REGIONAL TRADE AGREEMENTS

BY
S.POORNA ROLL-36 II PGDM, DIV-A

acts as a regulatory organization. 1994. according to the InterAmerican Development bank. Bilateral and multilateral trade agreements could be mutually beneficial to both the countries. The ASEAN-FTA. 1. with its 153 country members. but not restricted to. . It is an economic trade agreement to reduce tariffs and non-tariff barriers on trade between two or more nations to promote trade and investment. A classic example of deep economic integration among nations through an RTA is the European Union. RTAs are also viewed as a way to link developing and developed countries in a common project of economic development. In the EU all internal trade barriers have been eliminated and a common external tariff is exercised on all non-members. India. RTAs are primarily common among. South Asian Preferential Trade Arrangement (SAPTA) between Bangladesh. FACTORS BEHIND THE PROLIFERATION OF RTAs The need for regional t rade agreements has arisen from a number of socio-econo mic. All EU members also share a common currency and a set of macroeconomic policies.gov. spelling out the guidelines for regional trade agreements. RTAs encourage investment. small groups of neighboring countries sharing similar concerns as negotiations can be reached much faster when compared to a multilateral structure. Regional trade agreements regulate more than one half of global trade. One of the largest regional free trade agreements is the North American Free Trade Agreement. Nepal. po lit ical a n d security considerations. are such examples of RTAs among neighboring countries. Pakistan and Sri Lanka. This promotes and increases trade among member nations of a free trade agreement bloc. The three member nations implemented the agreement on Jan. NAFTA. Increasingly. According to WTO figures. Canada and Mexico in an accord that lifted trade barriers in the region. However Regional trade agreements (RTAs) could accelerate trade liberalization and set higher benchmarks for the multilateral system. Bhutan. A regional trade agreement requires the approval of the legislators of the countries which sign the trade agreement.INTRODUCTION A regional trade agreement refers to free trade among a number of nations in a specified area or region. The World Trade Organization (WTO). 193 regional trade agreements are in force as of 2010. NAFTA links the United States. Member nations signing a regional trade agreement agree to eliminate trade tariffs on exports and imports. according to Export. and trade between the nations has increased more than 200 percent. Maldives. facilitate productivity gains in participating developing countries and accelerate their economic growth.

To promote liberalization and bring about policy reforms 6. International Export Advantages Regional trade agreements provide trade advantages for all countries in a region which improve their worldwide competitiveness. Tariff reductions allow people to purchase goods from other countries at lower prices. 3. A car manufacturer that can purchase cheap steel from a country with which it has a regional trade agreement can sell cars elsewhere at a lower cost. Lower Prices Regional trade agreements reduce the tariffs between the countries which are part of the trade agreement. which has prompted other countries not involved in regional trade agreements to also consider engagement in such agreements ± termed as µdemonstration effect¶ 5. Rewarding Allies Allies can receive rewards through a regional trade agreement. To attract more foreign direct investment into the country 7. The World Trade Organization requires regional trade agreements to reduce tariffs between countries. 4. but does not allow these countries to increase tariffs on countries which do not participate. and currency manipulation. dumping products at low prices. Countries come into conflict with one another over agricultural subsidies.Countries have embraced regional trade agreements primarily due to the following reasons: 1. 3. including in the markets of countries not included in the trade agreement. and refuse to sign a free trade agreement with nations which violate human rights. 4. Dispute Resolution Regional trade agreements include processes to settle trade disputes. The United States delayed signing trade agreements with the nations of Chile and New Zealand since these nations opposed the Iraq War. reducing disputes about which organization has jurisdiction over the trade dispute. 2. Political and security considerations ADVANTAGES OF RTA 1. To derive benefits of increased preferential access to highly competitive larger markets The slow progress in trade liberalization under the WTO The failure of multilateralism based trade talks A sharp increase in FTAs around the world. The trade agreement includes standardized arbitration rules and ensures that trade disputes are resolved according to consistent rules. . A country can also reward nations that establish similar economic and political systems with a free trade agreement. Trade agreements often specify the forum in which trade disputes are resolved. 2.

