CHANAKYA NATIONAL LAW UNIVERSITY

Final draft on the project of International Trade Law.

On
“Regional Trade Agreements.”

Submitted to: - Dr. P.P. Rao

Faculty of International Trade Law

By: Aishwarya Shankar

Roll No:1913

Course: B.A., L.L.B. (Hons.)

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 DECLARATION BY THE CANDIDATE

I, hereby, declare that the work reported in the B.A., LL. B (Hons.) Project Report titled “Regional
Trade Agreements” submitted at CHANAKYA NATIONAL LAW UNIVERSITY, PATNA
is an authentic record of my work carried under the supervision of Dr. P.P Rao. I have not
submitted this work elsewhere for any other degree or diploma. I am fully responsible for the
contents of my Project Report.

Aishwarya Shankar

Course: B.A., LL. B (Hons.)

SEMESTER – 6th

CNLU, PATNA

Dated: 02/04/2021

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 CONTENTS

1. Introduction………………………………………………………………….……….5.
2. Evolution of Multi-Lateral Trading System and New Generation RTAs……………7.
3. WTO Rules on RTAs…………………………………………………………….….10.
4. Regionalism and Multilateralism in SAARC Countries…………………………….11.
5. Conclusion…………………………………………………………………….….….20.
6. Bibliography…………………………………………………………………………21.

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 ACKNOWLEDGEMENT

I would like to show my gratitude towards my guide Dr. P.P. Rao, Faculty of International Trade
Law, under whose guidance, I have structured my project.

I owe the present accomplishment of my project to my friends, who helped me immensely with
the materials throughout the project and without whom I couldn’t have completed it in the present
way.

I would also like to extend my gratitude to my parents and all those unseen hands that helped me
out at every stage of my project.

THANK YOU,

AISHWARYA SHANKAR

SEMESTER 6th

CNLU, Patna

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 INTRODUCTION

International economic order is rapidly changing. Until the early 1990s, multilateralism was
dominant and regional remained marginal. Today, however, regionalism is well acknowledged as
one of the two pillars of international economic order, together with multilateralism. It will be thus
important to explore the harmony between regionalism and multilateralism. The question is
whether regionalism may be a faster way to reach multilateralism or, rather, hurt multilateral
liberalization. Are regional integration arrangements “building blocks, or stumbling blocks,” in
Justice Bhagwati’s phrase or stepping stones toward multilateralism? Since the end of the Uruguay
Round, the world trading system has experienced the emergence of a large group of regional blocs.
Ranging from the NAFTA and the Mercosur to the APEC and the enlargements of the EU, regional
blocs seem to become factors that have to be taken seriously in the future trading system

The agenda of the eleventh Conference of UNCTAD (UNCTAD XI) centered on the coherence
between national development strategies and global economic processes to promote economic
growth and development, particularly of developing countries. A central aspect of this agenda is
international trade and trade negotiations both at the multilateral level under the WTO, and at the
regional (including bilateral, subregional and interregional) level. The interface between the two
processes has important implications for the trade and development prospects of developing
countries. They can be complementary and coherent with the multilateral trading system (MTS),
and thus facilitate international trade and enhance development prospects, or they can be divergent
and hence undermine the collective and national effort to use international trade as an engine of
growth and development. The coherence between multilateralism and regionalism becomes an
opportunity and challenge for countries, as well as their regional arrangements and the WTO to
manage in the evolving international trading system in order to maximize their potential benefits
and minimize their potential adverse effects.

Effectively managing the interface between regional and multilateral initiatives requires greater
synergy between national development objectives and external commitments. Central to this
challenge facing developing countries is to design and implement an appropriate and strategic
pacing and sequencing of national, regional and multilateral liberalization, so as to maximize
development gains from these processes of trade liberalization and regulatory commitments, by
rendering regional processes and multilateral liberalization mutually supportive and coherent. A
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challenge is that simultaneous participation by countries in a web of regional trade agreements
(RTAs) while also engaging in the evolving MTS, both of which have overlapping agendas,
increasingly affects sensitive development policies and overloads the limited negotiating capital
of developing countries. Negotiating and benefiting from RTAs requires important human and
institutional resources and infrastructures and resolving underlying asymmetries, including with
respect to size and economic conditions. This new interface between multilateralism and
regionalism in terms of coherence and compatibility deserves special attention by policy makers
and requires careful and in-depth study. Regional trading agreements refer to a treaty that is signed
by two or more countries to encourage free movement of goods and services across the borders of
its members. The agreement comes with internal rules that member countries follow among
themselves. When dealing with non-member countries, there are external rules in place that the
members adhere to. Quotas, tariffs, and other forms of trade barriers restrict the transport of
manufactured goods and services. Regional trading agreements help reduce or remove the barriers
to trade.

