RTAs and WTO

Dr. (Mrs.) Vijaya Katti

Professor and Chairperson (MDPs)
IIFT, New Delhi
Regional Trade Agreements (RTAs)

 Conceptual Economic Issues

 Recent Trends in RTAs
 Implications for India
 Relationship with Multilateral Trading System
 Recent Trends in RTAs
 Growth in Number of RTAs
 Intra-Regional Trade of Major RTAs
 Types of RTAs

RTA Share of intra-regional exports in

total exports: 2002 (%)
EU (15) 61.6
NAFTA (3) 56.5
AFTA (10) 24.0
CEFTA (7) 12.2
MERCOSUR (4) 11.5
ANDEAN (5) 10.2
 Implications for India

 India’s Recent Regional Trading Engagements

• Bilateral: India-Nepal, India-Bhutan, India-Sri Lanka, India-Thailand, India-
ASEAN, India-MERCOSUR, India-Singapore, India-China
• Sub Regional: BIMSTEC, BBIN, Bangkok Agreement
• Regional: SAPTA, SAFTA

 Economic Implications: Trade, Investment, Static &

Dynamic Gains
• Trade Gains: Goods and Services (Banking, Tourism, Infrastructure,
Professional etc.)
• Potentials for Investment flows : Industrial Restructuring
• Technology Exchange
• Human Resource Development
 Relationship with Multilateral
Trading System
 Stepping Stone towards Multilateralism
 GATT Article XXIV, Enabling Clause,
GATS Article V
 Three Criteria
• Transparency
• Deep Intra-regional Trade Liberalization
• Neutrality vis-à-vis non-parties’ Trade
Cont…

 Other Issues:
• Services
• Investment
• IPRs
• Competition Policy
• Technical Standards
• Government Procurement
 Problems
• Inconsistency
• Interpretational
• Institutional

 Harmonious Relationship between RTAs and WTO

Desired
BASIC GATT PRINCIPLES

 MFN (Most Favoured Nation

Treatment)
 TRADE TO BE REGULATED BY
CUSTOMS DUTY ONLY
 DUTIES TO BE BOUND
 NATIONAL TREATMENT
WTO RULES

 Permitted under Article XXIV of GATT

1994.
 Exception to MFN treatment within the
Rules subject to fulfillment of conditions:
• items on which there is substantial trade to be
covered
• the phase out of duties should be within a
reasonable period of time
• it should not have trade distorting effect
M.F.N. EXCEPTIONS

 Exception to MFN is also available

under the “Enabling Clause Decision”
of 1979 wherein the WTO members
may accord differential and more
favourable treatment to developing
countries, without according such
treatment to other Contracting
Parties.
The Global Context
Regional Trading Arrangements

 RTAs are viewed by most countries as

building blocks towards eventual global
free trade.
 More than 200 RTAs have been notified to
GATT/WTO.
 150 of these are still in force.
 250 RTAs are expected by 2005.
 STAGES OF ECONOMIC DEVELOPMENT

MONETARY
UNION
COMMON
EXTERNAL
TARIFF (CET)

FTA

PTA

ECONOMIC
COOPERATION
Regional Trading Arrangements
 RTAs can be used as a tool for –

Material management
Cheaper imports – domestic prices in control
Better quality products at competitive price
Better market access
Investments flow - JVs
Coverage of Services
Mutual recognition of standards & laboratories
Trade facilitation, Harmonisation of Customs procedures etc.
 Rules of Origin

 Objectives:
to prevent trade diversion
enhance intra-regional trade

 Components:
local content / value addition
manufacturing process
transformation
Free Trade Areas

 To eliminate completely quantitative

trade restrictions and customs tariffs
against each other’s goods
 Member countries retain the sovereign
power to decide the trade policies to be
imposed on non-members
Customs Union

 Similar to free trade area

 Adopt uniform import tariffs and common
quota restrictions to non-members
 Weakened the ability of member
countries to determine national trade
policies independently
Common Markets

