Indian Economy | Regional Trading Blocs Download PDF

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Regional Trading

So far, we have discussed various components of the external sector, generic process of globalization and the strategies being followed for opening of economies. A reference was also made to the basis of trade across countries, which was more economic in nature based on the theory of comparative advantage of goods being traded depending on their relative cost of production in different economies, based on their resource endowments.
However, a new dimension to trading has been given through regional trading or trading across regions having some degree of commonality as a region, proximity, or culture, tastes and preferences, similar resources, etc., or any such common denominator.
This is in complete contrast to trading with the Rest of the World (ROW) which is based on economic criteria and results in measurable welfare gains for all.
Need for Regional Trading ,
(1) Even though it is widely accepted that trading with the ROW is far more beneficial for economies, over 60 per cent of the global trade is through 200 odd regional blocs in the world. Economies are being driven towards regional trading out of domestic compulsions of looking at newer markets for their products outside domestic boundaries.
(2) Regional trading allows for judging of competitiveness and acceptability of domestic goods. –
(3) It enables all the trading partners to collectively have a ‘larger’ voice in the international arena on international issues.
(4) Regional trading is always meant to achieve penetration of markets, increased trade and host of other objectives such as economic cooperation, jointly addressing issues of energy, environment, political consensus on global issues, etc.
(5) It provides for greater bonding across regions facilitating investment in economies.
(6) It opens economies for tourism, exchange programmes achieving greater degree of cohesion among member countries.

Nature of Regional Trading

First, it can be bilateral (two countries), trilateral (three countries) or pluri-lateral (more than three countries) but can never be multilateral. That is, to say the ‘region’ and not the ‘product’ has to be the basis of trade. This is the basic difference between regional and 1 multilateral trading, of the former around regions and the latter across products and not across a given geography but traded globally. Secondly, it could be trade agreements which give preferential treatment to goods of member countries. Thirdly, it could be broader in nature by looking at areas of economic cooperation, joint ventures, etc. Fourthly, it could be deeper framework agreements looking for cementing ties between member countries
and government level cooperation. Most of the regional trading is around trade agreements. Economic cooperation and framework agreements are of recent origin and in an evolutionary phase. Trade Agreements Each and every economy has its own set of restrictions of goods coming into the country by imposition of import duty also known as tariffs. An important constituent of any trade agreement would be either gradual reduction of the tariff levels on different product lines or even their elimination. Even before entering into any trading agreement, as a first step, is according status of most favoured nation (MFN), which is based on the principle of non discrimination of goods in terms of tariffs and import duties on goods coming from that country in relation to goods coming from ROW. Trading agreements is the next step, around goods and tariffs/import duties and can be of various levels:
Level 1—under this, the member countries agree to give a preference in the import duty or tariffs for defined product line. This is referred as preferential tariff agreements (PTA). Let us say, tariff line on pens is 10 per cent for a country, a PTA would mean that pen coming from a member country would attract a lower tariff of say 8 per cent, and if coming from ROW then tariff lines would be 10 per cent.
Level 2—the member countries agree to drop tariff levels to zero on defined product lines or agree to drop it to zero over a given time frame. While member countries drop tariffs to zero, each of them is free to have a different tariff for trading with the ROW. This is referred as free trade agreements (FTA).
Level 3—it is similar to Level 2 except that the member countries, besides having free trade amongst them, also agree to a have a ‘common tariff line’ for dealing with the ROW. This is referred as ‘Customs Union’.
Level 4—the deepest form of regional trading is besides free trade amongst them but also agree to have a common currency and a common monetary policy.

Issues in Regional Trading

The first is defining the ‘sensitive list’, or a negative list which would not be open to trade, those product lines on whom tariffs would not be reduced. This is also referred as trading to a negative list, which means trading in goods, other than those in the negative list. Very often it is not possible to arrive at a consensus by the member countries. The second is the ‘early harvest’, which is that any agreement will require dropping of tariff lines on certain product lines immediately on signing of the agreement.
The third, it is difficult to establish tangible welfare gains under regional trading. Any trading has two aspects, trade creation and trade diversion. Trade creation happens if a high cost domestic input is replaced by globally the ‘lowest’ cost input. Trade diversion happens when a high cost domestic input is replaced by a lower cost input from a member country, which may not be the lowest in the world.
In regional trading it is difficult to establish whether trade creation or diversion is taking place. Regional trading does allow for expansion of trade but whether this expansion is better than trading with the ROW is not conclusively established.
The fourth is the contentious issue of establishing what is known as ‘Rules of Origin’ (ROO), which is how to establish that a good being traded with a member country has originated in the member country. This is becoming increasingly complex to resolve with emergence of global companies operating out of multiple locations, many of them housed in members of various trading blocs. The ROOs may well dilute the entire concept of regional trading.
The experience of various trading blocs in the world has been mixed and difficult to quantify other than that the trade has increased.
The other aspect also established has been that countries with large intra-regional trade have also seen increased multilateral trade at the same time. It has also been established that regional trading is only better than no trading.
What has not been established is that is this a better option than trading on a multilateral platform?

