PRIVATISATION

Privatization, which has become a universal trend, means transfer of ownership

and/or management of an enterprise from the Government sector to the private
sector. It also means the withdrawal of the state from an industry or sector,
partially or fully. Another dimension of privatization is opening up of an industry
that has been reserved for the public sector to the private sector. Privatization is an
inevitable historical reaction to the indiscriminate expansion of the state sector and
the associated problems. Even in the ‘communist’ countries it became a vital
measure of economic rejuvenation.

PRIVATISATION ROUTES

The important ways of privatization are:

• Privatization of ownership, through the sales of equity.

• Denationalization or reprivatisation.

• Contracting - under which government contracts out services to other

organizations that produce and deliver them.

• Franchising- authorizing the delivery of certain services in designated

geographical areas- is common in utilities and urban transport.

• Government withdrawing from the provision of certain goods and services

leaving then wholly or partly to the private sector.

• Privatization of management, using leases and management contracts

• Liquidation, which can be either formal or informal. Formal liquidation involves

the closure of an enterprise and the sale of its assets. Under informal liquidation, a
firm retains its legal status even though some or all of its operations may be
suspended.

BENEFITS

The benefits of privatization may be listed down as follows:

• It reduces the fiscal burden of the state by relieving it of the losses of the SOEs
(State Owned Enterprises) and reducing the size of the bureaucracy.
• Privatization helps the state to trim the size of the administrative machinery.

• It enables the government to concentrate more on the essential state functions

• Privatization helps accelerate the pace of economic developments as it attracts

more resources from the private sector for development.

• It may result in better management of the enterprises.

• Privatization may also encourage entrepreneurship.

• Privatization may increase the number of workers and common man who are
shareholders. This could make the enterprises subject to more public vigilance.

CRITICISMS

Some of the important argument against privatization is as follows:

• The public sector has been developed with certain noble objectives and
privatization means discarding them in one stroke.

• Privatization will encourage concentration of economic power to the common

detriment.

• If privatization results in the substitution of the monopoly power of the public

enterprises by the monopoly power of private enterprises it will be very dangerous.

• Privatization many a time results in the acquisition of national firms by foreign

firms.

• Privatization of profitable enterprises, including potentially profitable, means

foregoing future streams of income for the government.

• Privatization of strategic and vital sectors is against national interests.

• There are well managed and ill-managed firms both in the public and private
sectors. It is not sector that matters, but the quality and commitment of the
management.

• The capital markets of developing countries are not developed enough for
efficiently carrying out privatization.
• Privatization in many instances is a half-hearted measure and therefore it is not
properly carried out. As a result that the expected results may not be achieved.

• In many instance, there are vested interested behind privatization and it amounts
deceiving the nation. In many countries privatization often has been a “garage
sale” to favored individuals and groups.

CONDITIONS FOR SUCCESS

• Privatization cannot be sustained unless the political leadership is committed to

it, and unless it reflects a shift in the preferences of the public arising out of
dissatisfaction with the performance of other alternatives.

• Replacement of a government monopoly by a private monopoly may not increase

public welfare-there must a multiplicity of private suppliers. Freedom of entry to
provide goods and services.

• Public services to be provided by the private sector must be specific or have

measurable outcome.

• Lack of specificity makes it more difficult to control services provided by the

private sector. Service delivery by non-governmental organizational or local
governments may be more appropriate under these conditions.

• Consumers should be able to link the benefits they receive from a service to the
costs they pay for it, since they will then shop more wisely for difficult services.

• The importance of educating consumers and disseminating information to the

public is necessary.

• Privately provided services should be less susceptible to fraud than government

services if they are to be effective.

• Equity is an important consideration in the delivery of public services. Broadly

speaking, the benefits of privatization can accrue to the capital owner to the
consumer and to public at large.

GLOBALISATION
Globalization may be defined as “ the growing economic interdependence of
countries worldwide through increasing volume and variety of cross border
transactions in goods and services and of international capital flows, and also
through the more rapid and widespread diffusion of technology”. Globalization
may be considered at two levels .Viz, at the macro level (i.e., globalization of the
world economy) and at the micro level (i.e., globalization of the business and the
firm). Globalization of the world economy is achieved, quite obviously, by
globalising the national economies. Globalization of the economies and
globalization of business are very much interdependent.

REASONS FOR GLOBALISATION

• The rapid shrinking of time and distance across the globe thanks to faster
communication, speedier transportation, growing financial flows and rapid
technological changes.

• The domestic markets are no longer adequate rich. It is necessary to search of

international markets and to set up overseas production facilities.

• Companies may choose for going international to find political stability, which is
relatively good in other countries.

• To get technology and managerial know-how.

• Companies often set up overseas plants to reduce high transportation costs.

• Some companies set up plants overseas so as to be close to their raw materials

supply and to the markets for their finished products.

• Other developments also contribute to the increasing international of business.

• The US, Canada and Mexico have signed the North American Free Trade
agreement (NAFTA), which will remove all barriers to trade among these
countries.

• The creation of the World Trade Organization (WTO) is stimulating increased

cross-border trade.

FEATURES
The following are the features of the current phase of globalization:

New markets

• Growing global markets in services – banking, insurance, and transport.

• New financial markets - deregulated, globally linked, working around the clock,
with action at a distance in real time, with new instruments such as derivatives.

• Deregulation of anti - trust laws and proliferation of mergers and acquisitions.

• Global consumer markets with global brands.

New actors

• Multinational corporations integrating their production and marketing,

dominating food production

• The World Trade Organization - the first multilateral organization with authority
to enforce national governments compliance with rule

• An international criminal court system in the making

• A booming international network of NGOs

• Regional blocs proliferating and gaining importance – European Union,

Association of South- East Asian Nations, Mercosur, North American Free Trade
Association, Southern African Development Community, among many others

• More policy coordination groups – G-7, G40, G22, G77, OECD

New rules and Norms

• Market economic policies spreading around the world, with greater privatization
and liberalization than in earlier decades

• Widespread adoption of democracy as the choice of political regime

• Human rights conventions and instruments building up in both coverage and

number of signatories – and growing awareness among people around the world

• Consensus goals and action agenda for development

• Conventions and agreements on the global environment – biodiversity, ozone
layer, disposal of hazardous wastes, desertification, climate change

• Multilateral agreements in trade, taking on such new agendas as environmental

and social conditions

• New multilateral agreements- for services, intellectual property, communications

– more binding on national governments than any previous agreements

• The multilateral agreements on investment under debate

New Tools of communication

• Internet and electronic communications linking many people simultaneously

• Cellular phones

• Fax machines

• Faster and cheaper transport by air, rail and road

• Computer-aided design

STAGES OF GLOBALISATION

There are five different stages in the development of a firm into global
corporations.

First stage

The first stage is the arm’s length service activity of essentially domestic company,
which moves into new markets overseas by linking up with local dealers and
distributors.

Second stage

In the stage two, the company takes over these activities on its own.

Third stage

In the next stage, the domestic based company begins to carry out its own
manufacturing, marketing and sales in the key foreign markets.
Four stage

In the stage four, the company moves to a full insider position in these markets,
supported by a complete business system including R & D and engineering. This
stage calls on the managers to replicate in a new environment the hardware,
systems and operational approaches that have worked so well at home.

Fifth stage

In the fifth stage, the company moves toward a genuinely global mode of
operation.

GLOBALISATION STRATEGIES

The various strategies of transiting a firm into global corporation are as follows:

Exporting

Exporting, the most traditional mode of entering the foreign market is quite a
common one even now.

Licensing and Franchising

Under international licensing, a firm in one country (the licensor) permits a firm in
another country (the licensee) to use its intellectual property (such as patents,
trademarks, copyrights, technology, technical know-how, marketing skill or some
other specific skill).

Franchising is “a form of licensing in which a parent company (the franchiser)

grants another independent entity (the franchisee) the right to do business in a
prescribed manner.

Contract manufacturing

A company doing international marketing, contracts with firms in foreign countries

to manufacture or assemble the products while retaining the responsibilities of
marketing the product.

Management contracting
In a management contract the supplier brings together a package of skills that will
provide an integrated service to the client without incurring the risk and benefit of
ownership. The arrangement is especially attractive if the contracting firm is given
an option to purchase some shares in the managed company within a stated period.

Turnkey contracts

A turnkey operation is an agreement by the seller to supply a buyer with a facility

fully equipped and ready to be operated by the buyer’s personnel, who will be
trained by the seller. Turnkey contracts are common in international business in the
supply, erection and commissioning of plants, as in the case of oil refineries, steel
mills, cement and fertilizer plants etc.

Wholly Owned Manufacturing Facilities

Companies with long term and substantial interest in the foreign market normally
establish fully owned manufacturing facilities there. This method demands
sufficient financial and managerial resources on the part of the company.

Assembly operations

A manufacturer who wants many of the advantages that are associated with
overseas manufacturing facilities and yet does not want to go that far may find it
desirable to establish overseas assembly facilities in selected markets. The
establishment of an assembly operation represents a cross between exporting and
overseas manufacturing.

Joint Ventures

Any form of association, which implies collaboration for more than a transitory
period is a joint venture. Types of joint overseas operations are:

Sharing of ownership and management in an enterprise

Licensing / franchising agreements

Contract manufacturing

Management contracts

Third country location

When there are no commercial transactions between two nations because of
political reasons or when direct transactions between two nations are difficultdue
to political reasons or the like, a firm in one of these nations which wants to enter
the other market will have to operate from a third country base. For example,
Taiwanese entrepreneurs found it easy to enter People’s Republic of China through
bases in Hong Kong.

