The Hindu Business Line : Dynamics of the new regionalism

In the face of the continuing stalemate in wrapping up the Doha Development Round, India has lined up a raft of free trade agreements (FTAs), especially with the relatively advanced regional groupings such as the 10-member Association of South-East Asian Nations (Asean), besides the developed European Union and individual rich countries such as South Korea and Japan. How good such a bet would be in tying up our fortunes with the major trade players is clearly brought out in the latest Trade and Development Report (TDR) of the United Nations Conference on Trade and Development (Unctad), released on September 4.

The voice of Unctad

No doubt, Unctad does not command the clout of the post-War institutions such as the IMF and the World Bank and the former General Agreement on Trade and Tariffs (GATT), which morphed into the World Trade Organisation (WTO) after the successful conclusion of the Uruguay Round of Trade Talks in 1994. Yet, its voice, laced with pragmatism and a tinge of earnestness for the overall growth of the developing countries, is heard by policy-makers the world over. It is small wonder that the TDR 2007 has set apart an exclusive study on the “New Regionalism” and North-South Trade Agreements. Rightly, Unctad contends that following the failure of the global financial institutions to manage the shocks and crises towards the end of the 1990s and given the glacial pace of progress of the Doha Round of multilateral trade talks, regional arrangements have assumed prominence on the global development agenda.

A number of countries held the conviction that market liberalisation and opening up to international trade and finance would lead to the best possible factor allocation, augment productivity and accelerate technological upgrading in the developing countries.

This priority given to market forces in resolving factor allocations is reflected in the rapidly increasing number of regional and bilateral free trade agreements (FTAs) or preferential trade agreements (PTAs) concluded since the early 1990s.

New regionalism

The number of trade agreements notified to the GATT/WTO rose from 20 in 1990 to 86 in 2000, and to 159 in 2007. Unctad said the agreements concluded over the past two decades have been mainly bilateral and primarily between developing and developed nations.

They have increasingly included provisions aimed at “deep integration” with additional elements for harmonising national policies in concert with a reform agenda that encourages greater leeway for market forces — thus also subserving the freedom of movement of multinational corporations (MNCs) — and reduces the options for government intervention. This trend, coupled with the growing number of FTAs and RTAs (regional trading agreements) involving countries from different geographical regions, characterises what has come to be dubbed the “new regionalism”.

Unctad argues that this new regionalism bypasses multilateral institutions and arrangements, as governments pursue economic objectives and use instruments for which no agreements have been reached at the multilateral level.

Alongside, it also reflects the tendency to perceive globalisation as a process whereby access to markets of the North and attracting FDI from developed-country investors is key to successful integration into the world economy.

Even as the WTO is perceived as a villain for many a developing country’s ills and infirmities, it is also a paradox that not much is known about the potential disadvantages for developing countries due to the proliferating FTAs/RTAs.

Unctad points out that FTAs generally demand “far-reaching liberalisation of foreign investment and government procurement, new rules on certain aspects of competition policy, stricter rules on intellectual property rights and the incorporation of labour and environmental standards.”

Besides, many FTAs oblige developing countries to undertake much broader and deeper liberalisation of trade in goods than that agreed under WTO arrangements.

The fear expressed by domestic industry in India over the India-Thailand FTA and the proposed India-Asean FTA might be just the beginning of a long battle domestic industry must wage to secure its position, apart from the sensitivities of domestic agricultural growers over the steep tariff cuts on farm products or plantation sector in the India-Asean FTA. Unctad also the special and differential treatment (S&D), a plank the developing world assiduously sticks to in their Doha Round of trade talks, that may be granted to them in the context of other agreements.

The reciprocity norm in North-South FTAs places the developing world at a disadvantage vis-À-vis its developed partners, as they typically enter into the liberalised trade relationship at a less advanced stage of domestic indus trial development, implying lower supply and marketing capacities, a point being realised by Indian negotiators in all their FTA talks with advanced trade majors.

In this context, the Unctad report aptly argues that in assessing the potential economic and social benefits and costs of entering into North-South bilateral or regional FTAs, developing countries should not only take into account the potential changes in exports and imports arising from market opening and possible spurts in FDI.

They should also weigh the impact of such agreements on their ability to use various policy options and tools in the pursuit of a longer-term development strategy.

clear message

In an executive summary to the 195-page tautly-written monograph, the Unctad Secretary-General, Dr Supachai Panitchpakdi, said experience over the past five decades has revealed that regional cooperation is “neither a necessary nor sufficient condition for developing strong regional dynamics, but it can help to strengthen national policies and regional integration dynamics resulting from the interaction of private firms.

“If it is well-conceived and responds to the need to overcome region-specific constraints and gaps created by existing global governance structures, there is considerable potential for real benefits from closer regional economic integration. Such integration does not result automatically from trade liberalisation”.

That is, perhaps, the pithy message to those who cry hoarse over the greater need for trade liberalisation without exploring other avenues for regional cooperation such as energy, water supply and distribution to make a lasting impact on poverty reduction and promoting development in the veritable sense.