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PREFERENTIAL TRADE AGREEMENTS (PTAs)  THEORY, EVIDENCE AND POLICY OPTIONS FOR INDIA

PREFERENTIAL TRADE AGREEMENTS (PTAs)  THEORY, EVIDENCE AND POLICY OPTIONS FOR INDIA

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PREFERENTIAL TRADE AGREEMENTS (PTAs)  THEORY, EVIDENCE AND POLICY OPTIONS FOR INDIA

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  1. PREFERENTIAL TRADE AGREEMENTS (PTAs) THEORY, EVIDENCE AND POLICY OPTIONS FOR INDIA By Dr. N. C. PAHARIYAAssociate ProfessorDepartment of EconomicsUniversity of Rajasthan, Jaipur&Fellow, CUTS International, JaipurPresented at the Training Programme on Commercial and economic DiplomacyJanuary 9-12, 2008 at Chokhi Dhani, JaipurOrganised by CUTS CIRC, Jaipur

  2. Introduction Current wave of PTAs gives a lively debate PTAs mushroomed – over 300 now Factors contributing to recent PTAs proliferation: i) MTN narrowing of national policy space for developing countries. RTAs help reduce economic catastrophes ii) The failure to launch a round in Seattle; the subsequent difficulties in reaching agreements following the Doha Ministerial meeting iii) Two major blocs: EU & US aggressively going for such arrangements Policy induced integration (regionalism) Market-driven integration (regionalisation) Purpose of this paper to draw lessons for India by looking at the theoretical & empirical literature and recent Indian experience

  3. Preferential Trade Agreements: Theoretical Context and Empirical Evidence PTAs: Definition The WTO Provisions relating to the PTAs i) One-way (unilateral/non-reciprocal)trade preferences:(GSP, 1968) ii) The Enabling Claus(1979), Developing Countries exchange virtually any trade prereferences to which they agree. iii) Article XXIV of GATT

  4. Scope of beneficiaries Method of Implementation Reciprocal Unilateral Preferential: Selected Countries NAFTA, EU, COMESA, EPAs EPAs and other RTAs GPS, AGOA EBA, Contonou Non-discriminatory GATT/WTO Autonomous Liberalization (MFN): All countries multilateral agreements Source: World Bank (20050 Global Economic Prospects: Trade, Regionalism and Development PTAs: Methods of Implementation

  5. Reductionof tariffs inintra regionaltrade Eliminationof tariffs in intra regional trade Commontariffs forthe rest ofthe world Free factormobility Harmonization of economicpolicies Preferential trade agreement Yes - - - - Free trade agreement - Yes - - * Customs Union - Yes Yes - Coordinationdesirable Common Market - Yes Yes Yes Coordinationdesirable Economic Union - Yes Yes Yes Source: UNCTAD (2007), Trade And Development report, 2007, Main Characteristics of Different Types of Trade Integration Arrangements

  6. The Historical Evolution European Invention New wave in 1980s Race between Europe & Americas RTAs this time here to stay Traditional Theory: Viner’s “Static” Welfare Analysis

  7. Price -P c+t` DA PA Pc+t PB Pc g r e Fig.1: Trade Creation and Trade Diversion (Zero Elastic Demand Curve) DA 0 Qn Quantity

  8. Fig. 2: Trade Creation and Trade Direction (Downward slopping Demand Curve) Price DA PA Pc+t PB Pc f h e k DA 0 Qn Q0 Quantity

  9. Fig 3: CU: A preferential removal of a tariff by A Leads to a Loss of GFLH to itself, a Gain of GFUH to Partner B, and a net Loss of F to the Union as a Whole

  10. New Developments in PTAs Transport Costs and PTAs Rules of Origin in PTAs Non-traditional Gains Peace Dividend

  11. Transport Costs and PTAs In a new development, some analysts have argued that low transport costs make PTAs more likely to be beneficial. This proposition is without a sound theoretical basis In his comprehensive work, Viner (1950) had noted the presence of departures from the MFN principle in commercial pacts between countries within Europe going as far back as the 19th century. But he attributed them to ‘close ties of sentiment and interest arising out of ethnological, or cultural, or historical political affiliations’. This remains true.

