The Hindu Business Line : Regional trade blocs revisited

The emergence of information and communication technologies have helped spread production and service networks beyond the confines of national boundaries or trade blocs. But trade blocs still have an important role to play in expanding markets, gaining advantage of lower costs and ensuring access to natural resources.

GLOBALISATION has been around 25 years now, and this is perhaps as good a time to re-visit the concept and functioning of regional trade and economic blocs. Regional trade blocs aim to provide preferential Customs tariff for intra-regional trade, integrate markets and protect jobs. But several leading economists have argued that regional groupings have no place in a globalising world.

How have trade blocs fared? Progress has not been uniform. Asean (Association of South-East Asian Nations) rapidly moved to a higher level of economic cooperation followed by Nafta (North American Free Trade Area), which aimed at industrial production cooperation among the US, Mexico and Canada.

The Treaty of Rome envisioned in 1956 the creation of a single economic union of Europe as a counterpoise to the growing economic and political influence of the US. Despite different levels of economic development, languages and cultural diversity of members, the EU has shown remarkable success in market unification and has recently expanded to 25 countries.

The relationship between the US and the EU in trade matters continues to be uneasy. The emergence of the World Trade Organisation, with a mandate to liberalise world trade, has not resulted in the promised equitable distribution of trade to developing countries.

The least-developed countries of Africa and Asia have not benefited fully from the so-called liberalised trade regime. In fact, critical sectors of developing countries such as agriculture face the threat of unfair competition from developed countries. The share in global investment and trade flows happens to be the lowest for the least developed countries.

During the past decade, global trading patterns and investment flows have changed because of electronic and communication revolution. Increasingly, business transactions in financial and service sectors take place in a digitised environment. With service industries such asbanking, insurance, software, telecom and even healthcare going global, the share of service sector in foreign trade is on the rise.

In software exports or IT-enabled services, there are cost-advantages to be derived by developed countries through outsourcing them from developing countries such as India. In this transition, geographical proximity or trade blocs do not necessarily confer any special advantage to trading partners.

According to Unctad, China has a higher share of manufactures in total non-oil merchandise exports at over 91 per cent compared to India at 81 per cent. The structure of production also shows a similar trend. While in the case of China, machinery items constitute 35 per cent of total industrial production, for India, it is less by ten percentage points. Changes in specialisation are often associated with "international competitiveness" although as the Unctad report observes, this concept may be more appropriate to performance of individual enterprises.

In a broad sense, "developing countries are becoming increasingly similar to developed countries in the structure of their manufactured exports, but not in the structure of their manufacturing value added.

Also, evidence suggests a strong divergence in the evolution of international specialisation between Asian and Latin American countries. Revealed comparative advantage, say, in the case of Mexico and, to some extent, Malaysia, reflect increasing involvement in assembly-based activities within international production networks. Mexico is more in the automobile sector, while in Asia computer and communications equipment manufacture is on the increase". India stands out as a special case in software and IT-enabled exports with an annual 35 per cent growth compared to the overall 15 per cent export growth. In 2001, India became a full dialogue partner of Asean and last year's visit of the then Prime Minister, Mr Atal Bihari Vajpayee, to Asean was more than symbolic. It seems to have heralded an era of closer cooperation between India and the Asean countries, going beyond the trade bloc concept. India-Asean trade stands at a level of $14 billion and the combined population of Asean region is almost the same as that of China.

There is enough complementarity in the economies of India and of the Asean region to establish closer trade relationship. Indonesia is rich in oil resources which can partly meet India's growing demand for oil.

India imports palm oil and timber from Malaysia. Globalisation and new technologies have brought a new meaning and content to the old concept of "international division of labour" going beyond the artificial limits of regional blocs.

Global business is shifting slowly to South-East Asia, where the growth factors are better, projected by Unctad and the IMF at around 6.5 per cent. With increasing disposable incomes, demand for goods and services is set to boom in this region.

Governments may define trade blocs or try to practise protectionism in different forms, but industry pursues its own economic logic based on specific factor endowments, including human resource skills, which has seen significant development in the past two decades.

It no longer makes economic sense to organise entire production activity at one place under the same roof, because the good old theory of division of labour is back in newer forms.

The emergence of information and communication technologies, computer-aided design and computerised manufacturing processes have only helped the process of distributed production or service networks on a global basis beyond the confines of national boundaries or of trade blocs.

Does it mean that regional blocs have no rationale behind them? Yes, they do. They help in expanding markets, gaining advantage of lower costs and getting access to natural resources.

Under the WTO-mandated rules, developing countries have to lower their tariff levels steeply and open their markets to global trading. So far, however, WTO ministerial meets have not directly addressed the issue of unfavourable terms of trade to developing countries.

It is time developing countries built their own brand image in specific products and services and established linkages with regional trade blocs in sector-specific activities to augment their combined strength in international marketing.

(The author is a New Delhi-based management and financial consultant.)