REGIONALISM AS AGAINST GLOBALIZATION: SURVIVAL OF THE …

REGIONALISM AS AGAINST GLOBALIZATION: SURVIVAL OF THE FITTEST

- By HEMANT BATRA1

I. INTRODUCTION

When the heads of state travel abroad, their entourage includes many chief business managers

and executives. A couple of decades ago, military generals and admirals usually accompanied

presidents or prime ministers on state visits. Military alliances or non-aggression treaties commonly

occupied the agenda. Such peace policies have been replaced in recent years by commercial or

trade policies, given the fact that the primary focus of all countries now a days is economic growth

and development as this is what that determines the Global standing of a country in the present

global scenario.

Trade liberalization is widely recognized as a cornerstone of economic development and growth,

and , ultimately poverty reduction. Global multilateral trading system offers the best prospect for

reducing barriers to trade & achieving the greatest gains from trade liberalization and Free Trade

Agreements (FTAs) are the next best means of trade liberalization.

Thus FTA is a buzzword all over the world these days. Virtually every country wants to increase its

exports. One way to make sure of it is to negotiate with its trading partners to lower trade barriers.

1 Hemant Batra is a Corporate, Business & Commercial Strategist Lawyer, whose practice is concentrated across the Globe in general, specifically in India. He is Director – Legal Services, Kaden Boriss Consulting Pvt. Ltd., a consulting company with multi-national promoters. Kaden Boriss is engaged in undertaking consulting assignments for clients, seeking to outsource their legal, para-legal and strategic advisory, regulatory and compliance work. In addition to the above he is also the Director of Thames Tobacco Company located in the United Kingdom. He is the elected Secretary General of SAARCLAW (South Asian Association For Regional Co-operation In Law). As Secretary General of SAARCLAW, he enjoys a quasi-diplomatic status. SAARCLAW is an Association of the Legal communities of the SAARC countries namely Bangladesh, Bhutan, India, Maldives, Nepal, Pakistan & Sri Lanka. He is a Member of high-powered national legal affairs Committee of Indo-American Chamber of Commerce. He has written as well as edited and published the following publications and papers: “Doing Business in India”, “SAARC (Text Book)”, “SAARCLAW (Newsletters)”, “Doing Business With Destination – India”, “Doing Business With Asian Tiger – India”, “Foreign Direct Investment Policy Of India – How Direct & How Real”, “Regional Trade Agreements As Against Multilateral Agreements”, “Regional Trade Blocks As Against WTO”, “Preconditions of Free Trade: Political Aspects” and Papers on various topics of commercial significance Many a times he has been invited to speak on foreign investment, corporate & commercial subjects in various conferences/seminars/workshops in India and abroad. He is a visiting Guest Speaker to the Griffith University, Brisbane, National Law School, Hyderabad and American Bankruptcy Institute, New York. He has been associated with various literary projects undertaken by Nova Southeastern University, Florida. He has traveled extensively around the world, more particularly he has frequented USA, UK, Germany, France, Denmark, Holland, Russia, Dubai, Pakistan, Sri Lanka, Bhutan, Nepal, Myanmar, Maldives, Singapore, Thailand, Malaysia, Australia and South Korea. He is a connoisseur of Foreign Direct Investment Policy & Procedures (Regulatory Advise & Documentation), Commercial and Transactional Law (Consultancy & Documentation), Corporate Law including Corporate Management (Consultancy & Documentation) and Legal Auditing. He has been praised in these areas. His work in the field of strategizing FDI has been acclaimed immensely. He has executed a plethora of FDI assignments for renowned MNC(s). Under Trans-national work, he has maneuvered various international Greenfield projects beginning with due-diligence up to regulatory approvals. Commercial and Transactional law practice and consultancy are his areas of expertise. He has successfully advised many clients of an esteemed stature in respect of various complex problems of assorted nature relating to commercial transactions. He has an experience of 14 years in rendering strategic advice to his clients.

Regionalism As Against Globalization: Survival Of The Fittest Author: Hemant Batra

Regional or bilateral free trade agreements (RTA/FTA) are not a new phenomenon and have

become important aspects of any country’s trade policy. The trend started with the formation of the

single European market by the European Union in 1992 and the North American Free Trade

Agreement (NAFTA) in 1994. Over 300 FTA/RTAs are currently in different stages of negotiation.

More than half of world trade is now conducted on preferential basis within FTAs. Therefore, any

country that ignores this route of regional integration can do so only at its own peril.

II. CONCEPT - REGIONALISM

Regionalism is described in the Dictionary of Trade Policy Terms, as “actions by governments to

liberalize or facilitate trade on a regional basis, sometimes through free-trade areas or customs

unions”.