Mergers and acquisitions

Mergers and acquisitions (M & A) have been a very important market entry
strategy as well as expansion strategy. A number of Indian companies have also
used this entry strategy.

Strategic alliance

This strategy seeks to enhance the long-term competitive advantage of the firm by
forming alliance with its competitors, existing or potential in critical areas, instead
of competing with each other. Strategic alliance is also sometimes used as a market
entry strategy. For example, a firm may enter a foreign market by forming an
alliance with a firm in the foreign market.

Counter trade

Counter trade refers to a variety of unconventional international trade practices

which link exchange of goods- directly or indirectly – in an attempt to dispense
with currency transactions. Counter trade is a form of international trade in which
certain export and import transactions are directly linked with each other and in
which import of goods are paid for by export of goods, instead of money
payments.

BENEFITS

The important arguments in favour of globalisation are:

• Productivity grows more quickly when countries produce goods and services in
which they have comparative advantage.

• Living standards can go up faster.

• Global competition and imports keep a lid on prices, so inflation is less likely to
derail economic growth.

• An open economy spurs innovation with fresh ideas from abroad.

• Export jobs often pay more than other jobs.

• Unfettered capital flows give access to foreign investment and keep interest rates
low.

DISADVANTAGES

Following are the cases against globalisation:

• Millions have lost jobs due to imports or production shifts abroad. Most find new
jobs that pay less.

• Millions of others fear losing their jobs, especially at those companies operating
under competitive pressure.

• Workers face pay cut demands from employers, which often threaten to export
jobs.

• Services and white-collar jobs are increasingly vulnerable to operations moving

offshore.

• Employees can lose their comparative advantage when companies build advanced
factories in low-wage countries, making them as productive as those at home.

ESSENTIALS FOR GLOBALISATION

They are some essential conditions to be satisfied on the part of the domestic
economy as well as the firm for successful globalization of the business.

• Business freedom

There should not be unnecessary government restrictions like import restriction,

restrictions on sourcing finance or other factors from abroad, foreign investments
etc. the economic liberalization is regarded as a first step towards facilitating
globalization.

• Facilities
The extent to which an enterprise can develop globally from home country base
depends on the facilities available like the infrastructural facilities.

• Government support

Government support may take the form of policy and procedural reforms,
development of common facilities like infrastructural facilities, R & D support,
financial market reforms and so on.

• Resources

Resourceful companies may find it easier to thrust ahead in the global market.
Resources include finance, technology, R & D capabilities, managerial expertise,
company and brand image, human resource etc.

• Competitiveness

A firm derives competitive advantage from any one or more of the factors such as
low costs and price, product quality, product differentiation, technological
superiority, after sales services, marketing strength etc.

• Orientation

A global orientation on the part of the business firms and suitable globalization
strategies are essential for globalization.

WTO-GATTS

After World War II, several international measures were undertaken to liberalise
trade and payments between nations. Plans for the creation of a liberal, multilateral
system of world trade were started while the war was still in progress. Initiated for
the most part by the United States, these plans envisaged a close economic
cooperation among the nations in the fields of international trade, payments and
investment. International Monetary Fund and International Bank for
Reconstruction and Development (World Band) were set up. Similarly,
International Trade Organisation (ITO) was sought to set up to deal with the
international trade. In 1945, United States were called for convening of a United
Nations conference for the purpose of negotiating the international trade charter
and for the establishment of an international trade organisation. In December 1945,
the US in consultation with UK and Canada prepared a detailed draft trade charter.
The suggested Charter was discussed in London during October-November of
1946. There were two major tasks for this discussion. First, was the completion of
the draft trade for submission to UN Conference on Trade and Development
scheduled for December 1947 in Havana and second, a series of detailed
negotiations among the principal countries of the preparatory committee to reduce
tariffs and tariff preferences. The results took the form of a tariff schedule for each
participating country. These tariff schedules together with those Articles of the
Draft Charter that were required to protect the integrity of the trade concessions
were combined in an instrument entitled the “General Agreement on Tariffs and
Trade”-the GATT. All the participants of the preparatory committee signed the
Final Act establishing GATT. GATT came into force in 1948 with a membership
of 23 industrial countries. By the mid 1980s, its membership had enlarged 90
embracing as many as countries that accounted for over four-fifth of world trade.
The ever-expanding group of contracting parties to the GATT, the number of
countries joining GATT was 128 when WTO was created. Main activities of
GATT may be summarized as: tariff bargaining, bargaining on non-tariff trade
barriers, elimination of quantitative restrictions and settlement of disputes between
contracting parties. GATT is based on four major provisions: (i) the rules of non-
discrimination in trade relations between the contracting countries, (ii)
commitment to observe negotiated tariff concessions, (iii) prohibitions against use
of quantitative restrictions (quotas) on exports and imports, and (iv) special
provisions to promote the trade of developing countries. The remaining provisions
of GATT are concerned with exceptions to these general provisions, which include
trade measures other than tariffs and quotas, and sundry procedural matters.
Uruguay Round took seven and a half years, almost twice the original schedule. By
the end, 125 countries were taking part. It covered almost all trade, from
toothbrushes to pleasure boats, from banking to telecommunications, from the
plants to AIDS treatments.
It was quite simply the largest trade negotiation ever, and most probably the largest
negotiation of any kind in history. The seeds of the Uruguay Round were sown in
November 1982 at a ministerial meeting of GATT members in Geneva. Although
the Ministers intended to launch a major new negotiation, the conference was
stalled on the issue of agriculture and was widely regarded as a failure. In fact, the
work programme that the Ministers agreed; formed the basis for what was to
become the Uruguay Round negotiating agenda. Nevertheless, it took four more
years of exploring, clarifying issues and painstaking consensus building, before the
Ministers agreed to launch the new round in September 1986, in Punta del Este,
(Uruguay). They eventually accepted a negotiating agenda, which covered almost
every outstanding trade policy issue. The talks were going to extend the trading
system into several new areas, particularly, trade in services and intellectual
property, and to reform the trade in the sensitive sectors of agriculture and textiles.
Two years later, in December 1988, ministers met again in Montreal (Canada). The
purpose was to clarify the agenda for the remaining two years, but the talks ended
in a deadlock that was not resolved until officials met more quietly in Geneva the
following April. Despite the difficulty, during the Montreal meeting, Ministers did
agree a package of early results. These included some concessions on market
access for tropical products aimed at assisting developing countries, as well as a
streamlined, which provided for the first comprehensive, systematic and regular
reviews of national trade policies and practices of GATT members. The round was
supposed to end when Ministers met once more in Brussels, in December 1990.
But they disagreed on how to reform agricultural trade and decided to extend the
talks. Despite the poor political outlook, a considerable amount of technical work
continued, leading to the first draft of a final legal agreement. The then GATT
director general, Mr. Arthur Dunkel, who chaired the negotiations at officials’
level, compiled this draft “Final Act”. It was placed on the table in Geneva in
December 1991. The text fulfilled every part of the Punta del Este mandate, with
one exception (it did not contain the participating countries’ lists of commitments
for cutting the import duties and opening their services markets). The draft became
the basis for the final agreement. In November 1992, the EU and US settled most
of their differences on agriculture in a deal known informally as the “Blair House
accord”. By July 1993, the “Quad” (US, EU, Japan and Canada) announced
significant progress in negotiations on tariffs and related subjects including market
access. On 15 April 1994, the deal was signed by ministers from most of the 125
participating governments at a meeting in Marrakesh (Morocco).

The last round-the Uruguay Round-created a legal institution-the World Trade

Organization to replace the provisional GATT. The WTO is the only global
international organization dealing with the rules of trade between nations. At its
heart are the WTO agreements, negotiated and signed by a majority of the world’s
trading nations and ratified by their Parliaments. The goal is to help the producers
of goods and services, the exporters, and the importers conduct their business
smoothly.

FACT FILE AND FUNCTIONS OF WTO

Location: Geneva, Switzerland

Established: 1 January 1995

Created by: Uruguay Round negotiations (1986-94)

Membership: 148 countries (on 13 October 2004)

Budget: 169 million Swiss francs for 2005

Secretariat staff: 630

FUNCTIONS:

• Administering WTO trade agreements

• Forum for trade negotiations

• Handling trade disputes

• Monitoring national trade policies

• Technical assistance and training for developing countries

• Cooperation with other international organizations

The WTO’s main functions are to do with trade negotiations and the enforcement
of negotiated multilateral trade rules (including dispute settlement). Special focus
is given to four particular policies supporting these functions:
• Assisting developing and transition economies

• Specialized help for export promotion

• Cooperation in global economic policy-making

• Routine notifications when members introduce new trade measure or alter old
ones.

ASSISTING DEVELOPING AND TRANSITION ECONOMIES

Developing countries make up about three quarters of the total WTO membership.
Together with countries currently in the process of “transition” to market-based
economies, they play an increasingly important role in the WTO. Therefore, much
attention is paid to the special needs and problems of developing and transition
economies. The WTO Secretariat’s Training and Technical Cooperation Institute
organizes a number of programmes to explain how the system works and to help
train government officials and negotiators. Some of the events are in Geneva,
others are held in the countries concerned. A number of the programmes are
organized jointly with other international organizations. Some take the form of
training courses. In other cases individual assistance might be offered. The subjects
can be anything from help in dealing with negotiations to join the WTO and
implementing WTO commitments to guidance in participating effectively in
multilateral negotiations. Developing countries, especially the least developed
among them, is helped with trade and tariff data relating to their own export
interests and to their participation in WTO bodies.

