The Hindu Business Line : `Macro benefits, micro pains'

The Prime Minister's recent reiteration of his hope for a pan-Asian FTA set the alarm bells ringing among `protectionist' elements in political parties, and there was dissent from the president of his own party too. Dr Manmohan Singh's fears seem unfounded and shortsighted, as an intra-Asian trade grouping can bring many benefits for India.

The Congress President, Ms Sonia Gandhi's reported reservation over the fallout of the proposed free trade agreement (FTA) between India and the Association of South-East Asian Nations (Asean), particularly on domestic agriculture and manufacturing activities, is understandable, given the political sensitivity of the issues involved.

A missive sent a month ago from Ms Sonia Gandhi to the Prime Minister, Dr Manmohan Singh, was significant in that it reflected the divergence in thinking between the two leaders. Ms Sonia Gandhi's concern over the Indo-Asean FTA was in response to a plea by Dr Manmohan Singh, in his address to the inaugural session of the Board of Governors of the Asian Development Bank (ADB) in Hyderabad on May 5.

Dr Manmohan Singh had said that India was working closely with Asean, Japan, China and South Korea and that this "web of engagements may herald an eventual free trade area in Asia covering all major Asian economies and possibly extending to Australia and New Zealand. This pan-Asian FTA could be the future of Asia and will, I am certain, open up new growth avenues for our own economy."

A policy brief by the Research and Information System (RIS) for Developing Countries contends that economic integration among Japan, Asean, China, India and South Korea (JACIK) has the potential to generate welfare gains of up to $210 billion.

Huge potential

Besides, monetary and financial cooperation in Asia designed to mobilise the foreign exchange pools of Asian countries — the proverbial prudent-savers — for development of common regional facilities or infrastructure holds the potential for generating hundreds of billions of dollars of additional output and equally large employment opportunities. No wonder, Dr Manmohan Singh terms such a pan-Asian grouping "an arc of advantage" and "an anchor of stability and prosperity for Asia and beyond".

The Prime Minister has also initiated measures for an FTA with key West Asian economies through a pact with the Gulf Cooperation Council (GCC) consisting of Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and the United Arab Emirates. With Asean and the GCC FTAs on the anvil, there would be a seamless integration of Asian economies which can derive mutual benefits.

With the Doha Development Round of the WTO bogged down in fixing modalities for negotiations on contentious issues governing global trade liberalisation, the world is parcelling into a myriad regional trading arrangements (RTAs). More than half the world trade is conducted on a preferential rather than on MFN (Most Favoured Nation) terms, which was the bedrock of such post-War arrangements as the General Agreements on Tariffs and Trade and its present avatar, the WTO.

IMF concerns

The IMF contends that RTAs could divert resources from multilateral trade liberalisation, including in the context of WTO negotiations, and foster incentives for regional partners to lobby against any MFN-based reforms that would reduce the value of their tariff preferences, endangering prospects for trade reforms.

According to the latest IMF monograph, Asia and Pacific Regional Economic Outlook, released early this month, preferential trade agreements are proliferating around the world, including in the Asia and Pacific region. At least 23 such agreements among regional economies have entered into force in the past five years, and 30 more are under negotiation. If the RTAs in Asia appear to have been more trade-creating than elsewhere it is because regional trade integration in Asia followed a long period of unilateral liberalisation in the 1980s and the 1990s.

Many Asian countries acceded to the WTO in the mid-1990s and lowered their MFN tariff rates substantially, limiting the risk of possible trade diversion under subsequently agreed RTAs. So, if India is keen on hitching its economic fortunes to the Asian bandwagon by signing a comprehensive economic cooperation agreement with Asean, it should not unduly upset anyone, least of all domestic constituencies, since such arrangements in no way prevented India's trade with non-members at a higher level, as has been the case with Asean and intra-Asean trade.

However, a caveat is in order as the IMF has advised Asian countries to continue pursuing concerted trade liberalisation in accordance with the MFN principle, rather than focussing on regional trade preferences.

Protectionist fears

The Prime Minister has been envisaging an Asian Economic Community on the lines of the European Union for quite some time. But it was the reiteration at the ADB meeting of his hope for a pan-Asian FTA that unwittingly set the alarm bells ringing among the `protectionist' elements within the political parties.

Lest the Opposition takes the wind out of the Government's sails, the Congress Party President's earlier letter was resurrected and released to the press, to prove that the matter was too important to be brushed aside, particularly when the agrarian problems and the litany of woes by domestic industry — provoked by cheap competition from across the region — have assumed worrying proportions.

The anxiety is understandable, considering that Parliament is in session, where the Opposition has many an issue to beat the government with!

The Commerce Minister, Mr Kamal Nath, signed a spate of FTAs after the UPA Government took over, ranging from the framework agreement on the Bay of Bengal Initiative for Multi-Sectoral Technical Economic Cooperation Free Trade Area) — BIMSTEC-FTA involving Bangladesh, Bhutan, India, Myanmar, Nepal, Sri Lanka and Thailand; the Asia Pacific Trade Agreement (APTA) — a Preferential Trading Arrangement (PTA) among the member countries Bangladesh, China, India, Republic of Korea, Laos People's Democratic Republic and Sri Lanka; and the PTA with Mercosur — a trade bloc of Argentina, Brazil, Paraguay and Uruguay.

Impact on poverty

Mr Kamal Nath would not have gone in for more FTAs or comprehensive economic cooperation agreements (CECA) with a number of countries had Dr Manmohan Singh had any reservations.

On the contrary, as the Prime Minister himself is an ardent advocate of the pan-Asian FTA that is sweeping in content and coverage, the reservations voiced by Ms Sonia Gandhi appear to be a political stance that she held before she resigned as the Chairperson of the National Advisory Council (NAC), a coordination body between the Government and the coalition partners supporting the government from within and outside.

Even the NAC member, Mr Jairam Ramesh, Minister of State for Commerce, for all his rhetorical flourish, conceded at an interactive meeting with financial journalists in the capital on April 10 that "FTAs bring macro benefits and micro pains. We have to manage the micro pains. The FTA with Asean, when it comes up, may impose some economic price, it but would also yield political dividends."

With his vast experience in various economic ministries and international institutions such as the South Commission, Dr Manmohan Singh is an expert on trade issues and his positive stance on a pan-Asian FTA should reassure the stakeholders in the Asian region.

Integration of the region is undoubtedly a sensible policy to make a lasting impact on poverty and unemployment; if this can be accomplished through liberal trade and economic development, no price is too high to pay. A visionary and original economic reform architect like Dr Manmohan Singh knows this too well to be deflected by muted dissent from within his own party.