Should Regional Trading Be Promoted

If one was to keep aside the issue of welfare gains, regional trading should be promoted because:
(1) It is the global trend and one cannot be a silent spectator in the tide. Not swimming with the tide would definitely imply a missed opportunity.
(2) Such blocs enable building a collective voice at the international platform, giving bargaining strength on international matters.
(3) It sub-serves other interests of economic cooperation and cements regional ties.
(4) It can also be seen as a stepping stone of entering the global platform as it will allow for building relative efficiency and competitive abilities.
(5) It can provide a boost to investment and tourism.
Is regional trading in conflict with multilateral trading? Or does it mean that regional trading would lose significance after consensus at WTO? There is no conflict between regional and multilateral trading. Regional trading can co-exist with multilateral trading. In fact, both can play a complementary role with multilateral trading providing welfare gains to economies while regional trading to meet objectives of economic cooperation, better regional ties, mutual betterment and a larger collective voice for them in international matters.
Even though both forms of trading are around tariffs and import duties there is a critical difference of regional trading is around ‘applied’ rates of tariffs while multilateral is around ‘bound’ or the maximum rates of tariffs.

India and Regional Trading

India has been a rather late entrant in regional trading as many of the major agreements were concluded in as late as 2007. India has a number of operational agreements bi-lateral (Sri Lanka, Afghanistan, S. Korea, Bhutan, Nepal, etc.), tri-lateral (India, Brazil and South Africa [IBSA]), and pluri-lateral agreements (ASEAN), ranging from PTAs to FTAs to even broader areas of economic cooperation (Singapore, Thailand, Japan, S. Korea, etc.) and even framework agreements (Bay of Bengal Initiatives for Multi Sectoral Technical and Economic Cooperation [BIMSTEC]).
While all the agreements would provide expansion of trade, two operational agreements can be said to be the landmarks for India in terms of both markets as well as opportunities offered. ASEAN + 3 now ASEAN + 4 (Japan, China, S. Korea and India). This has become operational from 1 January 2010.
India has agreed to drop tariff lines to zero across 4000 products within six years. The sensitive list on which there would be no reduction has been pruned down to only four hundred and eighty-nine products. This agreement alone has the potential to increase trade by over USD 50 billion over the next decade or so.
The other is the IBSA which has the potential to provide newer markets in African and Latin American countries. India in the last few years has been fairly aggressive in concluding agreements conscious of the fact that it has been a late entrant and not to miss the bus. “
It has taken a different line of trading of moving away from conventional global ‘vertical trading’ into a ‘horizontal’ or deeper levels of regional trading. Global trading is around goods and tariffs while India as part of horizontal trading has gone beyond goods of trade in services and also areas of economic cooperation through comprehensive economic agreements (CECA) and comprehensive economic partnership agreements (CEPA). CECA is an agreement of trade in goods, the same like a FTA but an additional agreement of willing to negotiate or open to trade in services and also explore areas of mutual economic cooperation. Once these areas are negotiated, finalized and signed it becomes CEPA.
India has CECA in different stages with Singapore, France, Australia, Japan and CEPA with S. Korea, Sri Lanka, Hong Kong.
It is in the process of finalizing a broad based trade and investment agreement (BTIA) with the European Union which will open up entire Europe for trading.
Regional trading is seen as a way to accelerate exports and at the same time establishing better relations with member countries.

It will give an opportunity to explore newer markets, new trading partners, diversified trade, greater economic cooperation and a definite signal of its intention of making trade an engine of growth in future.
However, openness and trade are not only market-driven or about newer markets but also the ability to penetrate by being efficient and competitive. This is the challenge before the government, that eventually what matters, is not the markets of regional or multilateral, but to be globally competitive. That is, where reforms have helped but require far greater aggression in reforms to truly establish India as a globally competitive economy.