SPECIALIZED HELP FOR EXPORTING: THE INTERNATIONAL

TRADE CENTRE

GATT established the International Trade Centre in 1964 at the request of the
developing countries to help them promote their exports. It is jointly operated by
the WTO and the United Nations, the latter acting through UNCTAD (the UN
Conference on Trade and Development). The centre responds to requests from
developing countries for assistance in formulating and implementing export
promotion programmes as well as import operations and techniques. It provides
information and advice on export markets and marketing techniques. It assists in
establishing export promotion and marketing services, and in training personnel
required for these services. The centre’s help is freely available to the least-
developed countries.

THE WTO IN GLOBAL ECONOMIC POLICY-MAKING

An important aspect of the WTO’s mandate is to cooperate with the International

Monetary Fund, the World Bank and other multilateral institutions to achieve
greater coherence in global economic policy-making. A separate Ministerial
Declaration was adopted at the Marrakesh Ministerial Meeting in April 1994 to
underscore this objective. The declaration envisages an increased contribution by
the WTO to achieving greater coherence in global economic policy-making. It
recognizes that different aspects of economic policy are linked, and it calls on the
WTO to develop its cooperation with the international organizations responsible
for monetary and financial matters - the World Bank and the International
Monetary Fund. The declaration also recognizes the contribution that trade
liberalization makes to the growth and development of national economies. It says
this is an increasingly important component in the success of the economic
adjustment programmes, which many WTO members are undertaking, even though
it may often involve significant social costs during the transition.

WTO STRUCTURE

All WTO members may participate in all councils, committees, etc, except
Appellate

Body, Dispute Settlement panels, Textiles Monitoring Body, and plurilateral

committee
MULTINATIONAL CORPORATIONS

The dynamics of the business environment fostered by the drastic political changes
in the communist and socialist countries and the economic liberalization across the
world has enormously expanded the opportunities for the multinational
corporations, also known by such names as international corporation,
transnational corporation, global corporation (or firm, company or enterprise)
etc. The rapidity with which the MNC’s are growing is indicated by the fact that
while according to the World Investment Report 1997 there were about 45000
MNC’s with some 280000 affiliates. According to the World Investment Report
2001 there were over 63,000 of them with about 822,000 affiliates. Only less than
12 % of these affiliates were in the developed countries. China was host to about
3.64 lakh of the affiliates (i.e., more than 44% of the total) compared to more than
1400 in India. The MNC’s account for a significant share of the world’s industrial
investment, production, employment and trade.

DEFINITION AND MEANING

“A corporation that controls production facilities in more than one country, such
facilities having been acquired through the process of foreign direct investment.
Firms that participate in international business, however large they may be, solely
by exporting or by licensing technology are not multinational enterprises.” The
various benchmarks sometimes used to define “ multi nationality” are that the
company must:

• Produce (rather than just distribute) abroad as well as in the headquarters country

• Operate in a certain minimum number of nations (six for example)

• Derive some minimum percentage of its income from foreign operations (e.g.,
25%)

• Have a certain minimum ratio of foreign to total number of employees, or of

foreign total value of assets

• Possess a management team with geocentric orientations.

• Directly control foreign investments (as opposed simply to holding shares in
foreign companies).

MERITS OF MNC

The important arguments in favor of the MNCs are mentioned below:

• MNCs help increase the Investment level and thereby the income and
employment in host country.

• The transnational corporation has become vehicles for the transfer technology,
especially to the developing countries.

• They also kindle a managerial revolution in the host countries through

professional management and the employment of highly sophisticated management
techniques.

• The MNCs enable the host countries to increase their exports and decrease their
import requirements.

• They work to equalize the cost of factors of production around the world.

• MNCs provide an efficient means of integrating national economies.

• The enormous resources of the multinational enterprises enable them to have very
efficient research and development systems. Thus, they make a commendable
contribution to inventions and innovations.

• MNCs also stimulate domestic enterprise because to support their own

operations, the MNCs may encourage and assist domestic suppliers.

• MNCs help increase competition and break monopolies.

DEMERITS OF MNC

The various cases against MNCs are:

• The MNCs technology is designed for worldwide profit maximization, not the
development needs of poor countries.
• Through their power and flexibility, MNCs can evade or undermine national
economic autonomy and control, and their activities may be unfavorable to the
national interests

• MNCs may destroy competition and acquire monopoly powers.

• The tremendous power of the global corporations poses the risk that they may
threaten the sovereignty of the nations in which they do business.

• MNCs retard growth of employment in the home country.

• The transnational corporations cause fast depletion of some of the nonrenewable

natural resources in the host country. They have also been accused of the
environmental problems.

• The transfer pricing enables MNCs to avoid taxes by manipulating prices on intra
company transactions

• The MNCs undermine local culture and traditions; change the consumption
habits for their benefits against the long-term interests of the local community.

PRESPECTIVE

Future holds out an enormous scope for the growth of MNCs. The changes in the
economic environment in a large number of countries indicate this. A united
Nation’s report described several developments that points to a rapidly changing
context for economic growth, along with a growing role transnational corporations
in that process. These include:

• Increasing emphasis on the market forces and a growing role for the private
sector in nearly all developing countries.

• Rapidly changing technologies that are transforming the nature of organization

and location of international production.

• The globalization of firms and industries.

• The rise of services to constitute the largest single sector in the world economy
and
• Regional economic integration, which involve both the world’ largest economies
as well as selected developing countries.

Some facts:

• TATA Motors sells its passenger – car Indica in the UK through a marketing
alliance with Rover and has acquired a Daewoo Commercial Vehicles unit giving
it access to markets in Korea and China.

• INFOSYS has 25,634 employees including 600 from 33 nationalities other than
Indian. It has 30 marketing offices across the world and 26 global software
development centers in the US, Canada, Australia, the UK and Japan.

• Ranbaxy is the ninth largest generics company in the world. An impressive 76 %

of its revenues come from overseas.

• Dr.Reddy’s Laboratories became the first Asia Pacific pharmaceutical company

outside Japan to list on the New York Stock Exchange in 2001

• Asian paints are among the 10 largest decorative paints makers in the world and
has manufacturing facilities across 24 countries.

AGREEMENT ON SOUTH ASIAN FREE TRADE AREA (SAFTA)

The Governments of the SAARC (South Asian Association for Regional

Cooperation) Member States comprising the People’s Republic of Bangladesh, the
Kingdom of Bhutan, the Republic of India, the Republic of Maldives, the Kingdom
of Nepal, the Islamic Republic of Pakistan and the Democratic Socialist Republic
of Sri Lanka hereinafter referred to as "Contracting States" Motivated by the
commitment to strengthen intra-SAARC economic cooperation to maximise the
realization of the region’s potential for trade and development for the benefit of
their people, in a spirit of mutual accommodation, with full respect for the
principles of sovereign equality, independence and territorial integrity of all States;
Noting that the Agreement on SAARC Preferential Trading Arrangement
(SAPTA) signed in Dhaka on the llth of April 1993 provides for the adoption of
various instruments of trade liberalization on a preferential basis; Convinced that
preferential trading arrangements among SAARC Member States will act as a
stimulus to the strengthening of national and SAARC economic resilience, and the
development of the national economies of the Contracting States by expanding
investment and production opportunities, trade, and foreign exchange earnings as
well as the development of economic and technological cooperation; Aware that a
number of regions are entering into such arrangements to enhance trade through
the free movement of goods; Recognizing that Least Developed Countries in the
region need to be accorded special and differential treatment commensurate with
their development needs; and Recognizing that it is necessary to progress beyond a
Preferential Trading Arrangement to move towards higher levels of trade and
economic cooperation in the region by removing barriers to cross-border flow of
goods; Have agreed as follows:

Definitions; For the purposes of this Agreement:

I. Concessions mean tariff, para-tariff and non-tariff concessions agreed under the
Trade Liberalisation Programme;

2. Direct Trade Measures mean measures conducive to promoting mutual trade of

Contracting States such as long and medium-term contracts containing import and
supply commitments in respect of specific products, buy-back arrangements, state
trading operations, and government and public procurement;

3. Least Developed Contracting State refers to a Contracting State which is

designated as.’ Least Developed Country" by the United Nations;

4. Margin of Preference means percentage of tariff by which tariffs are reduced on

products imported from one Contracting State to another as a result of preferential
treatment.

5. Non-Tariff Measures include any measure, regulation, or practice, other

than .’tariffs" and "para- tariffs".
6. Para-Tariffs mean border charges and fees, other than "tariffs", on foreign trade
transactions of a tariff-Iike effect which are levied solely on imports, but not those
indirect taxes and charges, which are levied in the same manner on like domestic
products. Import charges corresponding to specific services rendered are not
considered as para-tariff measures;

7. Products mean all products including manufactures and commodities in their

raw, semiprocessed and processed forms;

8. SAPTA means Agreement on SAARC Preferential Trading Arrangement signed

in Dhaka on the 11th of April 1993;

9. Serious injury means a significant impairment of the domestic industry of like or

directly competitive products due to a surge in preferential imports causing
substantial losses in terms of earnings, production or employment unsustainable in
the short term;

10. Tariffs mean customs duties included in the national tariff schedules of the
Contracting States;

11. Threat of serious injury means a situation in which a substantial increase of

preferential imports is of a nature to cause "serious injury" to domestic producers,
and that such injury, although not yet existing, is clearly imminent. A
determination of threat of serious injury shall be based on facts and not on mere
allegation, conjecture, or remote or hypothetical possibility.