RESEARCH METHODOLOGY:

The methodology used in the project report is the doctrinal method of research.

AIMS AND OBJECTIVES:

1. To know about what regional trade agreement is.

2. To know about changing landscape of regional trade agreement.
3. To know about how trade agreements are made; advantages and disadvantages of trade
agreements.

HYPOTHESIS:

Regional trade agreements (RTAs) are a key fixture in international trade relations.

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 EVOLUTION OF MULTILATERAL TRADING SYSTEM AND “NEW
GENERATION” REGIONAL TRADE AGREEMENTS

Regional trade agreements (RTAs) cover more than half of international trade and operate
alongside global multilateral agreements under the World Trade Organization (WTO). Two broad
policy lessons have emerged from OECD work in this area. The first is that the actual effects of
RTAs bolster the case for a strengthened multilateral framework, particularly when regionalism
leads to a patchwork effect between members and non-members within the concerned region, and
thereby raise transaction costs for business. A second lesson is that while some consequences of
RTA activity contribute to the case for strengthening the multilateral framework, some features of
regional approaches may complement multilateral rules. The scope for such complementarily
arises from the contribution which regional initiatives can make towards multilaterally-driven
liberalization and harmonious rule-making that goes beyond the WTO. Together, these two
elements have yielded highly effective synergies between approaches at the regional and
multilateral levels.

The conclusion of the Uruguay Round of multilateral trade negotiations in 1994, and the
establishment of the WTO in 1995 to provide the institutional support to the multilateral trade
agreements, constituted a significant milestone in the evolution of the multilateral trading system.
The principle of “single undertaking” bound all WTO members to all the results of the Uruguay
Round negotiations (with the exception of plurilateral agreements), thereby reinforcing the
fundamental principle of most-favored nation (MFN) treatment. With the conclusion of the
Uruguay Round and the strengthened MTS, there was an expectation that exceptions to
multilateralism, such as regional trade agreements, even though legally covered by the WTO under
certain conditions, would either become less of an alternative policy option for countries or will
need to be adapted and conducted in such a manner as to become outward-oriented, not inward-
looking, and thus constitute building blocks for the new multilateralism ushered in by the WTO. 1

The debate on the interrelationship between MTS and RTAs is long-standing and well
documented. It mainly pertains to the following two broad issues: (i) relative welfare effects of

1
WTO, “Compendium of issues related to regional trade agreements”, background note by the Secretariat
(TN/RL/W/8/Rev.1), 1 August 2002. Retrieved on 27th March. 2021.

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non-preferential across-the-board (MFN) liberalization versus preferential liberalization; and (ii)
the political economy implications of RTAs for MTS, as well as those of MTS for RTAs.11 While
the first question asks which approaches to trade liberalization are superior in terms of trade and
welfare gains for the members of RTAs, third countries and the world as a whole, the second
question seeks to ascertain the systemic implications of RTAs for the MTS in general and
multilateral trade negotiations in particular, i.e. whether regional integration constitutes a building
block or stumbling block to multilateral trade liberalization and a more open and liberal
multilateral trading system.

In the economic literature, it is well documented that regional integration would entail static and
dynamic gain. In a simple partial equilibrium model under perfect competition, an RTA may
increase the level of trade between members at the expense of less efficient domestic producers
(“trade creation”) or of more efficient third countries (“trade diversion”). The net effect of an RTA
on welfare thus depends on the relative size of these two effects. This depends on a variety of
assumptions and conditions, including complementarities of production structure among RTA
partners and initial level trade barriers, and cannot be determined a priori. The dynamic effects
resulting from regional integration include competition effects and scale effects. These dynamic
effects of regional integration have been a major rationale for the formation of recent RTAs,
including those arising from FDI flows, strengthened intellectual property rights protection, or the
predictability of the trade regime and institution building and governance. Such dynamic effects
of RTAs have been observed most vividly in the EU and NAFTA, which not only increased their
intraregional exports but also their trade with the rest of the world.