 Similar to customs union

 Plus free movement of factors of production
 A significant reduction of national sovereignty

An example of a common market is the EEC

which is composed of Belgium, Denmark,
France, Germany, Ireland , Italy, Luxemburg,
Neitherlands and the UK.
Economic Unions

 Similar to common markets

 Harmonization of monetary, fiscal and social
policies
 A single common policy as an essential
prerequisite for the effective functioning of the
union
 An example of an economic union is the
Benelux which is the economic union formed
by Belgium, the Netherlands and Luxembourg.
 Infact Belgium, Netherlands and Luxemburg
formed a customs union in as early as 1948 and
they became an economic union in 1960.
The different forms of RTAs Represent
different degrees of Economic integration.
They start from the lowest degree Of
economic integration (i.e. a Preferential
trading club ) and go Through progressively
higher degrees until the most complete Form
of economic integration (i.e.economic union).
The theory of Customs Union
Basically deals with two concepts
1. Trade Creation
2. Trade Diversion
These two concepts were first put forth by
Jacob Viner in early 1950’s .
Trade Creation

The formation of a customs Union Causes some

products which were formally produced domestically
to be imported from other partner countries-the tariffs
on such imports are eliminated. Since there is pro-
duction shift from a high cost domestic producer
to a lower cost producer in a partner country-it is
trade Creation.
Trade Diversion
Customs Union also causes some Products which
were formerly imported from the rest of the world to
Imported from the partner country-Thanks to the
newly formed geogra
phical tariff discrimination. Here the
Shift in production is from a lower
Cost producer in the rest of the world
To a higher cost producer in a partner
Country-trade diversion.
The fundamental notion behind these
Concepts is that trade transfers goods
From a high cost region to a low
Cost region. Thus trade increases
Welfare by reducing costs or alterna
tively by increasing world income.
It is in this sense trade creation is
Conceived to be beneficial and trade
Creation detrimental.
 Motivations for RTAs

Market factors:
1. To maintain market access
2. To open new markets
3. To attract foreign direct investments (FDI)
4. To benefit from economies of scale
 Cont…

Political factors:
1. To act as a counterbalance to other RTAs
2. To act as a commitment to internal reform
3. Inspired by previous successful examples
4. To increase bargaining power
5. To maintain intraregional security
Costs of RTAs

For member countries:

1. Increase in competition
2. Loss of national sovereignty
3. Increase in unemployment in some
sectors
4. Loss of tax revenues due to the
relocation of companies to low-cost areas
 Cont…

For non-member countries:

1. Trade diversion
2. Deterioration in the terms-of-trade due
to a fall in export demand
3. The risk of being isolated if trade war
occurs
The View of WTO
 In the conclusion of a 1995 study by the
WTO Secretariat
“... To a much greater extent than is
often acknowledged, regional and
multilateral integration initiatives are
complements rather than alternatives in
the pursuit of more open trade.”
GATT Article XXIV
 The agreement must eliminate
substantially all barriers and discrimination
to trade between the parties
 The agreement must cover substantially
all trade between the parties .
 The terms of access for non-members
must not be worse than before the
agreement went into effect
Committee on Regional Trade
Agreements (CRTA)
 Established in 1996
 To centralize the effort of working parties
in one body
 To examine in detail future regional trade
agreements notified to the WTO
 To provide a common platform to discuss
ways of dealing with the issue of
regionalism in the WTO
Open Regionalism
 The criteria
1. Trade barriers against nonmembers
should not be raised
2. Nonmember countries are eligible to
join the group on the basis of clear and
reasonable criteria for accession
 Cont…