Objectives and Principles

1. The Objectives of this Agreement are to promote and enhance mutual trade and
economic cooperation among Contracting States by, inter-alia:

a) eliminating barriers to trade in, and facilitating the cross-border movement of

goods between the territories of the Contracting States;

b) promoting conditions of fair competition in the free trade area, and ensuring
equitable benefits to all Contracting States, taking into account their respective
levels and pattern of economic development;
c) creating effective mechanism for the implementation and application of this
Agreement, for its joint administration and for the resolution of disputes; and

d) establishing a framework for further regional cooperation to expand and

enhance the mutual benefits of this Agreement.

2. SAFTA shall be governed in accordance with the following principles:

a) SAFTA will be governed by the provisions of this Agreement and also by the
rules, regulations, decisions, understandings and protocols to be agreed upon
within its framework by the Contracting States;

b) The Contracting States affirm their existing rights and obligations with respect
to each other under Marrakesh Agreement Establishing the World Trade
Organization and other Treaties/Agreements to which such Contracting States are
signatories;

c) SAFTA shall be based and applied on the principles of overall reciprocity and
mutuality of advantages in such a way as to benefit equitably all Contracting
States, taking into account their respective levels of economic and industrial
development, the pattern of their external trade and tariff policies and systems; d)
SAFTA shall involve the free movement of goods, between countries through,
inter alia, the elimination of tariffs, para tariffs and non-tariff restrictions on the
movement of goods, and any other equivalent measures;

e) SAFTA shall entail adoption of trade facilitation and other measures, and the
progressive harmonization of legislations by the Contracting States in the relevant
areas; and

f) The special needs of the Least Developed Contracting States shall be clearly
recognized by adopting concrete preferential measures in their favour on a non-
reciprocal basis.

Instruments The SAFTA Agreement will be implemented through the following

instruments:-

1. Trade Liberalisation Programme

2. Rules of Origin
3. Institutional Arrangements

4. Consultations and Dispute Settlement Procedures

5. Safeguard Measures 6. Any other instrument that may be agreed upon.

Components SAFTA may, inter-alia, consist of arrangements relating to:

a) tariffs;

b) para-tariffs;

c) non-tariff measures;

d) direct trade measures.

Trade Liberalisation Programme

1. Contracting States agree to the following schedule of tariff reductions:

a) The tariff reduction by the Non-Least Developed Contracting States from

existing tariff rates to 20% shall be done within a time frame of 2 years, from the
date of coming into force of the Agreement. Contracting States are encouraged to
adopt reductions in equal annual installments. If actual tariff rates after the coming
into force of the Agreement are below 20%, there shall be an annual reduction on a
Margin of Preference basis of 10% on actual tariff rates for each of the two years.

b) The tariff reduction by the Least Developed Contracting States from existing
tariff rates will be to 30% within the time frame of 2 years from the date of coming
into force of the Agreement. If actual tariff rates oIl the date of coming into force
of the Agreement are below 30%, there will be an annual reduction on a Margin of
Preference basis of 5 % on actual tariff rates for each of the two years.

c) The subsequent tariff reduction by Non-Least Developed Contracting States

from 20% or below to 0-5% shall be done within a second time frame of 5 years,
beginning from the third year from the date of coming into force of the Agreement.
However, the period of subsequent tariff reduction by Sri Lanka shall be six years.
Contracting States are encouraged to adopt reductions in equal annual installments,
but not less than 15% annually.
d) The subsequent tariff reduction by the Least Developed Contracting States from
30% or below to 0-5% shall be done within a second time frame of 8 years
beginning from the third year from the date of coming into force of the Agreement.
The Least Developed Contracting States are encouraged to adopt reductions in
equal annual installments, not less than 10% annually.

2. The above schedules of tariff reductions will not prevent Contracting States
from immediately reducing their tariffs to 0-5% or from following an accelerated
schedule of tariff reduction.

3. a) Contracting States may not apply the Trade Liberalisation Programme as in

paragraph I above, to the tariff lines included in the Sensitive Lists which shall be
negotiated by the Contracting States (for LDCs and Non-LDCs) and incorporated
in this Agreement as an integral part. The number of products in the Sensitive Lists
shall be subject to maximum ceiling to be mutually agreed among the Contracting
States with flexibility to Least Developed Contracting States to seek derogation in
respect of the products of their export interest; and

b) The Sensitive List shall be reviewed after every four years or earlier as may be
decided by SAFTA Ministerial Council (SMC), established under Article 10, with
a view to reducing the number of items in the Sensitive List.

4. The Contracting States shall notify the SAARC Secretariat all non-tariff and
para-tariff measures to their trade on an annual basis. The notified measures shall
be reviewed by the Committee of Experts, established under Article 10, in its
regular meetings to examine their compatibility with relevant WTO provisions.
The Committee of Experts shall recommend the elimination or implementation of
the measure in the least trade restrictive manner in order to facilitate intra- SAARC
trade.

5. Contracting Parties shall eliminate all quantitative restrictions, except otherwise

permitted under GA1T 1994, in respect of products included in the Trade
Liberalisation Programme.

6. Notwithstanding the provisions contained in paragraph I of this Article, the Non-

Least Developed Contracting States shall reduce their tariff to 0-5% for the
products of Least Developed Contracting States within a timeframe of three years
beginning from the date of coming into force of the Agreement.

Note: Afghanistan is also the member state of SAARC

BIMSTEC

Bay of Bengal Initiative for Multi-Sectoral Technical and Economic Cooperation

(BIMSTEC) comprising Bangladesh, Bhutan, India, Myanmar, Nepal, Sri Lanka,
Thailand brings together 1.5 billion people – 21% of the world population, and a
combined GDP of over US$ 2.5 trillion.

EVOLUTION OF BIMSTEC

BIST-EC (Bangladesh, India, Sri Lanka, Thailand - Economic Cooperation) was

formed at a meeting in Jun 1997 in Bangkok. Myanmar was admitted in Dec 1997
and the organization was renamed as

BIMST-EC. The grouping expanded when Nepal and Bhutan were admitted in
Feb 2004. The grouping’s name was changed to

BIMSTEC (Bay of Bengal Initiative for Multi-Sectoral Technical and Economic

Cooperation) at 1st Summit Meeting held in Bangkok in Jul 2004.

FUNCTIONING OF BIMSTEC

BIMSTEC organizes inter-governmental interactions through Summits, Ministerial

Meetings, Senior Officials Meetings and Expert Group Meetings and through
BIMSTEC Working Group (BWG) based in Bangkok. There have been two
BIMSTEC Summit meetings (Bangkok Jul 2004, New Delhi Nov 2008), and 13
Foreign Ministerial meetings (13th MM held in Nay Pyi Taw in Jan 2011) and 15
SOMs so far. Myanmar is hosting the 3rd BIMSTEC Summit, 14th Ministerial
Meeting, 16th SOM and 2nd Preparatory meetings from 1-4 March, 2014 in Nay
Pyi Taw. BIMSTEC Chairmanship rotates among member countries
(alphabetically). Myanmar is Chair of the Group since Dec 2009 and took over
from previous chair India (Aug 2006-Dec 2009). Nepal has agreed to Chair after
3rd Summit.

BIMSTEC Permanent Secretariat

The BIMSTEC Permanent Secretariat is to be established in Dhaka with first SG to

be nominated by Sri Lanka. India would be contributing 32% of the cost of
Secretariat reflecting its strong commitment to BIMSTEC process.

AREAS OF COOPERATION

BIMSTEC has identified 14 priority areas where a member country takes lead.
India is lead country for Transport & Communication, Tourism, Environment &
Disaster Management and Counter Terrorism & Transnational Crime.

Transport and Communications (India)

BIMSTEC Transport Infrastructure and Logistics Study (BTILS) conducted by

ADB in 2007 was endorsed in 12th Ministerial Meeting (Dec 2009). The Report
was finalised in Dec 2013. ADB organised Inception Workshop on BTILS
updating and 1st meeting of Expert Group on Road Development in Yangon in Jun
2013.

Tourism (India)

A BIMSTEC Information Centre has been established in Jul 2007 in New Delhi.
Ministry of Tourism organized a meeting on BIMSTEC Information Centre and
contribution to Tourism Fund (1st JWG on Tourism) in Sep 2013 in New Delhi.
1st Round Table and Workshop of Tourism Ministers was held in Kolkata in Feb
2005; Nepal held 2nd Meeting in Kathmandu in Aug 2006; Bangladesh will host
next meeting.

Counter-Terrorism and Transnational Crime (CTTC)

BIMSTEC cooperation under CTTC has been divided into 4 sub-groups with lead
shepherds - Intelligence Sharing (Sri Lanka); Combating Financing of Terrorism
(Thailand), Legal and Law Enforcement Issues (India) and Prevention of Illicit
Trafficking in Narcotics Drugs, Psychotropic Substances and Precursors
(Myanmar).
L&T Division of MEA hosted 5th Sub-group on Legal & Law enforcement

issues in Jan 2013 in New Delhi where draft Convention on Mutual Legal
Assistance in Criminal Matters was finalised. Members signed ‘BIMSTEC
Convention on Combating International Terrorism, Transnational Organized Crime
and Illicit Drug Trafficking’ in Dec 2009; India has ratified it.