  12. Rules of Origin in PTAs Rules of Origin (ROO) ensure that imports from third parties do not benefit from negotiated preferential treatment 3 basic methods: Value-added; changes in tariff classification and process definitions; and often combinations of these. different RoO in different FTAs, an additional stringency measure

  13. Non-traditional Gains DSM of developed countries Escape anti-dumping & safeguard by developed countries Excess to large developed country market

  14. Peace Dividend Wilfred Pareto (1889) wrote, “customs unions and other systems of closer commercial relations (could serve) as means to the improvement of political relations and the maintenance of peace”. J M Keynes (1919) remarked,” A Free Trade Union, comprising the whole of Central, Eastern and South-Eastern Europe, Siberia, Turkey, and (I should hope) the United Kingdom, Egypt and India, might do as much for the peace and prosperity of the world as the League of Nations itself”. Trade and commerce have been the most effective way of establishing peace between rival nations. History offers great many examples to support this viewpoint. World War II: Allied forces led by the UK and the US, and the Axis powers led by Germany, on the other. Bitter memories of the Nazis atrocities amongst the people of Poland, Holland and Russia Thailand was on the opposite side in the Vietnam War; Vietnam invaded Cambodia in 1975, Vietnam and China fought in 1979 and Thailand had a border skirmish with Laos as recently as 1988 Regional co-operation has come a long way since SAFTA may prove to be a peace dividend for India –Pakistan Mansfield and Pevehouse (2000) found that, on an average, the likelihood of the outbreak of a militarised inter-state dispute declines by around 50 percent if both belong to the same RTA. However, only RTAs that expand trade flows appear to have a substantial impact on conflict. In Africa, for example, RTAs that address the management of cross-border resource issues (such as water) are more effective in reducing military conflict than other RTAs.

  15. Shallow Vs Deep Integration PTAs Shallow integration implies lowering or eliminating barriers to the movements of goods and services across national borders within the region. Alternatively, it implies preferential reduction in tariffs and non-tariff barriers (NTBs) amongst member countries. “Deep integration” that go beyond border protection measures, which involves: Facilitating financial and FDI flows; Regulatory harmonization and removal of NTBs to trade; Liberalizing the movement of labour within the RTA; Harmonization of domestic tax and subsidy policies especially those affecting production and trade incentives; Harmonization of macroeconomic policies to attain a stable macroeconomic Environment within RTA, including a co-ordinated exchange rate policy; establishing institutions to manage and facilitate integration (e.g. regional development funds, institutions to set standards, dispute resolution mechanisms); Improvements in communications and transport infrastructure to facilitate increased trade; Factor mobility and harmonisation of legal regulations in product and factor markets The prerequisite for a successful deep integration is a strong and sensitive institutional structure, efficient and transparent administration and strong and sustained political will, which are nearly absent at present in majority of developing countries.

  16. The Spaghetti-Bowl Phenomenon (Bhagwati 1995) and Noodle Bowl (Baldwin 2004) The bewildering variety of rules of origin of the various RTAs, different negative lists of goods, and different levels of tariff preference have created the notorious ‘spaghetti bowl’ effect. hub-and–spoke” phenomenon

  17. Building Blocks or Stumbling Blocks to MTN Two Key Questions: Regionalism Impacting Multilateralism Can PTAs make previously infeasible multilateral freeing of trade feasible? Can PTAs make previously feasible multilateral freeing of trade infeasible? The answer to the first question is typically in the negative while to the second may go either way. Levy (1997) and Krishna (1998) answer the second question in affirmative.

  18. Multilateralism Impacting Regionalism: Multilateral freeing of trade may make FTAs more sustainable (Freund 1998). Multilateral liberalization among rich countries may make rich-poor country FTAs more profitable. Summers (1991) ultimately 3 big groups-due to riders’ problems etc would lead to MTN. Baldwin (2006) offers a novel political economy mechanism-spaghetti bowls as building blocs-whereby offshoring creates a force that encourages the multilateralisation of regionalism  South South and North-South Agreements

  19. India’s Engagement in Preferential Trading Arrangements A champion of the multilateralism and a frontrunner of the developing countries advocating for the poor countries at the global forums Having realised that regionalism this time to stay, India, of late, has turned to regional/bilateral PTAs. In the past, India had adopted a very cautious approach to regionalism, and was engaged in only a few bilateral/regional initiatives, mainly through PTAs

  20. The Free Trade Agreement (FTA) Spree The trade agreements are new pillars in India’s economic diplomacy. Having realized that free trade pacts are a sine qua non for the country’s economic development India has drawn an ambitious agenda for negotiating trade and economic cooperation agreements from countries in the Far East to those in Latin America and the EU.