With regard to the political economic implications of RTAs vis-à-vis the MTS, various arguments
have been advanced, both in favour of and against regionalism. On the positive side, RTAs enable
participating countries to move closer and quicker to freer trade with stronger disciplines over a
wider range of goods and services than could be attained at the multilateral level. RTAs could also
act as laboratories for testing approaches to new issues, and their operating experiences can provide
the basis for future multilateral trade negotiations for developing rules for application at the
multilateral level. In this way, RTAs could be halfway houses or building blocks for a more open
and liberal MTS. As regards the supremacy of the WTO over RTAs, the constituent treaties of
many new-generation RTAs clearly state that these need to be consistent with WTO rules. This

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indicates that future RTAs would be built on the WTO, seeking to maintain compatibility with its
disciplines. This points to a positive, dynamic interface between regional trade liberalization and
disciplines on the one hand, and multilateral liberalization and disciplines on the other. Of course,
in order for these intentions to become reality, all RTA provisions need to be WTO-compatible. 2

For developing countries in particular, RTAs tend to form the nucleus of a wider regional economic
integration process that is an integral aspect of national development strategies. This is particularly
so, given that developing countries have a limited number of policy options to maintain and
increase their market shares in world trade in goods and services, promote sustained economic
growth and development, and enhance their beneficial integration into the global economy. The
formation of an enlarged regional market space through regional trade liberalization is not
perceived as an end in itself but as a stepping-stone towards the future attainment of a single
economic, social and cultural grouping spanning several countries.

Developed countries (with the exception of the EU), in contrast, tend to emphasize the free trade
agreement feature, which expands beyond trade in goods to cover services, investment and other
trade-related issues (such as competition policy). This is clear from the many FTA initiatives
launched primarily by developed countries, whereas in agreements to which developing countries
are parties, the tendency is to include wider development partnership agreements such as between
the ACP States and the EU. Regionalism could serve as a lock-in mechanism for domestic political
and economic reforms in developing country RTA members.

On the negative side, RTAs may result in inward-looking, discriminatory and protectionist trading
entities competing for spheres of influence and becoming self-contained fortresses. In particular,
large RTAs – those whose membership covers a large share of global trade – can potentially have
harmful effects for non-members leading to net trade diversion rather than net trade creation. Much
depends on the policies and disciplines of RTAs with regard to imports from non-participants,
which need to be supportive and complementary to the greatest extent possible with the MTS in a
way, which strengthens its credibility.

2
Jaime d e M e l o: Regionalism and Developing Countries: A Primer, in: Journal of World Trade, Vol. 41, No. 2,
2007, pp. 351-369. Retrieved on 27th March. 2021.

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 WTO RULES ON RTAs

RTAs are governed by Article XXIV of GATT 1994, Article V of the GATS and the Enabling
Clause. All provisions allow WTO Members3 to depart from the cornerstone principle of the MFN
under certain conditions, and establish the requirements to be fulfilled by members of RTAs to be
compatible with the WTO. GATT Article XXIV requirements, which apply to FTAs, CUs and
“interim arrangement” leading to either FTAs or CUs, essentially provide that duties and other
regulations of commerce should be eliminated for “substantially all the trade” among RTA
members, and that the barriers placed in the way of third countries should not be “on the whole
higher or more restrictive”. These requirements are not applicable under the Enabling Clause The
Enabling Clause provides that the MFN clause of GATT Article I.1 is exempted for a limited
number of preferential arrangements, including “regional or global arrangements entered into
amongst less-developed countries for the mutual reduction of tariff reduction or elimination of
tariffs” (paragraph 2c). Thus, it can be argued that the Enabling Clause sets out less stringent
requirements than those contained in GATT Article XXIV. Indeed, a number of South-South
RTAs have been notified under the Enabling Clause.19