Environment and Disaster Management

Ministry of Earth Sciences in association with MEA conducted a Workshop on

“Seasonal Prediction and Application to Society” in June 2011. India is
establishing BIMSTEC Weather and Climate Centre at National Weather
Forecasting Centre at NOIDA. The MOA for establishment of the Centre was
finalized at 10th Ministerial meeting in New Delhi in Aug 2008 and is expected to
be signed during 3rd Summit.

Trade & Investment (Bangladesh)

A Framework Agreement for BIMSTEC Free Trade Area was signed in Phuket,
Thailand in Feb 2004. The Framework Agreement commits the parties to negotiate
FTAs in goods, services and investments. An agreement on Trade in Goods and
other provisions relating to Rules of Origin, Operational Certification Procedures
and agreement on Customs Cooperation was finalised in Jun 2009 at 18th Trade
Negotiating Committee (TNC) meeting in Phuket. 19th TNC was held in Bangkok
in Feb 2011.India has exchanged its tariff preference schedules with member
countries.

The 6th meeting of BIMSTEC Business and Economic Forum were held in Feb
2011 in Bangkok. India hosted a Business Summit meeting in Nov 2008 in
association with CII, FICCI, and ASSOCHAM. India hosts an annual Integrating
BIMSTEC Seminar held in the North East (Shillong 2013, Imphal 2014). To
facilitate business travel among BIMSTEC member countries, three meetings of
the Expert Group have been held on BIMSTEC Visa Scheme.

Cultural Cooperation (Bhutan)

Members are expected to sign MoU on establishment of BIMSTEC Cultural

Industries Commission (BCIC) and BIMSTEC Cultural Industries Observatory
(BCIO), Bhutan during 3rd Summit. India hosted the 1st Expert Group Meeting
BCIC&O in 2006 in New Delhi. The first BIMSTEC Ministerial meeting on
Culture was held in Paro, Bhutan in May 2006.

Energy (Myanmar)

Thailand hosted BIMSTEC Regional Workshop and Study Visit on Bio-Fuels

Production and Utilization in Jun 2012 in Bangkok. Ministry of Power hosted
4thmeeting of Task Force on Power Exchange in Jan 2013 in New Delhi which
discussed the draft text of MOU on Grid Interconnection. Meeting of Energy
Ministers took place in Oct 2005 in New Delhi and in March 4- 5, 2010 in
Bangkok, Thailand.

India also hosted Task Force Meeting in Feb 2011

in Bengaluru and SOM in Feb 2011 in New Delhi on operationalisation of

BIMSTEC Energy Centre (MOA signed during 13th MM). A land for the Centre
has been allocated in premises of Central Power Research Institute, Bengaluru.
Agriculture (Myanmar)

Sri Lanka hosted the 3rd meeting on Agriculture

in Kandy in Nov 2010. Earlier, at the 2nd Expert Group Meeting held in New
Delhi in Apr 2008, nine priority areas (along with lead countries), were finalised;
India will lead in Prevention and control of transboundary animal diseases (India);
Affiliation of Universities/Research Institutions (India); Development of
agricultural biotechnology including bio-safety (India); Development of Seeds
(India).

Poverty Alleviation (Nepal)

Nepal hosted the 2nd Ministerial Meeting in Jan 2012 in Kathmandu where Plan of
Poverty Alleviation was adopted.

Technology (Sri Lanka)

Sri Lanka hosted the 3rd meeting on May 9-10, 2011 in Colombo on
establishment of BIMSTEC Technology Transfer Exchange Facility. The meeting
discussed the draft Concept Paper.
Fisheries (Thailand)

Thailand organized a training programme on Advance Aquatic Plants Tissue

Culture in Aug 2013 in Bangkok.

Public Health (Thailand)

Deptt. Of AYUSH in association with MEA hosted two Workshops on IPR

issues and Regulatory issues in Traditional Medicines in October 2011 in New
Delhi. Since 2005, India has granted 30 slots of AYUSH scholarships to study in
India in the fields of traditional medicine in undergraduate, post-graduate and
doctorate programs.

Thailand hosted 2nd meeting of Network of National centres of Coordination

in Traditional Medicine in Aug 2010 in Nonthaburi; Institute of PG Teaching and
Research in Ayurveda (IPGTRA), Jamnagar is the Indian nominee.

People-to-People Contact (Thailand)

At India offers 1440 (Civilian), 274 (Defence) and 18 slots in NDC & DSSC under
ITEC programme to BIMSTEC countries and the utilisation is almost 1200. India
has set up BIMSTEC Network of Think Tanks with RIS as nodal agency. RIS
hosted a twoday meeting of think tanks on 12-13 Feb, 2010. Climate

Change (Bangladesh)

Bangladesh will be circulating a concept paper on cooperation in this area soon.

The North American Free Trade Agreement (NAFTA)

entered into force on January 1, 1994. The agreement was signed by President
George H. W. Bush on December 17, 1992, and approved by Congress on
November 20, 1993. The NAFTA Implementation Act was signed into law by
President William J. Clinton on December 8, 1993 (P.L. 103-182). The overall
economic impact of NAFTA is difficult to measure since trade and investment
trends are influenced by numerous other economic variables, such as economic
growth, inflation, and currency fluctuations. The agreement likely accelerated and
also locked in trade liberalization that was already taking place in Mexico, but
many of these changes may have taken place without an agreement. Nevertheless,
NAFTA is significant, because it was the most comprehensive free trade
agreement (FTA) negotiated at the time and contained several groundbreaking
provisions. A legacy of the agreement is that it has served as a template or model
for the new generation of FTAs that the United States later negotiated, and it also
served as a template for certain provisions in multilateral trade negotiations as part
of the Uruguay Round. The 115 th Congress faces numerous issues related to
NAFTA and international trade. On May 18, 2017, the Trump Administration sent
a 90-day notification to Congress of its intent to begin talks with Canada and
Mexico to renegotiate NAFTA, as required by the 2015 Trade Promotion
Authority (TPA). The administration also began consulting with Members of
Congress on the scope of the negotiations. Alternatively President Trump, at times,
has threatened to withdraw from the agreement without satisfactory results.
Congress may wish to consider the ramifications of renegotiating or withdrawing
from NAFTA and how it may affect the U.S. economy and foreign relations with
Mexico and Canada. It may also wish to examine the congressional role in a
possible renegotiation, as well as the negotiating positions of Canada and Mexico.
Mexico has stated that, if NAFTA is reopened, it may seek to broaden negotiations
to include security, counter-narcotics, and transmigration issues. Mexico has also
indicated that it may choose to withdraw from the agreement if the negotiations are
not favorable to the country. Congress may also wish to address issues related to
the U.S. withdrawal from the proposed Trans-Pacific Partnership (TPP) free trade
agreement among the United States, Canada, Mexico, and 9 other countries. Some
observers contend that the withdrawal from TPP could damage U.S.
competitiveness and economic leadership in the region, while others see the
withdrawal as a way to prevent lower cost imports and potential job losses. Key
provisions in TPP may also be addressed in “modernizing” or renegotiating
NAFTA, a more than two decade-old FTA. NAFTA was controversial when first
proposed, mostly because it was the first FTA involving two wealthy, developed
countries and a developing country. The political debate surrounding the
agreement was divisive with proponents arguing that the agreement would help
generate thousands of jobs and reduce income disparity in the region, while
opponents warned that the agreement would cause huge job losses in the United
States as companies moved production to Mexico to lower costs. In reality,
NAFTA did not cause the huge job losses feared by the critics or the large
economic gains predicted by supporters. The net overall effect of NAFTA on the
U.S. economy appears to have been relatively modest, primarily because trade with
Canada and Mexico accounts for a small percentage of U.S. GDP. However, there
were worker and firm adjustment costs as the three countries adjusted to more open
trade and investment.

The rising number of bilateral and regional trade agreements throughout the world
and the rising presence of China in Latin America could have implications for U.S.
trade policy with its NAFTA partners. Some proponents of open and rules-based
trade contend that maintaining NAFTA or deepening economic relations with
Canada and Mexico will help promote a common trade Congressional Research
Service agenda with shared values and generate economic growth. Some
opponents argue that the agreement has caused worker displacement, and
renegotiation could cause further job losses.

Goals of NAFTA

NAFTA was created to eliminate barriers to trade and investment between the US,
Canada and Mexico. The implementation of NAFTA immediately eliminated
tariffs on more than one-half of Mexico's exports to the US and more than one-
third of US. exports to Mexico. Within 10 years of implementation, all US-Mexico
tariffs would be eliminated except for some US agricultural exports that were to be
phased out within 15 years. NAFTA also seeks to eliminate non-tariff trade
barriers and to protect the intellectual property right of the products.

In the area of intellectual property, the North American Free Trade Agreement
Implementation Act made changes to the copyright law of the US, foreshadowing
the Uruguay Round Agreements Act of 1994 by restoring copyright (within
NAFTA) on certain motion pictures which had entered the public domain.

Trade

The agreement opened the door for free trade, ending tariffs on various goods
and services, and implementing equality between Canada, the US and Mexico.
Since the implementation of NAFTA, the countries involved have been able to do
the following:

 The US had a services trade surplus of $28.3 billion with NAFTA countries
in 2009 (the latest data available).

 Foreign direct investment of Canada and Mexico in the US (stock) was

$237.2 billion in 2009, up 16.5% from 2008.

 To alleviate concerns that NAFTA would have negative environmental

impacts, in 1994 the Commission for Environmental Cooperation (CEC)
was given a mandate to conduct ongoing ex-post environmental assessment
of NAFTA.