  21. Signed and operational FTAs with Sri Lanka (1999), Thailand (2004) and CECA with Singapore (2005). SAFTA in January 2004. Negotiations on all aspects of SAFTA were concluded and the tariff liberalisation programme has been operationalised since July 1, 2006. MERCOSURE; Bay of Bengal Initiative for Multi Sectoral Technical and Economic Cooperation (BIMSTEC); BFTAs with Chile, Nepal, Bhutan, under negotiations Framework Agreement on CECA with ASEAN; South African Customs Union (SACU); GCC and Afghanistan FTA on goods, services and investment are. Joint Study Groups have been set-up for FTA feasibility with respect to China, Japan, South Korea, Chile, Malaysia, Indonesia and other countries

  22. Country Partner Status of the Negotiation Agreement Type India ASEAN Negotiation in progress Bilateral FTA India Afghanistan 2003 Bilateral RTA India Bangkok Agreement 1975 Regional Trade Agreement India Bangladesh Negotiation in progress Bilateral FTA India Bhutan 1995 Bilateral FTA India BIMSTEC 2004 Regional Trade Agreement India Chile Negotiation in progress Bilateral FTA India China Under study Bilateral FTA India Egypt Negotiation in progress Bilateral Trade Agreement India GCC Under study Bilateral FTA India GSTP 1989 Inter-Regional Trade Agreement India’s Current FTA/RTA Engagements

  23. India Indonesia Under study Bilateral FTA India Mauritius Under study Bilateral FTA India MERCOSUR 2005 Bilateral FTA India Nepal 1996 Bilateral FTA India SAARC (SAFTA) 2006 Regional Trade Agreement India SACU Negotiation in progress Bilateral FTA India Singapore 2005 Bilateral FTA India Sri Lanka 1998 Bilateral FTA India Thailand 2003 Bilateral FTA Source:” UNDP, THE GREAT MAZE Regional and Bilateral FTAs in Asia, Trends, Characteristics, and Implications for Human Development: Policy Paper, Asia-Pacific Trade and Investment Initiative, UNDP Regional Centre in Colombo, December 2005, Table 1, pp.21-29.

  24. On India’s PTAs there is very little empirical research so far On India’s PTAs there is very little empirical research so far Few studies have found PTAs with developing countries like South and East Asia, Latin America and also Africa not very trade creating. SAFTA experience not very positive, though TLP has just started in July 2006. India-Sri Lanka FTA (signed 1998 & operational March 2000), - misuse of ROO (vanaspati, pepper, tea etc.) not so good- trade deflection in vanaspati observed. For SL trade deficit with India reduced from 11:1 in 1999 to 5:1 in 2002. India-Thailand FTA. (Signed 2003, operational 2004 - “Inverted duty”(higher duty on raw materials and low on final/finished products) a big problem Early Harvest Scheme (EHS) completed by Sept. 1, 2006.

  25. India-Singapore CECA:(June 2005,operationalised since 1 August 2005) covers trade in goods and services, investment, MRAs and customs cooperation. EHS Trade with developing countries especially with Asian countries can be enhanced even without PTAs/BFTAs. Cost of trade can be reduced significantly through TF measures. For India-EU FTA: our study: University of Sussex and CUTS for the EC shows that “shallow integration” FTA may lead to more trade diversion for both parties. It is only through the “Deep Integration” that there will be an increase of FDI by at least 30% India-ASEAN FTA: (consultations since 2002) Framework Agreement on CECA on 8 October 2003. EHS was expected to begin on 1 January 2007, not yet happen. Pan-Asian FTA: ASEAN+3+2+1

  26. Year EU 15 EU25 NAFTA Mercosur ASEAN ASEAN+4 SAARC 1995 27.4 28.0 14.9 0.8 7.8 18.1 2.9 1999 23.5 24.0 15.2 1.1 8.5 17.5 2.1 2003 20.2 20.7 12.9 0.9 9.3 19.9 3.4 Source: Adopted from Batra. Amita (2007) “South Asia’s Free Trade Agreement: Strategies and Options” EPW, September 22, 2007, Table5, p.3882. Table 1: Shares of Select Trade Blocs in India’s Total Trade (percent) Issues with India’s PTAs The Roadblocks: political opposition; high level of asymmetry in benefits, industry concerns. Domestic Preparedness ROO, Negative Lists; Planning Commissions remark Agricultural Exports

  27. Policy Options MNT best options for developing countries Present economic and political conditions donot favour any Deep Integration Large multi-party democratic country, all stakeholders concerns, consensus A think-tank out side government to oversee PTAS. Help by developed countries to capacity building of LDCs. Minimum items in sensitive/negative list N-S or S-S PTAs no conclusive evidence; broader developmental aspects be studied S-S PTAs more essential; may not be on economic benefits but for political cooperation to build strong South bloc at world forums

  28. Conclusion

  29. THANKS

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