A Regional Trade Agreement (RTA), as the name itself suggests, is a an agreement undertaken by

countries located within a defined geographic area whereby the participating countries align

themselves with each other to achieve some form of economic integration. The agreement could

take various forms like free trade areas2, customs unions3, common markets4 and economic

unions5, each of which has a different scope and purpose.

In the WTO context, we can assign both, a more general and a more specific meaning to the

regional trade agreements (RTAs): more general, because RTAs may be agreements concluded

between countries not necessarily belonging to the same geographical region; more specific,

2 Countries may come together to form a free trade area which means that goods traded between those countries will not attract customs duties. It would also typically mean that quotas or preferences would not apply to trade between themselves. However, countries that constitute a free trade area do not have the same policies with respect to non-members. Some of the better known free trade areas include the North American Free Trade Agreement (NAFTA), European Free Trade Association and South American Community of Nations. 3 A customs union means that a group of countries agree to have a common external tariff. That is, the same customs duties, quotas, preferences or other non-tariff barriers to trade apply to all goods entering the area, regardless of which country within the area they are entering. 4 A common market not only eliminates all barriers to trade in goods among the members and adopts a common external tariff, but also. permits the free movement of goods, services, people, and capital within the countries that constitute it. The Southern Common Market (MERCOSUR) is an example of a common market. 5 An economic union has all the features of a common market and in addition provides for a common monetary policy, a common fiscal policy and a common currency for its members like the European Union (EU).

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because the WTO provisions which relate specifically to conditions of preferential trade

liberalization with RTAs.

Ordinarily, geographic proximity is a natural driving force in international trade regardless of

whether there is any official trade arrangement. Distance is statistically verified to be a very

important determinant of trade. Member countries in each trading bloc tend to have similar cultures

and comparable economies. They are tempted to “merge” as a group to function together in

international trade negotiations because collective efforts will make their voice louder and

safeguard their public interests more effectively.

Therefore, regional trade groupings are a natural and logical choice for the countries of a region to

increase the quantum of their international trade and also to increase their clout in other

international markets . This is particularly true for small developing economies, which singularly

lack strong economic influence. These economies also lack high-caliber human resources and

negotiating skills. They benefit from collaborating with each other on the World Trade Organization

(WTO) issues and dispute settlements, especially when rival countries are not only economically

resourceful but also politically influential.

Conceptually, regional collaboration should help attain improved efficiency, however, cumbersome

approval processes and bureaucratic friction often impede progress on such efforts.

Coordination across countries is typically difficult, particularly when a trade bloc6 includes countries

of great diversity. Countries with drastically different levels of development have remote chances of

effectively formulating a free trade area for several reasons. Rarely do they have genuinely

common interests. Worse yet, as they tend to be dominated by a few influential countries,

negotiations or resolutions are likely to be prejudiced, not reflecting collective interests. Because of

such biases, small countries are prone to dissention. Otherwise, they are tempted to collaborate

with each other so as to gain a counterbalance.

Developing countries often find it beneficial to participate in regionalism for the following reasons:

(1) upgrade production techniques and standards; (2) expand import and export markets; (3)

develop the capacity to compete; (4) broaden investment prospects; (5) improve consumer welfare;

and (6) prevent the adoption of, or cope successfully with, unilateral measures. However, free trade

6 A trade bloc is a large free trade zone or near-free trade zone formed by one or more tax, tariff and trade agreements. Usually, trade pacts specify formal adjudication bodies. Sometimes, they may include an even more democratic and participative system, such as the EU and its parliament. In the last few decades, a number of regionally based economic blocs have been developed to promote trade between member states. Varieties of economic blocs include free trade areas, customs unions, single markets, and economic and monetary unions.


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areas also generate negative impacts as well. For instance, fledgling industries in one member

country frequently encounter difficulties in competing with more advanced competitors in another

member country. Given the scarcity of some essential inputs, natural resources, and experience,

some businesses are left at a disadvantage under liberalization. In short, although regional free

trade seems compatible with an increasingly competitive global atmosphere, it leads to painful

adjustments and often overlooked repercussions.

Another raging debate in the context of RTAs is that , regionalism generates not only trade creation

but also trade diversion. Trade creation refers to the situation where, in the absence of tariffs or

trade barriers, an efficient member country produces the output in which it has a comparative

advantage in an amount exceeding domestic demand in order to export to a less efficient member

country. Trade diversion, on the other hand, occurs when a member country switches imports from

an efficient non-member country to those from an inefficient member country because of the RTAs

biased tariff structure. From a global perspective, trade creation is a clear-cut contribution of the

RTA to efficiency in resource use, while trade diversion is the opposite.