 Agriculture is the only section that requires three separate agreements

between each pair of parties. The Canada–US agreement contains significant
restrictions and tariff quotas on agricultural products, whereas the Mexico–
US pact allows for a wider liberalization within a framework of phase-out
periods.

 Mexico has gone from a minor player in the pre-1994 US export market to

the 2ndlargest importer of U.S. agricultural products.

 According to the Department of Homeland Security Yearbook of

Immigration Statistics (2006), 73,880 foreign professionals were admitted
into the US for temporary employment under NAFTA.

Objectives

1. The objectives of this Agreement, as elaborated more specifically through its

principles and rules, including national treatment, most-favored-nation treatment
and transparency are to:

(a) eliminate barriers to trade in, and facilitate the cross border movement of,
goods and services between the territories of the Parties;

(b) promote conditions of fair competition in the free trade area;

(c) increase substantially investment opportunities in their territories;

(d) provide adequate and effective protection and enforcement of intellectual

property rights in each

Party's territory;

(e) create effective procedures for the implementation and application of this
Agreement, and for its joint administration and the resolution of disputes; and

(f) establish a framework for further trilateral, regional and multilateral cooperation
to expand and enhance the benefits of this Agreement.

2. The Parties shall interpret and apply the provisions of this Agreement in the
light of its objectives set out in paragraph 1 and in accordance with applicable rules
of international law.

ASEAN an INTRODUCTION: BACKGROUND AND RATIONALE

ASEAN is committed to build a Community by 2015. To realise this goal, a

community of enhanced connectivity is essential because a well connected
ASEAN, from its transportation networks to its peoples, will contribute towards a
more competitive and resilient ASEAN as it will bring peoples, goods, services
and capital closer together in accordance with the ASEAN Charter. This will
ensure continued peace and prosperity for its peoples. This Master Plan on ASEAN
Connectivity is a key step towards realising this vision.

2. The development of this Master Plan drew impetus from the 15th ASEAN
Summit in Cha-am Hua Hin, Thailand on 24 October 2009, where ASEAN
Leaders adopted a Statement on ASEAN Connectivity. At the 16th ASEAN
Summit in Ha Noi, Viet Nam on 8-9 April 2010, the Leaders emphasised the need
to identify specific measures in the Master Plan on ASEAN Connectivity, with
clear targets and timelines as well as the need to develop viable infrastructure
financing mechanisms for the implementation of the Master Plan.
3. Enhancing intra-regional connectivity within ASEAN and its sub-regional
groupings would benefit all ASEAN Member States through enhanced trade,
investment, tourism and development. As all of the overland transport linkages will
have to go through the mainland Southeast Asian countries of Cambodia, Lao
PDR, Viet Nam and Myanmar, these countries stand to benefit the most through
infrastructure development, and the opening up of remote inland and less-
developed regions. All these efforts would significantly narrow the development
gap within ASEAN.

4. In addition to the tangible economic benefits of ASEAN Connectivity, the

linkages created would intensify and strengthen ASEAN Community building
efforts, not only in terms of enhanced regional cooperation and integration, but
also through people-to-people contacts. In this regard, the concept of ASEAN
Connectivity would also complement the ongoing regional efforts to realise a
people-oriented ASEAN Community by 2015 with a focus on fostering a sense of
shared cultural and historical linkages.

5. While recognising the tangible benefits of closer connectivity, the problems

caused by transnational crime, illegal immigration, environmental degradation and
pollution, and other cross-border challenges should be addressed properly. As we
advance ASEAN Connectivity, the need to address climate change and its
consequences should also be taken into account.

6. The Master Plan should encompass various aspects of economic and social
development to achieve a broad-based and inclusive outcome in line with the
Millennium Development Goals (MDGs). In this context, the Connectivity
initiative should contribute towards promoting local economic and social
development in the region.

Objectives

To achieve the goals, the Master Plan sets out the following objectives for an
enhanced ASEAN Connectivity:

(i) To consolidate existing work plans related to connectivity and prioritise and
enhance actions, taking into account related existing sub-regional cooperation
frameworks; Physical Connectivity (ii) To develop an integrated and well-
functioning intermodal transport, ICT and energy networks in ASEAN and the
wider region; Institutional Connectivity

(iii) To put in place strategies, agreements, and legal and institutional mechanisms
to effectively realise the ASEAN Connectivity, including those to facilitate trade in
goods and services, and the appropriate types of investment policies and legal
frameworks to ensure that the investments are protected to attract the private sector
investments; People-to-People Connectivity

(iv) To develop initiatives that promote and invest in education and life-long
learning, support human resource development, encourage innovation and
entrepreneurship, promote ASEAN cultural exchanges, and promote tourism and
the development of related industries; Operationalisation of ASEAN Connectivity

(v) To establish the principles of funding, recommend appropriate funding

mechanisms and provide an estimate of the required funding to develop and/or
enhance the linkages identified in the Master Plan;

(vi) To forge win-win partnerships among the public sector, the private sector,
ASEAN peoples and the international community;

(vii) To enhance the role of private sector and local communities in the
implementation of the ASEAN Connectivity initiatives;

(viii) To draw up specific timetables for realising the goals of ASEAN

Connectivity which will complement the work being undertaken to realise the
ASEAN Community by 2015 as well as take into account the different levels of
development of ASEAN Member States; and (ix) To prepare capacity building
cooperation arrangements in ASEAN such as the Initiative for ASEAN Integration
(IAI) and other appropriate regional institutes in narrowing the development gap
within the region, and in 9 complementing ongoing regional efforts to realise a
people-oriented ASEAN Community by 2015.

Conclusions

1. The vision of ASEAN Leaders to build an ASEAN Community by 2015 calls

for a well-connected ASEAN that will contribute towards a more competitive and
resilient ASEAN, as it will bring peoples, goods, services and capital closer
together. An enhanced ASEAN Connectivity is essential to achieve the ASEAN
Community, namely the ASEAN Political-Security Community, ASEAN
Economic Community and ASEAN Socio-Cultural Community. 2. In light of rapid
developments in the region and the world resulting from globalisation, ASEAN
must continue to strive to maintain its centrality and proactive role by being the
driving force in the evolving regional architecture. To do so, ASEAN needs to
accelerate its integration and Community building efforts while intensifying
relations with external partners.

3. As a key step towards realising the ASEAN Community of continued economic

growth, reduced development gap and improved connectivity among Member
States and between Member States and the rest of the world by enhancing regional
and national physical, institutional and people-to-people linkages, ASEAN has
developed this Master Plan on ASEAN Connectivity.

4. Under the Master Plan, ASEAN has reviewed the achievements made and the
challenges encountered or that are impeding each of these linkages. Key strategies
and essential actions have been adopted with clear targets and timelines to address
these challenges to further enhance ASEAN Connectivity in realising the ASEAN
Community by 2015 and beyond.

5. The Master Plan is both a strategic document for achieving overall ASEAN
Connectivity and a plan of action for immediate implementation for the period
2011-2015 to connect ASEAN through enhanced physical infrastructure
development (physical connectivity), effective institutions, mechanisms and
processes (institutional connectivity) and empowered people (people-to-people
connectivity). The three-pronged strategy will be supported by the required
financial sources and coordinated institutional mechanisms. The Master Plan also
ensures the synchronisation of ongoing sectoral strategies and plans within the
frameworks of ASEAN and its sub-regions. Through an enhanced ASEAN
Connectivity, the production and distribution networks in the ASEAN region will
be deepened, widened, and become more entrenched in the East Asia and global
economy.

6. For the Physical Connectivity, the challenges that need to be addressed in the
region include poor quality of roads and incomplete road networks, missing
railway links, inadequate maritime and port infrastructure including dry port,
inland waterways and aviation facilities, widening of digital divide, and growing
demand for power. This calls for the upgrading of existing infrastructure, the
construction of new infrastructure and logistics facilities, the harmonisation of
regulatory framework, and the nurturing of innovation culture. Seven strategies
have been drawn up with the view to establish an integrated and seamless regional
connectivity through multimodal transport system, enhanced Information and
Communications Technology (ICT) infrastructure and a regional energy security
framework.

7. With regard to Institutional Connectivity, ASEAN needs to resolve a number of

key issues including impediments to movements of vehicles, goods, services and
skilled labour ii across borders. To achieve this, ASEAN must continue to address
non-tariff barriers to facilitate intra-ASEAN trade and investment, harmonise
standards and conformity assessment procedures, and operationalise key transport
facilitation agreements, including ASEAN Framework Agreement on the
Facilitation of Goods in Transit (AFAFGIT), ASEAN Framework Agreement on
the Facilitation of Inter-State Transport (AFAFIST), and ASEAN Framework
Agreement on Multimodal Transport (AFAMT), to reduce the costs of moving
goods across borders. In addition, ASEAN Member States must fully implement
their respective National Single Windows towards realising the ASEAN Single
Window by 2015 to bring about seamless flow of goods at, between and behind
national borders. An ASEAN Single Aviation Market and an ASEAN Single
Shipping Market must be pursued in order to contribute towards the realisation of a
single market and production base. Essentially, ASEAN should further open up
progressively to investments from within and beyond the region. Here, ten
strategies have been adopted to ease the flow of goods, services and investment in
the region.