The examination of notified RTAs with regard to their compatibility with WTO rules is conducted
by the Committee on Regional Trade Agreements (CRTA).20 The CRTA has not been able to
adopt final reports on its examination to date. This is in large part due to the very limited progress
made by WTO Members in resolving "systemic issues" concerning WTO rules on RTAs. Systemic
issues pertain to the interpretation of some of the terms and benchmarks in the provisions. 21 For
instance, there has been no agreement among WTO Members as to the exact meaning and
measurement of key terms such as “substantially all the trade”, “not on the whole higher or more
restrictive”, and “other regulations of commerce (ORC)”; and with respect to the treatment of
preferential rules of origin, “other restrictive regulations of commerce (ORRC)” and obligations
during transitional periods. The relationship between RTAs notified under the Enabling Clause
and GATT Article XXIV has also been raised. Systemic issues with regard to GATS include the

3
Germán C re a m e r : Open Regionalism in the Andean Community: A Trade Flow Analysis, in: World Trade
Review, Vol. 2, No. 1, 2003, pp. 101-118. Retrieved on 27th March. 2021.

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interpretation of “substantial sectoral coverage” and “absence or elimination of substantially all
discrimination”.

REGIONALISM AND MULTILATERALISM IN SAARC COUNTRIES

There is a strange discrepancy in South Asia between regional cooperation on the one hand and
open hostilities on the other. The states, which once comprised British India (more or less, given
the sophisticated organizational set up of British supremacy), i.e. India, Pakistan, Bangladesh, Sri
Lanka, Nepal, Bhutan, Maldives, joined hands in 1985 to establish the South Asian Association
for Regional Cooperation (SAARC). With the exception of the smallest member, they all have
been experiencing strained relations with the largest one. In the case of India and Pakistan, we
have been observing open hostilities over decades, an undeclared war along the line of control in
Kashmir and an escalating arms race, becoming most terrifying with the Indian and Pakistani
missile and nuclear tests of 1998.

Thus, SAARC is a marriage of convenience rather than love. All the South Asian states have tried
other alignments, if only in the case of India, with the other non-aligned countries. Pakistan joined
various defense alliances as a partner of the West in the early days of the cold war and later turned
to the Islamic, South West and Central Asian states. None of the South Asian states has been
welcome to South East Asian or Pacific Rim associations. India has made it very clear that it would
not tolerate closer relations between its Himalayan neighbors and China, which in turn has been
Pakistan's most reliable partner.

Economics always have been emphasized as a golden opportunity of regional cooperation. So far,
however, this has been not more than wishful thinking. Intra-regional trade of the South Asian
states has been in the range of 3 per cent of all foreign trade of the member countries; in the face
of the numerous quantitative and administrative measures which restrict trade between India and
Pakistan Sajal Lahiri speaks of "inverse regionalism". Talks of intensifying regional trade, at
present exports of electric energy from Pakistan and of natural gas from Bangladesh are being
discussed, thus, are hardly more than wishful thinking.

The paper is set out to have a look at the economics of regional cooperation. Given the fact, that
present boundaries, especially between Pakistan, India and Bangladesh, run across areas, which

11
constituted a single economic unit until 1947, one could well imagine, that these boundaries may
be open at some time in future again. There seem to be, however, few studies dealing with this
aspect. Studies on South Asian regional economic cooperation mainly focuses on the economic
situaton in the member states, which usually are dealt with separately, and on intra-regional trade
prospects. Other aspects have to be looked at, too: transnational natural resource utilization (e.g.,
water), migration and capital movements.

Inverse regionalism

In his short introduction into the current debate on regionalism versus multilateralism Sajal Lahiri
coined the term "inverse regionalism":

"In spite of the formation of the South Asian Association for Regional Cooperation (SAARC) in
the mid-eighties, intra-regional trade between the member countries remain negligible even in
absolute terms. Trade between India and Pakistan are restricted by numerous quantitative and
administrative measures. This can be called inverse regionalism. The political process in the two
countries have a lot to do with this inverse regionalism. Clearly such restrictions to trade can be
reduced by regional agreements without necessarily imposing trade restrictions against countries
outside Asia. Such reversals of inverse regionalism could only reinforce the multilateral trading
system."