Nevertheless, from each member country’s viewpoint, the RTA typically brings about a higher

volume of international trade. It is difficult to conclude how much is due to trade creation and how

much is attributed to perilous trade diversion. Due to this regionalism remains controversial as

according to one view point RTAs are a stepping stone or complementary to global free trade,

while the converse view is that the proliferation of RTAs is a threat to the liberal trading system

and multilateralism; at one end of the spectrum are some economists who believe that regionalism

is a useful supplement to multilateralism, and at the other end is the view that regional groupings

and preferential trade arrangements are counter-productive and a threat to the central pillar of

WTO or unconditional trade practice. This raises the question that do these FTAs/RTAs pose a

possible challenge to the multilateral trading system as developed under the aegis of WTO and

also to the WTO's objective of global free trade since technically regional trading arrangements

breach multilateralism and the Most Favoured Nation Principle which is a cornerstone of the WTO?

III. THE MULTILATERAL TRADING SYSTEM– WTO

The World Trade Organization (WTO) is the only global international organization dealing with the

rules of trade between nations. It embodies various WTO agreements, negotiated and signed by

the bulk of the world’s trading nations and ratified in their parliaments. The goal is to help producers

of goods and services, exporters, and importers conduct their business. Its main function is to

ensure that the trade flows as smoothly, predictably and freely as possible. It is leading the

economic world towards more prosperity, peacefulness and accountability. Decisions in the WTO


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are typically taken by consensus among all member countries and they are ratified by members’

parliaments. Trade friction is channeled into the WTO’s dispute settlement process where the focus

is on interpreting agreements and commitments, and how to ensure that countries’ trade policies

conform with them. That way, the risk of disputes spilling over into political or military conflict is

reduced. By lowering trade barriers, the WTO’s system also breaks down other barriers between

peoples and nations.

The WTO agreements are the legal ground – rules for international commerce. Essentially, they

are contracts, guaranteeing member countries important trade rights. They also bind governments

to keep their trade policies within agreed limits to everybody’s benefit. The agreements were

negotiated and signed by governments. But their purpose is to help producers of goods and

services, exporters, and importers conduct their business. The goal is to improve the welfare of the

peoples of the member countries.

The World Trade Organization came into being on 1st January 1995. It is the successor to the

General Agreement on Tariffs and Trade (GATT) established in the wake of the Second World

War. So while the WTO is still young, the multilateral trading system that was originally set up

under GATT is already 50 years old. The WTO’s rules-the agreements-are the result of

negotiations between members. Through these agreements, WTO members operate a non-

discriminatory trading system that spells out their rights and their obligations. Each country

receives guarantees that its exports will be treated fairly and consistently in other countries’

markets. Each promises to do the same for imports into its own market. The system also gives

developing countries some flexibility in implementing their commitments.

The WTO had 148 members (as on 16th February 2005), accounting for over 90% of world trade.

Article XVI.4 of the WTO Agreement requires conformity of domestic laws, regulations and

administrative procedures to the obligations contained in the annexed agreements. The annexed

agreements predominantly being:

a. General Agreement on Tariff and Trade (GATT). Some of its sub-agreements being

Agreement on Technical Barriers to Trade, Agreement on Trade Related Investment

Measures, Agreement on Subsidies and Countervailing Measures, Agreement on

Rules of Origin, Agreement on Agriculture etc.

b. General Agreement on Trade in Services (GATS).

c. Agreement on Trade Related Aspects of Intellectual Property Rights (TRIPs).


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Apart from these there are three other agreements dealing with Settlement, Trade Policy Review

and Plurilateral Trade.

Any member country of WTO has to follow dual path of commitments running parallel to one

another. First legal path could be very well branded as National Treatment (NT) and the second

one as Most-Favored Nation Treatment (MFN).

National Treatment: Under the National Treatment, a country is expected to bring about changes

in relevant laws, regulation, policies and procedures whereby uniform & universal treatment is

given to others and its own nationals. Imported and locally produced goods to be treated equally at

least once the foreign goods enter the domestic market. The same principle applying to foreign and

domestic services and to foreign and local trademarks, copyright and patents.

Most-Favored Nation Treatment (MFN): Under MFN a country cannot grant special favor to some

one alone, if it does then it suo moto extends to other countries too. Each member is required to

treat other member as `most favored’ trading partner. Same treatment for all. However, the only

exception to this rule is the existence of regional trade agreements which may grant special

preferences to the regional member to the exclusion others.