8. Whereas for People-to-People Connectivity, two strategies have been formulated

to promote deeper intra-ASEAN social and cultural interaction and understanding
through community building efforts and, greater intra-ASEAN people mobility
through progressive relaxation of visa requirements and development of mutual
recognition arrangements (MRAs) to provide the needed impetus for concerted
efforts in promoting awareness, collaboration, exchange, outreach and advocacy
programmes to facilitate the ongoing efforts to increase greater interactions
between the peoples of ASEAN.

9. While recognising the tangible benefits of closer connectivity, the problems

caused by transnational crime, illegal immigration, environmental degradation and
pollution, and other cross-border challenges should be addressed properly.

10. The Master Plan also identified prioritised projects from the list of key actions
stipulated under the various strategies mentioned above, especially those, which
implementation will have high and immediate impact on ASEAN Connectivity.
These include:

(i) Completion of the ASEAN Highway Network (AHN) missing links and
upgrade of Transit Transport Routes (TTRs);

(ii) Completion of the Singapore Kunming Rail Link (SKRL) missing links;

(iii) Establish an ASEAN Broadband Corridor (ABC);

(iv) Melaka-Pekan Baru Interconnection (IMT-GT: Indonesia);

(v) West Kalimantan-Sarawak Interconnection (BIMP-EAGA: Indonesia);

(vi) Study on the Roll-on/roll-off (RoRo) network and short-sea shipping;

(vii) Developing and operationalising mutual recognition arrangements (MRAs)

for prioritised and selected industries;

(viii) Establishing common rules for standards and conformity assessment

procedures;

(ix) Operationalise all National Single Windows (NSWs) by 2012;

(x) Options for a framework/modality towards the phased reduction and

elimination of scheduled investment restrictions/impediments;

(xi) Operationalisation of the ASEAN Agreements on transport facilitation;

(xii) Easing visa requirements for ASEAN nationals; (xiii) Development of

ASEAN Virtual Learning Resources Centres (AVLRC);

(xiv) Develop ICT skill standards; and

(xv) ASEAN Community building programme.

11. Critical to the Master Plan is the mobilisation of required financial resources
and technical assistance to implement the key actions and prioritised projects
stipulated under the adopted strategies. Recognising the scarcity of available
resources, ASEAN will be exploring and tapping on new sources and innovative
approaches, which include, among others, the possible establishment of an ASEAN
fund for infrastructure development, public-private sector partnerships (PPP), and
development of local and regional financial and capital markets, particularly to
finance the key deliverables identified to be achieved by 2015. ASEAN will further
strengthen partnership with external partners, including Dialogue Partners,
multilateral development banks, international organisations and others for effective
and efficient implementation of the Master Plan.

12. To implement the Master Plan, relevant ASEAN sectoral bodies will
coordinate the implementation of the strategies and actions under their respective
purview while the National Coordinators and the relevant government agencies are
responsible for overseeing the implementation of specific plans or projects at the
national level.

13. An ASEAN Connectivity Coordinating Committee will be established

comprising Permanent Representatives to ASEAN or special representatives
appointed by the ASEAN Member States. The Committee will report regularly to
the ASEAN Coordinating Council, ASEAN Political-Security Community
Council, ASEAN Economic Community Council and the ASEAN Socio-Cultural
Community Council on the progress of and challenges faced in the implementation
of the Master Plan. Partnership arrangements and regular consultations with the
private sector, industry associations and the wider community at the regional and
national levels will also be actively sought to ensure the participation of all
stakeholders in developing and enhancing the ASEAN Connectivity.

14. To monitor and evaluate achievements and constraints, a scorecard mechanism

will be set up to effectively review, on a regular basis, the status of the Master Plan
implementation and the impact of enhanced ASEAN Connectivity, and especially
to ensure that all the list of priority measures and actions undertaken are responsive
to the needs and priorities of ASEAN.
15. To ensure cohesiveness and close collaboration among stakeholders or
constituents, a communications strategy, aimed at achieving the objectives of
ASEAN Connectivity, is envisaged for outreach and advocacy purposes.

16. The desired outcomes emanating from the Master Plan would be to facilitate
the deepening and widening of the production and distribution networks in
ASEAN. Equally important, enhanced ASEAN Connectivity narrows development
gaps in ASEAN and leads to increased opportunities for greater investment, trade,
growth and employment in these areas. Finally, deeper intra-regional economic
linkages and people-to-people interactions within ASEAN will contribute towards
the achievement of an ASEAN Community by 2015, and which will reinforce the
centrality of ASEAN in regional cooperation and integration.

PROTECTIONISM

The devices or methods which are used to restrict inflow of imports and increase
exports are called protectionism. It is a debatable issue because some economists
believe there should be free trade for best utilization of resources and other group
thinks trade barriers are essential for the survival of certain economies.

The case for free trade is based on the analysis of trade theories i.e; absolute
advantage theory and comparative advantage theory. Free trade allows the
maximization of world production, thus making it possible for each consumer in
the world to consume more goods then he or she could without free trade. As there
more goods and service can be produced country’s GDP rises. This leads to rise in
per capita income. On the side there is availability to consume more goods and
services, therefore living standard can be improved. Besides comparative
advantage free trade increases competition which rises efficiencies.

Free trade also expands market of a product which raises level of employment in
the economy. Although some argue that rise is at the cost of employment
opportunities in other countries. Other advantages may be in terms of economies of
large scale, learning by doing, wider choice etc. The case for protectionism Non
economic advantages of diversification Comparative advantage might dictate that a
country specializes and should produce a narrow range of products. The might
decide, that there are distinct social advantage in encouraging a more diverse
economy. Citizens should be given wide range of occupation, and social and
psychological advantage of diversification would more than compensate for
reduction in living standard.

Risk of specialization If a country specializing in the production of few goods, it

might face problems in the long run. One such risk is that technological changes
may render its major products obsolete. This is why government encourage a more
diversified economy should by protecting industries which otherwise cannot
compete.

To alter the terms of trade Trade restrictions can be used to turn the terms of trade
in favour of countries that produce and export a large fraction of world’s supply of
some products. They can also be used to turn the terms of trade in favour of
countries that constitute a large fraction of the world demand for some product that
they import. To protect against ‘unfair’ actions by foreign firms and governments
Tariff may be used to prevent foreign industries from gaining an advantage over
domestic industries by use of predatory practices that will harm domestic
industries. Two common practices are subsidies paid by foreign governments to
their exporters and price discrimination which is called dumping when it is done
across international borders. These practices are typically countered by levying
tariffs called countervailing and anti-dumping duties. To protect infant and sunset
industries This is the oldest valid argument for protectionism. In the beginning
newly born industries produce on the small scale therefore cost will be high.

A trade restriction may protect these industries from foreign competition while
they grow up. When they are large enough, they will be able to produce as cheaply
as foreign rivals and thus will be able to compete without protection. Similarly
there are many dwindling industries which play important role to maintain
employment but cannot compete with foreign firms. Therefore government also
protect such industries with the intention to protect employment.

To protect employment This is another important reason for protectionism. This

reason is generally related with the developing economies where infant industries
or small industries cannot compete with the large scale foreign industries and close
down which create unemployment. To maintain the given level of employment
government opt the policies of protectionism. To improve balance of payments A
prolonged and large deficit in balance of payments is not desirable for any
economy. It has large repercussions. For instance, government needs to pay out the
deficit from foreign reserves or borrow from other financial institutions which
increase national debts. If foreign reserves are drained out it will damage the
credibility of the state for repayments and in case of national debts state may
charge more taxes which are disincentive to work and produce and may raise cost
of living in an economy. Retaliation Sometimes countries levy tariffs and quotas
because rival country has already imposed trade restriction. There may or may not
be any economic reason but just the retaliation. Methods of protection Tariff It is a
type of policy that directly raises the prices of imported goods. It is often called as
import duties. It is of two types, specific and advalorem. Specific tariff is per unit
tariff, for example, $5 per unit, whereas advalorem tariff levies on the value of the
product, for example, 5% of the price of the product. Tariffs not only restrict
imports but are also main source of revenue for the state. Usually government
levies high tax rates on imports of luxury goods and make large revenues.

Limitations of Tariff Tariff policy is effective if demand for imports is price

elastic; if it is inelastic then there is no considerable change in imports and difficult
to get desirable outcomes. However, government is able to generate large revenue.
Secondly, sometimes domestic goods remain less competitive even tariff is added
to prices of imported goods if importers absorb the tariff and do not increase their
prices. In some cases even tariff amount is not that mush satisfactory to make
imports less competitive. Thirdly, other economies may retaliate and they also levy
tariffs on exports of the given economy, so there is possibility in reduction of
exports. Lastly, if tariff is levied on imports of raw material or oil, it increases cost
of production and which leads to cost push inflation. Import Quotas It is a non
tariff barrier and do not raise revenue for the government. It is a physical
restriction on the import of a product. It is relatively more restricted form of trade
barriers as compare to tariff. In case of tariff any quantity one can import after
paying custom duties but in quotas only the predefined quantity can be imported in
the specified period of time. For example if government allows to import 100 cars
in a year then importers cannot import even on additional car.

FDI (Foreign Direct Investment)

FDI is defined as a cross-border investment in which a resident in one economy

(the direct investor) acquires a lasting interest in an enterprise in another economy
(the direct investment enterprise). The lasting interest implies a long-term
relationship between the direct investor and the direct investment enterprise and
usually gives the direct investor an effective voice, or the potential for an effective
voice, in the management of the direct investment enterprise. By convention, a
direct investment is established when the direct investor has acquired 10 percent or
more of the ordinary shares or voting power of an enterprise abroad.