Even if we consider, that South Asian data are often subject to later revisions (e.g., Indian exports
reported for 1998 might have been more than hardly a tenth of 1997 as reported by the IMF), intra-
regional trade developed just in step with exports from South Asia to third countries.

Given the poor quality of statistics, it is not possible to say, whether the share of intra-regional
trade has remained the same, has declined or has grown since the foundation in 1985. But in any
case, the share is not substantial. Of course, one must not expect such high shares of intra-regional
trade as we experienced in the European Union: given the fact that India's economy is roughly
three times as big as that of the other six taken together, the volume of intra-regional trade is
restricted by the much smaller production and absorption capacities of India's regional trading
partners, but one easily could expect a more intensive intra-regional trade. This is evident if we
look at the smaller members: Just 3 per cent of Pakistan's exports of 9.39 bn US$ (1996) were

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shipped to the SAARC countries and it received only slightly more. Bangladesh's exports to
SAARC countries amounted even to only 2 per cent of total exports of Bangladesh (although it
received much more). Only the smallest of the SAARC countries have to rely more on their
SAARC partners: Nepal, however, has been successful in reducing its dependency on India;
Bhutan might try the same (no separate IMF figures for Bhutan), and the Maldives, which hardly
have any agriculture or industry, have to rely on neighboring Sri Lanka.

Besides India's sheer size, geography is responsible for the smaller countries trying to distant
themselves from India: as is well known, all the smaller states neighbor India but none of the
others. Nepal and Bhutan are land locked and have only one other neighbor, i.e., China. Most of
their population live on the slopes and in the plains south of the Great Himalaya; there are no
natural boundaries between the two Himalayan states and India; the border areas to the north in
China (Tibet), however, are forbidding mountains and high plains and are thinly populated.
Politically, India has been treating the Himalayan states as its sphere of influence; it only recently
agreed to transit trade from Nepal to Bangladesh; until now it does not permit any direct flights
between Nepal and Pakistan.

To Bangladesh, India is the only neighbor except Myanmar. The long border to India runs for most
of its length across open plains and has been fenced (partly) only recently. Illegal trade and
migration have become sensitive political issues in Bangladesh and India. Furthermore, India,
lying upstream, controls the main waters flowing into Bangladesh; any withdrawals of water (for
irrigation and - in the case of the Hooghly River - for shipping) affect Bangladesh's agriculture,
fishery, shipping and ecology. Historically and politically, Bangladesh owes India its very
existence; Muslim Bengalis, however, played an important role in the Pakistan movement and in
Partition.

The delicate relations between India and Pakistan are too well known to be described here [Zingel
1998]. Pakistani feel fundamentally threatened by India; common belief is that India is out to
destroy Pakistan and to undo Partition. This even more after India's nuclear tests of May 1998.
Like Bangladesh, India controls the upper portions of almost all Pakistani rivers. In a country
which relies more on irrigation than any other and which has buit the largest irrigation system of
the world, water surely could become casus belli. As a rare example of political farsightedness,

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India and Pakistan agreed in 1960 on the Indus Water Treaty, allocating the waters of the three
western rivers (Indus, Jhelum, Chenab) to Pakistand those of the three Eastern rivers (Ravi, Sutlej,
Beas) to India. India and Pakistan also agreed to the decision of the International Court after the
short and futile war of 1965 over the Run of Kutch. As is too well known, both the neighbours
cannot agree on Kashmir, where an undeclared war is going on since years. Both the countries
accuse each other of funding, training and arming separatist movements and terrorist groups;
hostilities did not lose their momentum after the nuclear tests, proving them to be not deterring
and to be not improving national security. Fortunately, there is no talk of massive retaliation, a
threat, which is said to have worked during the cold war.

Sri Lanka and India are divided by the waters of the Palk Street. Ceylon, as it was called then, was
no part of British India and always had been under separate administration. This made things easier
after Independence. In the beginning, the fate of the migrants from Southern India working in the
tea gardens, the so-called Indian Tamils, constituted the main bilateral problem; under the bilateral
agreements many of them returned to India, the others, finally, were accepted as Sri Lankan
citizens. India's intervention in the civil war was neither helpful nor successful. The Tamil Tigers'
alleged involvement in the assassination of the former Indian prime minister Rajiv Gandhi marked
the end of clandestine Indian (Tamil) support of the Tamil Tigers.

