The Hindu Business Line : Advantage, FTAs

THE mid-1990s witnessed a renewed interest in regional trade agreements (RTAs). From about 50 in 1990, their number crossed 250 in 2003. And, according to the World Trade Organisation, by end of 2005, the total number of RTAs in force may reach 300.

Almost all WTO members, excluding Mongolia, are part of some RTA or the other. This surge of RTAs in different forms — Preferential Trade Areas, Free Trade Areas, Common Markets, and Customs and Economic Unions — somehow suggests that the early gains that were expected of multilateral trade negotiations through the WTO have not been fully realised, at least in three key areas of agriculture, services and textiles. As a result, various member countries, mostly developing ones, are focusing on FTAs as a viable means of opening up of international trade.

Many experts feel that the failures of Seattle and Cancun highlighted the inherent difficulties of the multilateral trading system and probably pushed many countries into diverting their negotiating energies to form RTAs.

The current North-South divide at some mini-ministerial meets is only strengthening that apprehension of developing countries. Today, half the global trade takes place within the RTAs, which are outside the purview of the WTO.

The idea of establishing FTAs is gaining ground and many experts suggest that they could play a crucial role in the trade reform agenda.

First, the complementarities that exist between the FTAs and the multilateral trading system governed by the WTO rules can benefit the member-countries in various ways.

It can boost global free trade by allowing the member-countries to intensify competition, provide the domestic industry time to adjust and create an environment to tackle difficult issues, such as agricultural subsidies and trade in services.

Besides, the circles of trade that are created through this exercise can help form expansive multilateral agreements.

Basically, the argument is that if a country is not yet ready for global competition, it can pick and choose trading partners with which it feels relatively more comfortable with. This may help raise the country's confidence and competitiveness and pave the way for eventual free trade at the global level.

Second, a critical aspect of forming FTAs, which could be seen as an advantage, is that it allows countries to phase and sequence their liberalisation episodes in a manner that can optimise benefits. It may be argued that this has been one of the factors propelling countries to engage in FTA negotiations.

Third, the long-term political and ethnic hostility among various member-countries can to an extent be minimised with the signing of FTAs, and this in a way can contribute towards establishing a multilateral trading regime.

In other words, formation of FTAs can be seen as a strategic move to consolidate peace and increase regional security among members.

Fourth, setting up of the FTAs can promote the spirit of open regionalism, which would be complementary to a non-discriminatory multilateral system, as espoused by the WTO. The open regionalism — agreements with low external trade barriers, non-restrictive rules of origin, liberalised service markets and reduced transaction costs at borders — can reduce complexities such as restrictive rules of origin of the international trading system.

Fifth, among other economic factors that are propagating regionalism or formation of FTAs, is foreign direct investment (FDI) and the advantages associated with the economies of scale.

According to the World Trade Report (2003), preferential access to large regional markets is one of the key determinants of FDI in developing countries.

Also, as FDI has become the most important source of foreign capital inflow and key promoter of economic growth for developing countries, it is increasingly felt that countries form RTAs or FTAs to attract FDI.

On somewhat similar reasons, it is also suggested that smaller countries join FTAs because it can offer domestic firms the advantage of economies of scale.

Sixth, another angle to this entire debate of forming FTAs of whether it is productive or beneficial to developing countries is propagated by a few experts who believe that there has been a consistent dominance and monopoly of developed countries, particularly the US and the European Union, given their presence in terms of foreign capital in developing regions.

With this capital they may be luring various developing countries to make more and deeper trade and investment commitments through regional agreements with them in anticipation that it would help them achieve higher growth.

On the other hand, there has been a marked difference among developing countries in their approach to entering into RTAs with developed countries. That, according to the experts, is to believe that the developing countries are forging regional trade linkages to resist the hegemony of large powers in world trade.

This may be seen as a strategic move among like-minded developing countries to forge FTAs and that's the reason why there is a surge towards establishing so many RTAs or FTAs in different regions, especially in the developing part of the world.

(The author is with the Indian Institute of Foreign Trade, New Delhi. Views are personal.)

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