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Are Regional Trade Agreements good for economy?

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The proliferation of regional trade agreements has continued unabated since the early 1990s. In recent years, this has led to widespread debate on the advantages or disadvantages of regionalism over multilateralism. The debate stems from the increased use of regional trade agreements (RTAs) in a world now ruled by an improved and disciplined multilateral trading system. The key question is whether these agreements will push the world toward discriminatory regionalism, or can be used as a vehicle for promoting multilateralism. Regional trade agreements of all variety span the globe. As more and more states form these associations, they have become an ever more popular area of academic enquiry.

The structure of regional agreements varies hugely, but all have one thing in common — the objective of reducing barriers to trade between member countries. At their simplest, they merely remove tariffs on intra-bloc trade in goods, but more now go beyond that to cover non-tariff barriers and to extend liberalisation to trade and investment. On the whole, the newer agreements tend to have deeper coverage, extending into areas of domestic disciplines beyond the exchange of tariff concessions, and a number of agreements now also cover the services sector and other areas of cooperation.

In this context, it is difficult to arrive at a clear conclusion on India’s stance on RTAs. To do so requires careful consideration of India’s place in the global economy, and the impact of potential trade diversion on its domestic industries. Traditionally, India has been a supporter of the multilateral system, but given the slow pace of negotiations and the developmental needs of its economy, it too has recently joined the RTA bandwagon.

Clearly RTAs may affect the setting of external tariffs. This is true by definition in the case of a customs union and indirectly true in the case of a free trade area. Recent research finds that World Trade Organization (WTO) members do not appear to have more liberal external trade policies than non-WTO members, and that membership in a RTA has, on average, no clear effect on a country’s trade policy. Member countries of successful trade agreements in effective regional groupings, distinguished by the growth of intra-area trade, have undertaken more far-reaching trade liberalization including standardization of non-tariff barriers. However, there are cases of liberalizing countries that did not belong to an RTA and of countries in an effective RTA that did not liberalize trade policy. The conclusion is that the acceptance of a liberal trade policy covering major instruments may be a requirement for the survival and deepening of a meaningful RTA, whereas belonging to a regional scheme constitutes neither a necessary nor a sufficient condition for an open and liberal trade regime. In the 1960s and 1970s, preferential agreements among developing countries were typically accompanied by high external tariff barriers as part of an import substitution strategy. In contrast, agreements among more developed countries in the same period were more often associated with declining external barriers. For example, the simple average external tariff of the original six members of the European Union fell from 13 percent in 1958 to 6.6 percent after the Kennedy Round of General Agreement on Tariffs and Trade (GATT) negotiations. Agricultural products were excluded from these reductions, reflecting their exclusion from GATT negotiations until the Uruguay Round. The failure to reduce agricultural tariffs in Europe led to substantial trade diversion in agriculture with significant welfare losses for European consumers, especially the poorest, and a considerable hardship for poor farmers in developing countries. Many developing countries have since reduced external tariff barriers both unilaterally and through multilateral negotiations. As a result, recent preferential agreements among many developing countries have been introduced or revamped with lower external barriers. This is particularly true in Asia and Latin America, where preferential and MFN tariffs declined in tandem after 1985, so that margins of preference remained stable or were slightly compressed.

The U.S. and EU have the largest trading and investment relationship in the world. A reduction of tariffs and non-tariff barriers will significantly impact on both the U.S. and EU economies, and increase leverage for both the U.S. and EU in negotiating future agreements with third countries.

This agreement marks the historic shift away from multilateral trade discussions in favour of bilateral or regional trade agreements – a positive shift that will ultimately result in greater volumes of international trade.

Finally, this agreement sets the stage for a greater polarization between “the West and the rest”. A stronger alliance between the most developed countries will inevitably create tensions with other global powers not benefiting from the same tariff and non-tariff treatment. This is an important, albeit negative development

Despite Chinese investments in the region, India remains a leading actor in South Asia given its historic trading routes and sociocultural ties with neighbouring countries. India’s focus on developing its infrastructure for both domestic manufacturing and cross-border transportation is also likely to benefit foreign invested companies in the region as it opens up new market opportunities”. Thus what we need to work on the “state of art” to realize the potential through regional trade agreement.

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