For the Maldives the situation is markedly different from that of the other South Asian states. The
Maldives are neighbors to Sri Lanka rather than to India, and to that extent the common phrase,
that the smaller countries of South Asia all border India bur none of the others, is not exactly true.
Thanks to tourism the Maldives are economically much better off than the other SAARC members.
Colombo is the nearest larger city and used to be the natural port of call for all those coming and
going to the Maldives. But after Male's airport has been upgraded (and Colombo became too
unsafe) directs flights from Europe reach the Maldives and make the country less reliant on Sri
Lanka. As for shipping, Singapore is the regional hub, having replaced Colombo.

As a consequence of politics and geography, the four South Asian intra-regional land boundaries
have their very own characteristics:

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1. The boundary between India and Pakistan is the longest and most difficult: most of the boundary
runs over open, in the southern part, thinly populated areas with no natural dividing features, there
is only one official crossing: between Lahore and Amritsar, by road and rail.

2. The boundary between India and Bangladesh also mostly runs over open plains, although most
of the boundary areas are densely populated. There is a number of crossings; rail service - to the
author's knowledge - is possible in principle, but discontinued, more or less, since decades. After
India agreed to transit between Nepal and Bangladesh, it now hopes for Bangladesh's permission
of transit between West Bengal and the North Eastern states and territories.

3. Most of the boundary between Nepal and India is in the Terai, once impenetrable plains, which
have been cleared and today have a population of around three million of Indian origin. The border
is known to be easily to cross and subject to massive re-exports, i.e., smuggle to India. In 1989
India closed almost all of the small border crossings, officially to stop smuggling, but unofficially
to impress on the government of Nepal and to ensure India's "special interests".4

4. A similar situation exists for the border of Bhutan and India. The main problem here is the influx
of migrants of Nepali origin via India (the two Himalayan kingdoms have no common border).

Nepal and Bhutan, in principle, could trade with Pakistan via China: road transports to and from
Pakistan, for example, would be possible technically, although costly. India, however, uses all its
influence to deter the Himalayan states from closer relations with China.

Only India has direct flights to the other members and controls all flights from and to Nepal and
Bhutan; flying to Maldives is a matter of economics rather than politics. A similar situation exists
for sea trade: the Himalayan states have to rely on transit through India; lack of direct shipping
otherwise is again a matter of economics; using far away hubs (Singapore, Dubai) for
transshipment is not uncommon also in other world regions.

4
L. Alan Winters, The EC and Protection: Political Economy, 38 European Economic Review at pp.596, 601-02
(1994)

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To sum up this small chapter: There are no natural unsurmountable hindrances to intra-regional
trade in South Asia. One could imagine that once the borders are open again - with many of the
centres of economic activity of India and Pakistan located in the plains of Indus und Ganges -
goods traded would be transported mainly overland by road and rail rather than by sea, resulting
in a restructuring of regional development patterns. 5

Obstacles to trade: the energy market

The literature is full of "potential" of South Asian trade. I shall take up a recent issue, i.e., that of
the energy market. Electric power has been mentioned again and again as an ideal example for
regional exchange. None of the South Asian countries produces enough natural oil for its own
consumption; actually, only India and Pakistan produce some of it, but also have to import. India,
Pakistan and Bangladesh have substantial proven reserves of natural gas, no gas it is imported or
exported, but Pakistan and Bangladesh may be in the position to export and India is believed to be
interested in imports. All SAARC members except the Maldives produce hydroelectric power; in
Bangladesh the potential has been almost fully utilized, but the others still could mobilize
enormous reserves; already, Nepal and Bhutan are exporting electricity to India; there are plans
for more export oriented hydel projects in Nepal and Bhutan. India is one of the largest coal
producers with enormous reserves, although partly of poor quality; Pakistan also has coal and
produces some; there is coal in Bangladesh, but it has been found to be too expensive to produce.
Finally, India and Pakistan have developed their nuclear industries, there are plans to build more
nuclear power stations.

All South Asian states have been investing heavily in building their national electricity grids;
Nepal and Bhutan power plants have been connected to the Indian grid. At Independence only
isolated grids existed, until the early 1950s India and Pakistan traded electricity; there has been no
exchange of electricity afterwards. A connection of the national grids of India and Pakistan would
be easy with both Punjab well connected to the rest of their respective countries.

