Though it is not possible to have precisely demarcated categories of regional groupings, a broader classification is as under:
1. Preferential Trade Arrangements (PTAs):
It is the loosest form of economic integration. PTAs liberate trade among member countries by lowering of barriers against imports from each other compared with trade barriers against outside countries.
As such, PTAs place non-member countries at a competitive disadvantage, and divert trade from them towards member countries. This is because the duty free (even with high production costs) imports from within members may become cheaper than duty-paid (but with lower production costs) imports from non-members.
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As noted above, the number of PTAs has increased very rapidly in recent past. India has lagged behind in entering into such arrangements with other countries.’
As a result, it is claimed by economists like Professor Jagdish Bhagwati that Indian exports are being competed out at a massive scale by PTA partners of the US, Europe and even many Latin American countries.
Indian exports may suffer more if the proposed Free Trade Area of the Americas and emerging arrangements in the East and Southeast Asia come into effect.
2. Free Trade Areas (FTAs):
In this form, member nations remove both tariff and non-tariff barriers against trade with each other. However, each nation retains its own set of trade barriers (including customs duties) against non-members; and these trade barriers can vary from one member to the other.
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Similarly, a member may retain a separate set of barriers against imports from different non-members. It is noteworthy that the member countries of a FTA need not have common geographical frontiers. This type of FTA has the danger of trade deflection (that is, exports of a country being re-exported by the importing country).
3. Special Economic Zones (SEZs) (also variously termed as Duty-Free Zones, Free Economic Zones, and Free Trade Zones, etc.):
Strictly speaking, an SEZ is not a regional grouping. Instead, it is a specific form of an attempt of a country to boost its exports. Setting up of such zones is a recent phenomenon.
An SEZ is an officially notified geographical location meant for the housing of export-oriented enterprises. Units located in an SEZ are helped in producing internationally competitive products.
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For this purpose, they are provided with assured infrastructural facilities (like power supply and bank credit), duty-free import of inputs, tax concessions, liberal labour laws, a streamlined procedural framework, and the like.
A SEZ may also encourage the inflow of foreign investment capital, more so because it is easier to monitor its functioning, and may further help in increasing exports.