The Hindu Business Line : Bowl of untangled spaghetti with sauce to embellish

WITH the Sixth Ministerial Conference only a day away, there is enough indication that we may once again witness what has now become a routine tie: WTO vs RTA. While the World Trade Organisation (WTO) pushes for consensus, even as it declares itself to be "the only global international organisation dealing with the rules of trade between nations", different countries are busy talking to one another about free trade agreements (FTAs).

Also, whole regions are on this game, as evidenced by the regional trading agreements (RTAs) and preferential trading agreements (PTAs) gaining popularity. So much so, there is this doomsday warning from the WTO Chief, Mr Pascal Lamy, that "if global trade negotiations are not successful, an unhealthy jump in smaller regional agreements might make it harder to resolve trade disputes around the world," as www.forbes.com reports.

As if to affirm this, `breaking news' on www.bangkokpost.com is a story titled, `Free trade agreements (FTAs) draw flak'.

It notes that two countries at the forefront of a regional proliferation of bilateral free trade agreements (FTAs), namely, Thailand and Australia, will be worth watching at the World Trade Organisation (WTO) talks starting in Hong Kong on December 13.

Meanwhile, Xinhua (http://news.xinhuanet.com) has a report dated December 10, on the speech of the Malaysian Prime Minister, Abdullah Ahmad Badawi. He has referred to how in 2004, the Asean (Association of Southeast Asian Nations) together with China, South Korea, Japan, India, Australia and New Zealand accounted for 22.7 per cent of world trade. "This is no small achievement because it represents 24.2 per cent of world exports and 21.2 per cent of world imports," Badawi has said, even when pushing for `closer business cooperation'.

And the Prime Minister Manmohan Singh is expected to tell Asean to focus on India, and highlight, during the week, at the East Asian Summit in Kuala Lumpur, the fruits that the `Look East' policy was already bearing. You may remember that Dr Singh had proposed, at the last Asean-India summit in Laos, the creation of an East Asian Community.

"Initially it was believed that the turn towards regionalism in trade was due to the failure of global community to provide effective mechanism for multilateral trade liberalisation," writes Ramesh Chand in his new book, "Free Trade Area in Asia," from Academic Foundation (www.academicfoundation.com). Traditional motivations for RTAs and PTAs have been the lure of market access, gains from trade, and political cohesion.

But that was during the 1960s and 1970s, points out Chand, about the `first regionalism'. The `new wave' or `second regionalism' that started during late 1980s is driven by "the distinct change in US policy to follow a regional path," notes the author. "The number of RTAs has grown from 31 in 1990 to 80 in 1995 and 184 in 2003," he mentions, with a graph that climbs sharply after the WTO was set up in 1995.

The US and other countries that staunchly supported multilateralism and strongly opposed regionalism in trade "started taking active interest in creating trade blocs and PTAs," he adds.

That regional trade initiatives are a key part of US trade strategy you would learn from www.ustr.gov, the site of the US Trade Representative. Initiatives from Uncle Sam include "the Free Trade Area of the Americas (FTAA), aimed at uniting the Western Hemisphere in a free trade zone; the Enterprise for Asean Initiative, designed to promote trade in Asian countries; the Middle East Free Trade Initiative (MEFTA); and the North American Free Trade Agreement (NAFTA), which links the US, Mexico and Canada in a free trade area of 427 million people," as the site informs.

Trading arrangements are no longer just regional driven by geographic factors, but preferential too, on strategic considerations. For countries that are not part of RTAs, the option is PTA, "to counter the adverse impact of other PTAs on them," points out Chand. Rather than study such externalities, his book looks at the internal factors such as opportunity for trade creation as a result of tariff rationalisation that lie behind integration of trade in Asia.

Old regionalism owed its role to the absence of sufficient multilateralism, while "the new regionalism has emerged as a consequence of post multilateral success," notes the author, citing published studies. RTAs are a fact of international order, says Chand, though there is no consensus on the impact of RTAs on multilateral liberalisation, and the last word hasn't been said on whether RTAs are `building blocs or stumbling block'.

For instance, a January 2005 report of a high-level commission, led by Peter Sutherland, former WTO chief, said that the `spaghetti bowl' of bilateral and regional trade deals was undermining the principle of treating all trading partners equally, informs www.bilaterals.org. Catch up also with "Swimming in the spaghetti bowl: Challenges for developing countries under the `new regionalism'," by Luis Abugattas Majluf on www.unctad.org.

And `Reshaping the WTO', an 8-page piece on www.columbia.edu by Jagdish Bhagwati, the author of the much-bowled metaphor!

Supporters of RTAs emphasise that regional agreements provide "a quicker route to trade liberalisation, as the like-minded group of a small number of countries finds it easy to negotiate and reach a consensus," says Chand. "PTAs are also said to be helpful in achieving substantial reductions in barriers in trade in difficult areas like agriculture."

Perhaps, a bowl of spaghetti need not daunt one if you can untangle it, and there is the sauce of benefits as embellishment.

Using data from cross trade tables of the UN for the final two decades of the last century the author computes `intensity index for intra-regional trade', which is "roughly the ratio of share of regional trade remaining in the region to the share of the region in world trade." The index is 1 when "there is no regional concentration of trade". Apart from IIT (that is, index of intensity to trade) there is also IPT or index of propensity to trade, "obtained by multiplying IIT by openness to trade (ratio of GDP traded)."

Separate chapters look at the changing patterns of Asia's trade and country-wise trade trends. Chand finds evidence that policy changes during the last decade "have led to increased regionalisation of trade in developing Asian countries (DAC)." Useful insight is that the increase is accompanied by `trade creation and not trade diversion' and that the increase happened despite there being no region-wide RTA.

"It is ironical that the fast growth of intra regional trade in Asia has not been followed by any regional integration in the form of trade blocs," opines Chand. "This is depriving Asia of a vast opportunity for trade creation and improvement," he adds.

The book cites the work of Xinshen Diao et al who found, after studying RTAs such as EU, NAFTA and MERCUSOR, that "it is natural to form RTAs when neighbourhood trade grows so as to harmonise policies."

Internal and external factors strongly favour regional integration for trade in Asia, concludes Chand. He couldn't have said that earlier because there are hopes that the talks of 16 leaders including Dr Singh, converging in Kuala Lumpur from December 11 to 14 will give shape to an `architecture of cooperation' that goes beyond trade to encompass education ties and infrastructure investment too. It was a curtain raiser of sorts when only weeks ago, the PM spoke about his vision of an FTA in Asia emerging within the next few years.

Addressing delegates at the concluding session of the India Economic Summit, he had outlined the road map for FTAs with China, Japan, South Korea and possibly, even Australia and New Zealand. "This pan-Asian Free Trade Area could be the third pole of the world economy after European Union and NAFTA and will open up new growth avenues for the economy," Dr Singh had said.

Chand's book, therefore, is a timely one to help comprehend the unfolding developments in the trade arena.

Economics@TheHindu.co.in

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