FTAs: Gainers and losers

G. Srinivasan | Updated on May 19, 2011

On an average, an  FTA induces roughly a 100-per cent increase in bilateral trade between members within ten years from their start.

The frenzy of free-trade agreements (FTAs) began in the 1990s among European, North American and Asian countries. Being a founder-member of the erstwhile General Agreement on Trade & Tariffs in the post-War global economic framework and also in the World Trade Organisation (WTO) in 1995, India firmly believed in multilateralism more than regionalism.

But when in 2001 the ambitious Doha Development Round held under the WTO umbrella began floundering (negotiations are still dragging on), New Delhi began a shift in trade policy by aligning increasingly with some of its trading partners either through signing FTA or entering into a comprehensive economic cooperation agreement (CECA) that encompassed services and investments, apart from merchandise goods. .

Hobson's choice

Faced with a Hobson's choice of multilateral talks remaining in limbo, India had to safeguard its commercial interests both through FTAs and through intensifying bilateral cooperation with its trading allies to ensure efficiency gains to its manufacturer-exporters besides assured markets.

Critics of bilateralism or regionalism always found such narrow pacts as being responsible for trade diversions to the detriment of non-members, contributing to distortions in international trade.

How far such a harsh conclusion is sustainable is open to debate, given the lack of any incontrovertible evidence to this effect.

But the fact remains that multilateralism and rule-based global trading system is any day preferable to what trade policy expert Prof. Jagdish Bhagwati described as the “spaghetti-bowels” of intricate and inter-woven webs of FTAs or regional trading blocs that would only distort global trading mechanism to the discomfiture of non-members.

Be that as it may, a recent monograph by the NBER on Terms of Trade and Global Efficiency Effects of Free Trade Agreements, 1990-2002 has concluded that regionalism delivered benefits while negligibly harming outsiders. Recent developments in the empirical literature demonstrate that trading blocs and FTAs have large direct effects on aggregate bilateral trade between member countries relative to non-members.

On average, a FTA induces roughly a 100-per cent increase in bilateral trade between members within ten years from their start.

Volume changes like these, larger than explicable by tariff changes, are plausible because FTAs typically spur unobservable trade cost reductions alongside the formal tariff cuts that are the core objectives of the agreement, the researchers said, adding that non-tariff barriers (NTBs) also stand whittled down between the parties to the FTA while the enhanced security of bilateral trade imparts relationship-investment in trade with partner countries.

Big losers, winners

Interestingly, the study reckons that for producers' losses, five of the six biggest losers are the regions that did not enter any FTAs during the 1990s, albeit their losses are relatively small. It, however, hastens to note that though its sample of outsiders is small, it is tempting to note that producers in the bigger outside regions suffer more!

Another nugget from the study shows the biggest winners from the integration of the 1990s are producers from relatively small European and Latin American economies that signed FTAs with large trading partners. From the European economies, Poland and Hungary are leaders with producer gains of 7.3 per cent and 5.5 per cent respectively, followed by Bulgaria with 5.3 per cent increase and Romania with 3.9 per cent.

The biggest FTA winners are relatively small countries that are geographically close to their major markets.

Thus the largest FTA gains are for small European economies including Hungary, Poland and Bulgaria. Again the three nations with the largest terms of trade (ToT) improvement during the 1990s (of more than 10 per cent) include Poland, Hungary and Bulgaria, even while large nations benefit less from FTAs.

As India is on a spree to conclude FTAs/CECAs or preferential trading arrangement (PTA) to exchange tariff concessions on a range of limited number of goods, it is better that mandarins in the Udyog Bhawan press the pause button to take stock of what these FTAs had achieved up till now.

If under FTAs, ‘early harvest' results do not show much of gains but only pains to domestic producers not being able to compete with cheaper imports from the FTA partners, it is time India did an introspection and focussed on making foray into new markets and manufacturing new products that markets elsewhere need.

Published on May 15, 2011

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