5
Mina Mashayekhi, Lakshmi Puri and Taisuke Ito, Multilateralism and Regionalism: The New Interface,
UNCTAD/DITC/TNCD/2004/7. Retrieved on 27th March. 2021.

16
From the economic point of view, the question, however is, how much South Asia would benefit
from intra-regional trade of power. The reason for not more power being traded at the moment
simply is the lack of availability. All South Asian states suffer from power famines, as every visitor
to South Asia is well aware of. Load shedding and power cuts are the rules of the day almost
everywhere. Liquid gas is rationed in India and petrol pumps at times are to be found without any
fuel; voltage fluctuations are even more annoying than power cuts.

The lack of availability is not so much a question of lack of potential than inefficiencies,
technically and even more economically. Making the systems more efficient would help indeed,
but on the longer run additional capacities are needed given the low levels of consumption in all
South Asian states. Whether a regional cooperation is needed for this purpose, is doubtful,
especially, since the major sources of primary power are located outside SAARC and since the
SAARC countries will be needing their own resources for themselves. The major exceptions are
hydroelectric power exports from Nepal and Bhutan to India (leaving aside the ecological aspects),
and - maybe - natural gas exports from Bangladesh to India. 6

The political environment for trade

The end of the cold war raised hopes for a peace dividend, i.e., public funds which no longer had
to be spent on defense and could be spent otherwise, e.g., for education, health and infrastructure,
or could be returned to the tax payer. This clearly happened in the West (e.g., Germany) and in the
East (although at the price of the collapse of the industrial-military complex and much of the state).
Some politicians expected a similar development in South Asia, only to learn, that the Indo-
Pakistan conflict is a genuine one with the two combatants having associating themselves with the
- then - warring super powers. The collapse of the old-world order, however, had different effects
on India and Pakistan as far as defense expenditure is concerned. Pakistan had associated
themselves much more with the USA than India did with the Soviet Union. The end of the US
engagement in Afghanistan had a dramatic effect on the amount of US aid going to and through
Pakistan, officially and unofficially. Furthermore, with Pakistan no longer needed as "front state",

6
Antoni Estevadeordal, Caroline Freund and Emanuel Ornelas, “Does Regionalism Help or Hinder Multilateralism?
An Empirical Evaluation.” Retrieved on 27th March. 2021.

17
the USA returned to their old legal position, i.e., that Pakistan because of its nuclear programme
comes under the restrictions of the various amendments (Symington et al.) to the US Foreign
Assistance Act of 1961 and - lacking a Presidential waiver - were cut off from most US aid;
Pakistan had been subject to such sanctions already in 1979 but was "rescued" by the Soviets
invading Afghanistan. Since 1990 Pakistan has (again) to rely more on the international arms
bazaar, at higher prices and less concessional conditions. India obviously was less generously
treated by the Soviets and had built up substantial defense research and productions facilities.
Speculations are that India managed to hire - low cost - defense and nuclear productions specialists
from the former Soviet Union. Accordingly, India must have received a much higher peace
dividend from the end of the cold war than Pakistan.

The present situation seems to be that both countries use substantial resources for national security
with the share of defence related expenditures in GNP higher in Pakistan (than in India with a
much larger economic basis than Pakistan India might see the chance to "bleed [Pakistan] white",
as President Reagan is said to have aspired in the case of the Soviet Union. The last months have
shown, that India is suffering from the various economic sanctions after the nuclear tests less than
Pakistan, which presently seems to be on the brink of economic collapse.

As has been pointed out at the beginning of the paper, the undeclared war in Kashmir is going on
despite the nuclear threats, it even seems to have intensified during the last months. It is here,
where SAARC is to play its role, providing a forum for a continuous dialogue between India and
Pakistan on the levels of heads of state down to the technical committees. SAARC provides a
multilateral forum which allows a continued dialogue even when bilateral talks break down. It also
allows to work on technical details in the various groups and work to out "innocent" programmes,
in which India and Pakistan could participate despite all bilateral tensions. The hope is, that as
long as this dialogue goes on a major war can be avoided, this being the real peace dividend of
SAARC.