In an FTA. Preferential Trade Agreements: Preferential trade agreement is a trading agreement giving preferential access to certain products from certain countries. and Central American Customs Union (CACU). India. RTAs are commonly classified into the following cat egories: a. Gulf Cooperation Council (GCC). The South Asian Preferential Trade Arrangement (SAPTA) between Bangladesh. Free Trade Agreement (FTA): A free trade agreement is the most widespread form of RTAs. Other prevailing Common Markets include Caribbean Community and Common Market (CARICOM). They a l s o essent ially i n c l u d e rules and regulations t h a t i m p r o v e the overall investment climate. in addition to the free flow of products (output). Pakistan and Sri Lanka was one such agreement. and also increasingly in services) among members. Nepal. 5-20% on products imported from outside. While all the features of a customs union are present under a common market system. The best known free trade agreements are the European Free Trade Association (EFTA). and the Association of Southeast Asian Nations (ASEAN). Typically. d. This is the weakest form of economic integration. The Southern Cone Common Market (MERCOSUR) and the Common Market of Eastern and Southern Africa (COMESA) are examples of well known common markets. This involves reducing tariffs but not their elimination. . and the Central American Common Market (CACM). Customs Union: The next level of integration is a Customs Union (CU). c. while each member is free to maintain different most-favored-nation (MFN) barriers on nonmembers.LEVELS OF ECONOMIC INTEGRATION Most RTAs are meant not merely to slash tariffs but also to reduce impediments in international trade and to promote trade by reducing either tariff or non-tariff measures. customs unions contain mechanisms to redistribute tariff revenues among member countries. member countries eliminate or reduce internal tariff and nontariff trade barriers (to trade in goods. Bhutan. Maldives. A CU moves beyond an FTA by establishing a common external tariff (CET) on imports from nonmember countries. the North American Free Trade Agreement (NAFTA). the latter also provides for free movement of factors of production (labor and capital) among the member countries. East African Community Customs Union (EAC). b. RTAs range across d i f f e r e n t levels of econo mic integration and differ significantly i n their scope and coverage. Common Market: Common Markets are a form of µdeep integration¶. The Andean pact establishes a free trade among the member countries and imposes a common tariff. where member countries attempt to harmonize institutional arrangements and laws and regulations among themselves. Some examples of Customs Unions include South African Customs Union (SACU).

FTAs are generally concerned with strategic market access. As can be seen from charts. although economic integration aids the majority. members have to maintain a common external tariff (CET). in the form of an Economic and Monetary Union is t he European Union. Further. First.à-vis a third (non-member) country. Economic and M onetary Union: The most comprehensive RTA is an Economic and Monetary Union. permit the free movement of capital a nd labor. The best known and most successful form of a Regional Trade Agreement in the world. . erect common external trade barriers.e. For eg: as a result of 1994. which requires coordination and harmonization of external trade po lic ie s amongst the me m ber countries. and g eo g rap hica l co nsiderat io ns often play a n important role in determining the objectives of such an integration. Economic and Monetary Community of Central Africa (CEMAC). IMPEDIMENTS TO THE INTERGRATION Despite strong economic and political arguments in support. in a customs union. in which members remove all internal trade barriers. The predominance of FTAs is probably due to the fact that they are faster to conclude and require a lower degree of policy coordination among the contracting parties. Ot her Economic and Monetary Unions include t h e West African Economic and Monetary Union (WAEMU). and are often not bound by any geographical considerations. Eurasian Economic Community (EEC) and the Economic Cooperation Organization (ECO). While a nation as a whole may benefit significantly from RTA. Here. In contrast. establishment of NAFTA. FTAs constitute t he largest proportions and t hey dominate all other types of the RTAs notified and in force. it has its costs. member countries share a common c u r r e nc y and macroeconomic p o l i c i e s . certain groups may lose moving to a free trade regime involves painful adjustments. and unify their fiscal and monetary policies. as in an FTA the member countries maintain their own trade policy vis. integration has never been easy to achieve or sustain for two main reasons 1.

while the cost have often ignored. The second one arises from concerns over national sovereignty. These rules allow free trade areas to be formed only if the member¶s set tariff that are not higher or more restrictive to the outsiders than the one previously in effect.a change for the worse. Trade diversion occurs when low cost external suppliers are replaced by high cost suppliers with the free trade area. They benefit that the benefits of regional integration are determined by the extent of trade creation as opposed to trade diversion. This was followed by a Comprehensive Economic Cooperation Agreement (CECA) with . the EU introduced the common currency. In theory WTO rules should ensure that a free trade agreement does not result in trade diversion. Suppose USA and Mexico. This arises because close economic integration demands that countries give up some degree of control over key issues like monetary policy. Thus the workers in industries like textile which employ low skilled and low cost labor lost their jobs.some of the Canadian & US firms moved production to Mexico. 2. THE CASE AGAINST REGIONAL INTEGRATION Although the tide has been running strongly in favor of RTA in recent years. A RTA will benefit the world only if the amount of trade it creates exceeds the amount it diverts. In Asia. India made a foray in RTAs with an FTA with Sri Lanka in 1998. then the trade has been diverted from a low cost source. then the FTA has shifted production to the cheaper source clearly the change is for the better. Although most member states have signed on. However if USA previously imported textile from Costa Rica. which produced them more cheaply than either Mexico or USA. Trade creation occurs when high-cost domestic production is replaced by low-cost imports within the free trade area. Target countries in India¶s regional trade initiatives cover various regions of the world. the Euro controlled by the central Euro bank. If the USA began to import textiles from Mexico would this change be for the better? If the USA previously produced its entire textile at a higher cost than Mexico. This has been a major stumbling block in EU. imposed tariff on imports from all countries and then they set up FTA scrapping all trade barriers between themselves but maintaining tariffs on imports from the rest of the world. INDIA¶S ENGAGEMENT IN REGIONAL TRADE AGREEMENTS India¶s endeavor to foster its international trade has also been well complemented by its efforts to promote regional trade. Great Britain remains an important holdout as they feel it would require relinquishing control over the country¶s monetary policy to the EU. To achieve full economic union. some economists have expressed concern that the benefits of Regional integration have been oversold. fiscal policy etc.