The lasting interest in a direct investment enterprise typically involves the

establishment of manufacturing facilities, bank premises, warehouses, and other
permanent or long-term organizations abroad. This may involve the creation of a
new establishment or investment (greenfield investments), joint ventures, or the
acquisition of an existing enterprise abroad (cross-border mergers and
acquisitions). The investment can be incorporated or unincorporated and includes,
by convention, ownership of land and buildings by individuals. Direct investment
comprises not only the initial transaction establishing the FDI relationship between
the direct investor and the direct investment enterprise, but all subsequent
transactions between them and among affiliated enterprises. Thus, the direct
investment relationship extends beyond the original direct investor and includes
foreign subsidiaries and affiliates of the direct investor that are part of the “parent
group.” Once FDI is established, increases in FDI can take the form of injections
of additional equity capital, the reinvestment of earnings not distributed as
dividends by subsidiaries or associated enterprises and undistributed branch
profits, and various intercompany claims, such as the extension of suppliers’
credits or loans, all of which represent FDI capital. These transactions cover only
one aspect of financing available to direct investment enterprises that can also
expand their operations by borrowing in local markets and in international capital
markets (with or without the guarantee of direct investors).

There are a number of popular misconceptions of what FDI is. FDI does not imply
control of the enterprise, as only a 10 percent ownership is required to establish a
direct investment relationship. FDI does not comprise a “10 percent ownership” (or
more) by a group of “unrelated” investors domiciled in the same foreign country—
it must be one investor or a “related group” of investors. FDI is not based on the
nationality or citizenship of the direct investor; it is based on residency.
Borrowings from unrelated parties abroad that are guaranteed by direct investors
are also not FDI. As regards FDI positions, FDI does not cover all of the assets of
the direct investment enterprise, it covers only that portion financed by the direct
investor or foreign subsidiaries and affiliates of the direct investor that are part of
the parent group.

1. The 1990s witnessed a number of major events, including the fall of

communism, the opening of China, and a radical shift in economic and political
regimes in many countries of Latin America. Following the adoption of economic
and structural reforms by a number of emerging market countries (EMCs),
which included, among other things, the elimination of trade barriers and a
reduction of restrictions on international capital flows, globalization of production
processes gained rapid momentum. These reforms coincided with remarkable
advancements in transportation and communication technology, making it easier
for companies to manage and control geographically dispersed production
networks and supply chains, while allowing EMCs to serve as venues for
investment.

2. As a result of these developments, trade and financial flows, notably foreign

direct investment (FDI), to EMCs surged in the 1990s. FDI and portfolio flows
have surpassed private debt flows to become the major source of international
capital for EMCs (Emerging Market and FDI is by far the single largest component
of net capital inflows to EMCs. Estimates suggest that at end-2000, almost one-
quarter of the global stock of FDI—estimated to be $6.8 trillion in book value—
was located in EMCs.

3. FDI and globalization tend to reinforce one another. In particular, while

globalization has led to higher FDI flows to a number of EMCs, the benefits of
FDI and the opportunity of receiving a greater share of global FDI flows has,
among other things, motivated a number of countries to undertake further
liberalization. For example, investment in certain sectors, such as
telecommunications and transportation, that were long closed to foreign
participation in many EMCs are now open to foreign investment. At the same time,
other impediments to FDI, including restrictions on the forms of investment and
the level of foreign ownership, have been gradually eased. Furthermore, a number
of countries have undertaken reforms to address administrative, regulatory, legal,
and institutional barriers to investment, with the overarching objective of
improving the climate for investment and private sector activity.
4. FDI facilitates the international integration of markets for goods and services.
By selling directly to residents within the host economy, foreign direct investors
may overcome natural or policy-induced barriers to market access and hence
substitute for trade. FDI has traditionally performed this function, and in service
markets where a local presence is often essential, it will continue to do so. By
contrast, so-called “efficiency-seeking” FDI has facilitated the international
division of labor, and hence stimulated the expansion of trade. Recent estimates
suggest that for two-thirds of world merchandise trade, a multinational company is
involved on at least one end of the transaction, and that about half of that share is
conducted in the form of intrafirm trade.

5. In addition to generating relatively large multiplier effects for the economy, FDI
typically facilitates the transfer of technology and promotes sound employment
and corporate governance practices. For example, FDI in the financial sector is
commonly credited with raising the efficiency of financial intermediation and the
quality of supervision through importing higher prudential standards. These
benefits accrue either through the direct linkages with local enterprises or through
positive spillovers—that is, outside contractual relationships, for instance, by
demonstrating to local firms ways of accessing international markets.

6. Furthermore, in the context of increasing the integration of financial markets,

FDI can serve as a source of stability at times of emerging pressures in the balance
of payments. In particular, FDI flows appear to be more stable than other capital
flows, possibly because the long time horizon of FDI allows the forbearance of
investors to shortrun economic upheavals, including those that arise from host
country policies. Also, unlike debt capital, for which payoffs are not linked to the
state of the economy, FDI entails an element of risk sharing between the investors
and the host country since the rate of return is designed to be “state contingent”—
the cost of servicing the investment moves in step with the recipient’s economic
fortunes.

7. More recently, FDI flows to EMCs have been declining, owing in large part to a
sharp reduction in flows to Latin America. To some extent, the recent decline can
be attributed to cyclical movements reflecting, among other things, growth trends
in the world economy, the fallout from the bursting of the technology and
telecommunications bubble, and regional and local growth prospects. Some
concern has, however, been expressed that risks, particularly of a regulatory nature,
pertaining to FDI in EMCs have increased. For example, recent events in
Argentina have involved the abrogation of contracts. Thus, and in light of the
global economic uncertainty and increasing balance sheet pressures, a broadbased
reassessment of risks could lead to a corresponding decline of FDI to many of
these countries.

Motivation for and determinants of FDI Investors

underscore that motivations for investing in EMCs and determinants of investment

location differ among countries and across the economic sectors. They concur,
however, that certain general factors consistently determine which countries attract
the most FDI. Investors cite, in particular the following:

• Market size and growth prospects of the host country play an important role in
affecting investment location since FDI in EMCs is increasingly being undertaken
to service domestic demand rather than to tap cheap labor.

• Wage-adjusted productivity of labor, rather than the cost of local labor per se,
will increasingly drive efficiency-seeking investments of “footloose” firms that use
EMCs as export platforms.

• The availability of infrastructure is critical. EMCs that are best prepared to

address infrastructure bottlenecks will secure greater amounts of FDI.

FDI prospects across the various geographic regions

highlight a number of differences concerning risk perceptions:

Asia A majority of investors note that Asia will lead the geographic regions, at
least in the near term, as the predominant location for FDI.

• Within Asia, China will remain the prime location for FDI because of a large
market with growing middle class, sound growth prospects, and continued
competitiveness. Furthermore, membership in the WTO will provide greater
incentives for new investments. Some investors are shifting efficiency-seeking
investments from other relatively high-cost Asian countries, including Malaysia to
China.

• India, with a large market and a well-educated and English-speaking labor force,
will continue to attract FDI in selected sectors, including technology. More broad-
based FDI is being impeded, however, by a difficult business environment,
uncertainties about receptivity to FDI, red tape and bureaucracy, and a lack of
adequate infrastructure facilities.

• Companies in labor-intensive manufacturing and natural resource sectors plan to

maintain their investments in Thailand and Malaysia. The investment climate in
Indonesia is perceived as weak, with foreign investors narrowly focused on the
natural resource sector.

Europe The outlook for FDI in Emerging Europe is highly uneven. In broad terms,
the key countries in the region can be separated into three categories: the accession
countries poised to join the European Union in May 2004; the CIS countries
(especially Russia); and Turkey.

• Accession to EU is playing an important role in bolstering the framework for

foreign investment in a number of countries in Eastern Europe. While domestic
market potential is rather limited, the region continues to attract large volumes of
FDI owing to production cost advantages vis-à-vis the rest of the EU. FDI is likely
to continue taking the form of export-oriented investment by firms, particularly
from Western Europe, seeking to lower manufacturing and services costs.

• Investors note that Russia, with its large market and rich endowment of natural
resources—especially oil—has significant potential for securing large amounts of
FDI. However, along with governance and corruption concerns, investors note that
institutions require strengthening and the business environment improved
significantly.

• Turkey is seen as having significant potential for market-seeking FDI, but the
potential is unlikely to translate into concrete outcomes until political and
economic risks perceived to be very high are alleviated, growth prospects become
clear, and bureaucratic impediments to FDI are removed.
Latin America • Most firms report they are in a “digestive” mode owing mainly to
growth having been lower than anticipated when substantial expansions were
undertaken several years ago. While a few investors are pulling out local
businesses, there is little interest at present in M&A activities, despite the large
volume of distressed assets. In some countries, low growth has exacerbated
regulatory problems in the electricity and telecom sectors.

• Brazil, largely because of its market size, continues to be Latin America’s

preferred location for FDI. While investors are encouraged by the new
government’s macroeconomic policy stance and FDI is likely to recover if
economic growth gains momentum, regulatory risks could undermine sentiment
and the prospects for investment in some sectors.

• Many companies for whom investment reflects a regional specialization

emphasize they will refocus their investments, at least in the near term, on selected
countries in the region, notably Mexico, where risks are perceived to be less.

• FDI in Mexico will be driven by NAFTA and its large market. It is also likely to
benefit from investors, particularly banks, refocusing their investments in Latin
America. This said, investments in the manufacturing sector could be hurt by
increased competition from China.