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 CONCLUSION

There is an increased attention being paid to regional arrangements. The threat to the multilateral
trading system does not appear to be as large as is often reported. The debate about whether RTAs
are” building blocks or stumbling blocks” for global freer trade, which was so virulent in the 1990s,
faded because, whatever the answer to the question, in practice RTAs have made so little difference
either way. The impact on the global trading regime of the hundreds of RTAs notified to the
GATT/WTO as being in contravention of the MFN principle has been trivial compared to the
establishment of multilateral trade law based on the nondiscrimination principle. The
dissemination of regionalism can contract and distort non-discriminatory multilateralism.
Countries are too diverse in their developments. Negotiations under the framework of WTO take
too much time as well. Regionalism is then an alternative to consider, at least, for countries
geographically close to each other, especially for countries with close economic exchanges and
interests.

The completion of the Uruguay Round of Multilateral Trade Negotiations coincided with the
development of a worldwide trend towards increased regionalism, as witnessed by the conclusion
of NAFTA, the emerging process of regional integration in Latin America and the launching of
APEC. While this new trend has caused some observers to evoke the prospect of a world economy
increasingly divided among rival “trade blocs”, recent studies suggest that regional trade
agreements may complement rather than threaten the multilateral trade system. At a theoretical
level, economists are divided over the desirability of regional trade agreement in a multilateral
trade regime. There is still no consensus about this issue. However, regionalism, with its
advantages and drawbacks, is a reality of the current global trade regime. The wave of regionalism
is likely to intensify in near future. If a very high proportion of global trade gets diverted through
the regional route, WTO is bound to lose some of its relevance in the global trading system.
However, in the current state of distorted multilateralism, regionalism has turned out to be one of
the more viable alternatives for developing countries to expand their market access. In this context,
South-South RTAs are particularly useful as they allow developing countries to expand their
market. Also, it is always possible that if the world is divided in a few mega trade blocks, then the
weakest countries will be marginalized.

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Regional trade agreements have proliferated in number, expanded their membership, and deepened
their integration since the creation of WTO, and in particular since the launch of the Doha Work
Programme. Both developing and developed countries have been actively participating in these
processes by establishing and reinvigorating North- South and South-South agreements, often on
an inter-regional basis. As regards North-South agreements, the development dimension needs to
be taken into account in respect of both market access and entry opportunities and domestic policy
space. North-South RTAs may address market entry barriers, most notably rules of origin. They
can also result in deeper Mode 4 commitments and facilitated recognition of qualification.
Adjustment costs may be significant for developing countries, and this requires meaningful special
and differential treatment, including resource transfer for development purposes, to be
incorporated in the agreements.

As regards South-South agreements, the potential for trade expansion is significant, while a
number of South-South integration groupings have yet to exploit their full potential for export
expansion and diversification. Deep integration would prove to be beneficial under South-South
agreements. Effectively managing the interface between RTAs and the MTS requires, at the
national level, comprehensive development-oriented trade policies and a clear assessment and
awareness of the impact of the norms and disciplines being entered into at the different levels of
trade integration. Clarity of policies addressing the development, trade and financial needs of
developing countries is necessary in order to mould RTAs into effective instruments for
development. Development objectives deserve priority attention in RTAs and in the WTO,
including in the context of questions touching upon special and differential treatment issues. At
the regional level, ensuring additional policy space and flexibility available for promoting
development in the context of RTAs is necessary. The emergence of issues related to “WTO plus”
and “WTO-minus” demands comprehensive analysis of the different regulatory developments in
the multilateral and regional contexts, and identifying additional policy space available for action
at the regional level. At the multilateral level, it is important to strengthen the rules affecting RTAs
in order to guarantee that RTAs are indeed instruments for promoting trade liberalization globally,
while at the same time the rules needed to allow for special and differential treatment for
developing countries to make use of flexibility available to them.

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 BIBLIOGRAPHY

BOOKS REFERED

• Freund, Caroline L., and Emanuel Ornelas. "Regional trade agreements."

• Pomfret, Richard WT. Regional trade agreements.
• Frankel, Jeffrey A., Ernesto Stein, and Shang-Jin Wei. Regional trading blocs in the world
economic system.

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