across the globe. RTAs have also proved to encourage investment. India is also seriously pursuing negotiations to establish RTAs with other developing countries located elsewhere. a framework agreement for FTA with Thailand and a Framework agreement for CECA with ASEAN. economic cooperation and global integration. The need for such agreements has arisen from a number of socio-economic. Japan. political and strategic fronts. and a PTA with South African Customs Union (SACU). It is important to ensure that regional trade agreements become building blocks to world trade and not stumbling blocks to achieving the universal goal of global amalgamation. Russia. an FTA with South Asian Association for Regional Cooperation (SAARC) members (SAFTA) and with the members of Bay of Bengal Initiative for Multi-Sectoral Technical and Economic Cooperation (BIMSTEC). CONCLUSION Bilateral regional trade agreements continue to proliferate. India has in place a preferential trade agreement (PTA) with MERCOSUR and with Chile. The gradual erosion of faith in multilateralism has given a new thrust to the concept of regionalism as a highly effective tool for expanding international trade.Singapore. These initiatives form an integral part of India¶s µLook-East Policy¶. Malaysia and Indonesia. China. It has also established JSGs with Mauritius and Israel to explore possibility of FTAs. as progress on the WTO based multilateral trade talks has remained subdued and talks mostly inconclusive in recent times. a framework agreement for FTA with the Gulf Cooperation Council (GCC). . With the establishment of Joint Study Groups (JSGs). facilitate preferential access to larger competitive markets and accelerate economic growth. which has gained substantial momentum in recent years and has started yielding desirable results on the economic. India¶s trade with its RTA partner countries as a percentage of its total trade has shown a decent rise from 20% to 30% from 2001-02 to 2006-07. India has also initiated negotiations with a number of countries like Korea. Engagement in regional trade agreements has had a significant effect over the past decade on India¶s trade performance with its partner countries. India¶s exports to and imports from its RTA partner countries have significantly increased from 2001-02 to 2006-07. RTAs have been found to be very useful in this context. political and security considerations.

com/facts_6850611_definition-regional-trade-agreements.html http://www.com/op/op120.eximbankindia.ehow.google.docstoc.pdf http://www.in/books?id=AUhPB9n7HZoC&pg=PA89&lpg=PA89&dq=when+was+the+f irst+Regional+Trade+Agreement+formed%3F&source=bl&ots=EDo6uNWN80&sig=pOhJ85YoxPL1 3RiR5_l8LgZFGDQ&hl=en&ei=C4rqTPmyAoHGcJbg5PAK&sa=X&oi=book_result&ct=result&resnu m=7&ved=0CEsQ6AEwBg#v=onepage&q=when%20was%20the%20first%20Regional%20Trade%2 0Agreement%20formed%3F&f=false .co.com/docs/19766365/Regional-Trade-Agreements-and-the-WTO http://www.com/list_6721244_advantages-regional-trade-agreements.html8 http://books.in/books?id=gAbHdR8MafQC&pg=PA266&lpg=PA266&dq=when+was+th e+first+Regional+Trade+Agreement+formed%3F&source=bl&ots=z1JObbO2vi&sig=BNR8IHDG0RVWA2-ECdE5BW9V4&hl=en&ei=C4rqTPmyAoHGcJbg5PAK&sa=X&oi=book_result&ct=result&resnum=3& ved=0CCsQ6AEwAg#v=onepage&q=when%20was%20the%20first%20Regional%20Trade%20Agre ement%20formed%3F&f=false http://books.co.google.REFERENCES http://www.ehow.

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