 Regionalism that is consistent with globalism

 The way for regionalism to conform to the
multilateral trading system
 Still difficult to achieve
1. Discriminatory benefit offered is the
source of incentive to join the RTA
2. Open accession is not welcomed by all
members due to different reasons
Conclusion
 Too early to draw a conclusion?
 A clear trend towards regionalism
 Inherent difficulties in building the
multilateral trading system
 Depends on the future development of
major RTAs
 Few major regional trading blocs may
replace the multilateral trading system
 Wait and see
The Regional Context
• South Asian countries are exchanging tariff
preferences under SAPTA.
• India, Sri Lanka and Bangladesh are members of
the Bangkok Agreement.
• South Asian countries are also exchanging
preferences under GSTP (Global System of Trade
Preferences).
• India, Sri Lanka and Bangladesh are also members
of other economic groupings like BIMST-EC, IOR-
ARC.
South Asian Regional Co operation

 SAARC was set up as a forum for regional

cooperation by adoption of its Charter in
its first Summit in Dhaka in December
1985.
 SAPTA was signed in 1993 and entered
into force in December 1995.
 SAPTA covers areas of tariff, para tariff,
non tariff and direct trade measures.
SAPTA
 It provides special and favourable
treatment to the LDCs.
 The First Round was largely symbolic.
 In the Second Round a combination of
Sectoral and product by product
approach was adopted.
 In all India gave tariff concessions on 997
tariff lines during the two Rounds.
The SAPTA negotiations

 Three Rounds of trade negotiations under SAPTA

have been completed. However, the results are fairly
modest.
 Upto the Third Round, which concluded in November
1998, India has granted concessions on 2565 tariff
lines (6 digit HS) to the other countries. However,
most of these concessions are to the LDCs.
 Exchange of concessions with Sri Lanka and Pakistan
was limited to a few items.
 Fourth Round of negotiations has started.
Free Trade in South Asia

 The Male Summit in May 1997 called for

achievement of the South Asian Free Trade
Area (SAFTA) by 2001 AD.
 This was modified to signing of the SAFTA
Agreement by 2001 AD in the Colombo
Summit in July 1998.
 At the 11th SAARC Summit, the Heads of
Nations agreed to revise the date for putting
the SAFTA Treaty in place by end of 2002.
Cont…

 The first meeting of Committee of Experts was

held in Kathmandu in July, 1999 wherein the
Terms of Reference for the drafting of the
SAFTA treaty were finalised.
 While the SAFTA Treaty is to be put in place by
2001, no time frame has yet been established
for achieving SAFTA.
 Thus achievement of a Free Trade Area
remains an open ended objective.
 BANGKOK AGREEMENT (BA)

 The Bangkok Agreement was signed in July 1975 for

contributing to expansion in trade through exchange of
tariff concessions among developing country members of
the ESCAP region.
 The Agreement is currently operational between
Bangladesh, India, Republic of Korea and Sri Lanka.
 China’s accession to the Bangkok Agreement was finalised
in the meeting of the Standing Committee of the Bangkok
Agreement in April 2000.
 The Third Round of BA has begun.
 With the entry of China the B.A. will gain momentum as now
two major countries with huge population are the members,
with a market size of more than 2.2 billion .
Generalised System Of Preferences
 Unilateral and generalised tariff concessions
given by the developed countries to the
developing countries under the GSP Scheme.
 Important to India are GSP given by USA, EU,
Japan etc.
 Rules of Origin to be fulfilled.
 Graduation process defined for no
concessions.
The Bilateral Context
 India and Nepal Treaty on
Transit and Trade
 India Bhutan Trade treaty

