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REGIONAL TRADE AGREEMENTS IN INTERNATIONAL BUSINESS

There exist different choices of instruments to alter the quantum of trade and trade direction such as export subsidies, tariffs, non-tariff barriers viz import licensing, quota shares, product specific quotas, labeling condition, product standards etc. Regional Trade Agreement (RTA) is another type of instrument to influence trade pattern of an economy. According to WTO Regional Trade Agreement (RTAs) are defined as reciprocal trade agreements amongst two or more partners, including free trade agreements and custom unions. Free trade agreements and partial scope agreements accounts for around 90% of the total RTAs, while customs unions account for 10%. When it comes to the effects of regional trade agreements on trade the empirical results are mixed for different RTAs.

Many theories in the arena of International Trade propose that Regional Trade Agreements (RTA) benefit the nation as this help in increasing the trade volume of a particular economy or a specific region. The counter argument is that RTAs hurt the nation. In particular regional trade agreement burgeon trade flows more freely among the countries in the group without barriers being raised on trade with the outside world. Many economists have written in for as well as in against the RTAs based on empirical analysis. Adam Smith who is considered to be the proponent of International trade theory argues that free trade among nations burgeon nation’s wealth. Quantum of regional trade agreement (RTA) is burgeoning continuously in each part of the globe.

Till January 8, 2015 some 604 RTA notifications have been received by the WTO, out of which some 398 were in force. According to WTO Regional Trade Agreement (RTAs) are defined as reciprocal trade agreements amongst two or more partners, including free trade agreements and custom unions. Free trade agreements and partial scope agreements accounts for around 90% of the total RTAs, while customs unions account for 10%.

Regional trade agreements in general exist in five types which are:

(a) Custom Union
(b) Free Trade Agreement
(c) Common Market
(d) Economic Union
(e) Preferential Trade Agreement.

In custom union, two or more nations who form a union eliminate tariffs and non-tariff barriers among themselves but maintain and implement separate tariffs for outside nation and simultaneously the member countries agree to maintain common external tariffs. Few examples of custom union are East African community (EAC), European Union Custom Union (EUCU), Southern African Custom Union SACU. Free trade agreement is almost similar to custom union but member countries do not maintain common external tariffs. Some of free trade agreement includes North Area Free Trade Area (NAFTA), AFTA, SAFTA, COMESA, and GAFTA. Common market is the platform where there is a free movement of capital and services but major trade barrier remains. In general all tariff and quotas are eliminated for imported goods traded within the members but non-tariff barrier remains.

Major focus of common market is economic convergence and the formation of integrated single market. ASEAN and MERCOSUR are the example of common market. Economic union is another form of regional trade bloc which is an amalgamation of custom union and common market where the members of the trading bloc practice common policies on free movement of goods and services, factor of production and on product regulation and also follow common external trade policies. Caribbean single market economy (CSME), European Union (EU) is the RTAs which comes under economic union. Preferential trade agreement is another form of union where all the members of that union lowers the trade barriers Regional trade Agreements though signed amongst nations to realize mutual gains but it does not guarantee the same because of regional bias.

Welfare effects, which are expected from RTAs depend on whether the surge in trade is primarily on the expense of non-members. Size of an economy has a vital role in deciding the nature and objective of RTAs. If a country is small in GDP and area then it will seek to attain social, economic and political security by forming a bloc with relatively larger economy. Nature and focus of Regional Trade Agreement around the world differs from each other because of which wide range of differences has to be taken into considerations while analysing the impact of RTAs.

Regional trade agreement plays a role in effecting the comparative advantage of commodities because it allows certain region or economy to trade either at a low tariff rates or at zero tariff. As in a custom union many economies come together for enjoying mutual gains from trade because of which those nations who are actually competitive in exporting a particular commodity actually moves out of the trading framework because it is not a member of a regional trade agreement. In this way it is necessary to study the impact of RTAs on the competitiveness of commodities.

According to WTO Regional Trade Agreement (RTAs) are defined as reciprocal trade agreements amongst two or more partners, including free trade agreements and custom unions. In some cases, there are multiple country negotiating objectives that drive participation in regional trade agreements; in other cases, one or two objectives tend to be dominant. It is also the case that objectives frequently reflect only the interests of narrower subgroups within countries, rather than a wider country interest, as with sectoral arrangements in textiles, agriculture, autos, or other areas perceived to be politically sensitive.

Nonetheless, once the reasons that countries seek these arrangements are understood, the form that the eventual agreement takes becomes more explicable. Perhaps the most conventional objective thought to underlie a country’s participation in any trade negotiation is the idea that through reciprocal exchanges of concessions on trade barriers there will be improvements in market access from which all parties to the negotiation will benefit. The reasons for participating in a regional negotiation rather than any other type, including multilateral, are usually that key trading partners are involved, that the chances of success are seen as high because the number of countries are small.

Next objective for framing RTAs is the idea that a regional trade treaty can underpin domestic policy reform and make it more secure; that is, by binding the country to the masthead of an international trade treaty, any future reversal of domestic policy reform becomes more difficult to implement. This was a central preoccupation behind the Mexican negotiating position on NAFTA. As such, it led to the outcome that Mexican negotiators were less concerned to secure an exchange of concessions between them and their negotiating partners, and were more concerned to make unilateral concessions to larger negotiating partners with whom they had little negotiating leverage as part of the bilateral negotiation. The idea was clearly to help lock in domestic policy reform through this process.

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