly bilateral, and primarily between developing and developed countries.

Developing countries entered into RTAs to obtain concessions that are not granted to other countries, particularly better market access for its products. To the developed country it eliminates the special and differential treatment that may be granted to developing countries in the context of other agreements.

The number of trade agreements increased after the disintegration of former USSR and the East European countries getting away from the domination of former USSR. The number of agreements came down by 65 after 10 more countries decided to join the EU.

The new regionalism has grown out of a sense of frustration of some governments at the slow progress in multilateral trade negotiations. This regionalism has made the Most-favored-Nation principle the exception rather than rule and has led to increased discrimination in world trade. As a result intra-RTA trade could soon account for more than half of world trade.

In addition, as the number if RTAs multiplies, networks of overlapping agreements may generate intricate webs of discriminatory treatment, which are likely to lead to complex and incoherent regulatory structures for the conduct of a growing share of world trade.

However, the advocates of new regionalism argue that rather than undermining the multilateral trading system, it has the potential to put negotiations back on track, precisely because it is part of the strategy of competitive liberalisation. This is possible when only one is an adept bargainer.

In fact, for India, bilateral arrangements could come handy in meeting its objective of increasing its services exports through facilitation of movement of professionals, more responsive competition regulations and relaxation of norms governing government procurement etc.

A major development in the year 2001 was the formal launch of negotiations on an FTA of Americas (FT A A), linking partners in North and South Americas (except Cuba). Other cross-regional trade integration initiatives in progress involved European Union, on the one hand, and Chile and MERCOSUR, respectively, on the other hand.

Another major development is the rising number of RTAs planned or under negotiation in Asia, the region with smallest number of RTAs currently in force, including by Japan, still among few WTO members not party to one or two RTAs.

Of the different forms of regional integration, Free Trade area ‘account for a big chunk, followed by Preferential Trade Agreements and Customs Union. African countries belong to several RTAs, but this has not always been accompanied by significant intraregional trade. The EU is negotiating with partners in the Mediterranean and North America.

The EU is also envisaging such a process with Africa, Caribbean and Pacific (ACP) countries. The EU’s FTA with Mexico took place in mid-2000 and with MERCOSUR and Chile in 2002. In Asia, Japan, like South Korea, has shifted its long­standing policy of multilateral-only trade liberalisation to sign an FTA with Singapore in 2001.

All of India’s present bilateral trade agreements for trade liberalisation are with underdeveloped or developing countries (barring the Comprehensive Economic Cooperation Agreement with the city- state of Singapore, basically a trading economy, and not of the likes of the EU or Japan that are strong in manufacturing and large markets themselves.

The trade treaty with its neighbours is more an act of camaraderie (political undertones) than the reciprocity. Recently, India has started negotiating with the likes of the EU, Japan, and Korea different in substance.

They are almost to be products of hard bargaining based on economic self-interests of parties concerned. These pacts in offing are antibodies being administered to the Indian economy to prepare it for the impending comprehensiveness and near-total opening up, to be culminated in the full float of rupee.

But all these regionalisation processes are not moving without difficulties. SAFTA is not moving because of enmity between India and Pakistan. MERCOSUR is facing difficulties from Argentina, who has suspended certain regional commitments. So is the case with Africa.

However, the large number of the agreements, in force and in offing, is evidence to the attraction of such agreements. RTAs can offer immediate steps to the broader process of integration into the world economy, and, in some cases, achieve faster and deeper liberalisation than is possible at the multilateral level.

Regional cooperation of this sort is not free from its limitations. Profession T N Srinivasan does not accept the concept that preferential trade agreements go beyond trade liberalisation and involve deeper integration of the countries entering into such agreements in other areas such as investment and technology transfer.

According to him, empirical evidence on the benefits of PTAs is contradictory. Experience has shown that 100% product coverage of free trade provisions is the exception rather than the rule. And RTA partners do not generally exempt each other from using trade defense in the WTO and also regionally. For third parties, RTAs imply trade diversion as a result of tariff preferences, reinforced by preferential rules of origin.

As FTAs proliferate, global economy efficiency is hit as trade gets diverted from efficient to the inefficient. With regard to scope and coverage, the broader agenda of the current generation of regional agreements reflect, among other developments, decreasing tariff levels in OECD countries for most non-agricultural commodities, the globalisation of markets, and the growing importance of cross-border issues such as services, foreign direct investment, and corporate strategies (mergers and amalgamation), together with insufficient provisions for non-tariff issues at both the regional and multilateral levels.

As the regional agreements increase in importance, the world trading system looks more and more multi-tier than multilateral. In an increasingly multi- tiered system, there is a growing risk of inconsistencies in the rules and procedures adopted by these agreements on the same and different tiers.

Such inconsistencies-would not only increase current regulatory confusion, but would also greatly complicate future efforts to develop a consistent set of multilateral rules and procedures governing countries’ trade related policies. The result could be “regulatory gridlock”. Jagdish Bhagwati has called bilateral trade treaties as “a shame”. Analysts are of the opinion that FTA is beneficial only when two countries fill up each other’s needs, i.e., complement and not compete.

Table 9.11: Trade Pattern of Regional Groups (Percentage Share of intra-regional trade to total global trade):

Does RTA lead to increased trade among members of RTA? A look at the data at the share of intra- RTA trade compared to total global trade of all the RTA countries before and after implementation of an RTA shows that except MERCOSUR, in no other RTA has there been a significant increase in intra-RTA trade after the implementation of the agreement.