 India Sri Lanka Free Trade

Agreement
INDO-NEPAL TREATY
 On 2nd March, 2002, the validity of India-
Nepal Treaty of Trade and Protocol was
extended for a period of 5 years w.e.f.
6.3.2002.
 Rules of Origin along with local content
and substantial manufacturing clause
introduced.
 TRQ for Vanaspati, acrylic yarn, copper
products and zinc oxide introduced.
 INDO-BHUTAN TREATY
 Agreement on Trade and Commerce between
India and Bhutan signed on 28th February, 1995
 Preferential market access allowed for products
originating from respective countries
 All exports and imports of Bhutan to and from
countries other than India will be free from and
not subject to customs duties and trade
restrictions of the Government of India.
INDIA-SRI LANKA FTA
• PM Vajpayee offered to consider bilateral FTAs
with our South-Asian neighbours in his address in
the Colombo SAARC Summit.
• The FTA was signed by PM of India and President
of Sri Lanka on 28th December 1998.
• The Agreement envisages phasing out of tariff on
all products except for a limited number of items
in the Negative List, over a period of time. While
India would complete the process of tariff
elimination over a period of 3 years, Sri Lanka
would achieve this over 8 years.
 CONT…

 The FTA has been implemented with the issuance of

Customs Notification by Sri Lanka on 15th February 2000
and by India on 1st March 2000.
 Procedural modalities on import of Quota of tea and
textile items have been finalised.
 The first meeting of the Working Group on Customs was
held on 14-15 September 2000 in Colombo.
 The first meeting of the JMC was held on 6 – 7 June 2002
in New Delhi.
 BIMST- EC

 The Initiative was taken by Thailand in 1994 and with

the admission of Myanmar in December 1997 it was
named as “Bangladesh, India, Myanmar, Sri Lanka,
Thailand Economic Cooperation” (BIMST-EC) to serve
as a bridge linking ASEAN and SAARC.
 6 areas of Trade and Investment, Technology,
Transportation and Communication, Energy, Tourism
and Fisheries were identified for cooperation
 The Second Economic/ Trade Ministers meeting in
April 2000 decided to constitute an Inter Governmental
Group (IGG) to prepare a Concept Paper on possible
approaches towards a PTA leading to an FTA.
Cont…

 IGG’s recommendation was considered by the

Ministers in their third meeting held in Yangon in
2001 and a Group of Experts was constituted to
examine in detail the two approaches.
 The GOE consists of the representatives of
Government, Business and the Academia.
 GOE has recommended to go for a ‘negative list
approach’ for FTA in BIMST-EC.
 A final decision will be taken in the next Trade and
Economic Ministers Meeting, scheduled to be held
in Sri Lanka.
 INDIAN OCEAN RIM - ASSOCIATION FOR REGIONAL
COOPERATION (IOR - ARC)

 IOR - ARC was founded in 1995 with the first

meeting on Working Group held in Mauritius.
 The focus for economic cooperation is in the
areas of Trade Facilitation, Promotion and
Liberalization, Promotion of Foreign Investment,
Promotion of Scientific and Technological
exchanges, Promotion of Tourism, Promotion of
Movement of Natural persons and Service
providers, Development of Infrastructure and
Human Resources
STEPS AHEAD ……

 Consider enlargement of products

 Deepening of concessions
 Remove non tariff barriers
 Include coverage of “Services,
Investments etc.” under the Agreements
 Regular interaction among the business
and academia
 Government to play more pro-active role
Future plans
 Concentrate on ‘Trade facilitation measures’.
 Harmonisation of customs documents,
procedures and regulations
 Harmonisation of standards.
 Promotion of Joint ventures, technology
transfers
 Consider devising means for having industrial
linkages (backward-forward linkages) to
promote intra-regional investments.
Cont…

 Study the areas of complementarities,

looking for global market
 Organise workshops, seminars etc at
regular intervals
 Study and recommend the areas of
JV, and enhancing intra regional
investments.
 Dissemination of information
NEW FTA PROPOSALS

We are also studying the feasibility of

having PTAs/FTAs with the following
countries:
Bangladesh Egypt South Africa
Oman Chile Singapore
Mauritius Venezuela Brazil
Thailand
Argentina Colombia USA
EU Morocco Syria
THANK YOU

Contact :
Dr. (Mrs.) Vijaya Katti
Professor and Chairperson (MDPs)
IIFT, New Delhi
E-mail: [email protected]; [email protected]