These principles form the cornerstone of the multilateral system established by the WTO.

IV. REGIONAL TRADING ARRANGEMENTS AND THEIR GROWING POPULARITY

The vast majority of WTO members are party to one or more regional trade agreements. The rush

of RTAs has continued unabated since the early 1990s. Some 250 RTAs have been notified to the

GATT/WTO up to December 2002, of which 130 were notified after January 1995. Over 170 RTAs

are currently in force; an additional 70 are estimated to be operational although not yet notified. By

the end of 2005, if RTAs reportedly planned or already under negotiation are concluded, the total

number of RTAs in force might well approach 300.

Pre 1999, the Asian region had stayed on the edge of the movement towards concluding regional

and bilateral agreements on trade. With a few exceptions including the adoption of the ASEAN

Free Trade Area (AFTA) by the Association of Southeast Asian Nations (ASEAN) in 1992, free

trade agreements (FTAs) in the sense of Article XXIV of the General Agreement on Tariffs and

Trade (GATT) were almost nonexistent in the region. It was only in 1999 and 2000 that


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government-level negotiations and studies began to gather momentum. Since then several bilateral

agreements have been concluded among countries in the region as well as with countries from

other regions. Several proposals for a FTA are now under negotiation, involving not only individual

countries, but also regional groupings such as ASEAN.

In most FTAs concluded in Asia, parties go well beyond their WTO commitments in terms of tariff

concessions. However, while negotiators within the WTO have been increasingly shifting their

agendas towards issues other than tariffs, such as environmental protection, intellectual property

rights, labour standards and competition policies, with the exception of the recent bilateral

agreements such as the US – Singapore agreement, FTAs in Asia have essentially concentrated

on issues related to trade liberalization per se.

For example, APEC (Asia-Pacific Economic Cooperation) leaders have so far wanted APEC to

concentrate on matters which will help improve the economic prosperity of APEC countries. This

was the original purpose for which APEC was established in 1989. APEC is the only inter

governmental grouping in the world operating on the basis of non-binding commitments, open

dialogue and equal respect for the views of all participants. Unlike the WTO or other multilateral

trade bodies, APEC has no treaty obligations required of its participants.

Similarly, AFTA (ASEAN Free Trade Area) seeks to eliminate tariff and non-tariff barriers among

member countries through progressive reductions of tariffs, elimination of import duties and trade

facilitation measures. It provides for binding commitments towards trade liberalization but has only

one exception covering the environment.

Likewise, the South Asian Association for Regional Cooperation (SAARC) Preferential Trading

Arrangement (SAPTA) aims to promote and sustain mutual trade and the economic cooperation

among the Contracting States but involves no issue related to environment.

RTAS/FTAS IN ASIA

Here we may discuss features of some of the more important RTAs/FTAs concluded/existing in

Asia and their effect on the region.

Countries may come together to form a free trade area which means that goods traded between

those countries will not attract customs duties. It would also typically mean that quotas or

preferences would not apply to trade between themselves.


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However, countries that constitute a free trade area do not have the same policies with respect to

non-members. Some of the better known free trade areas include the North American Free Trade

Agreement (NAFTA), European Free Trade Association and South American Community of

Nations.

SAFTA - South Asian Free Trade Area

SAARC region with just 3 percent of the world's area houses 21 percent of the global population

and also it is the most densely populated part of the world with about 263 people for every square

kilometre. The region is characterized by large income disparities, with 43 percent of its population

living below the poverty line. But according to a recent World Bank report, "South Asia's Integration

into the Global Economy," predicts South Asia will have "the world's fastest growth in exports" by

2028.

Two major initiatives aimed at boosting intra-SAARC trade have been South Asian Preferential

Trading Agreement (SAPTA) introduced in 1995, and agreement to establish South Asian Free

Trade Area (SAFTA), over a period of 10 years starting January 1, 2006. SAPTA was envisaged

primarily as the first step towards the transition to a South Asian Free Trade Area (SAFTA) leading

subsequently towards a Customs Union, Common Market and Economic Union.

SAPTA – South Asian Preferential Trading Agreement:

In December 1991, the Sixth Summit held in Colombo approved the establishment of an Inter-

Governmental Group (IGG) to formulate an agreement to establish a SAARC Preferential

Arrangement (SAPTA) by 1997. Given the consensus within SAARC, the Agreement on SAPTA

was signed on 11 April 1993 and entered into force on 7 December 1995 well in advance of the

date stipulated by the Colombo Summit. The Agreement reflected the desire of the Member States

to promote and sustain mutual trade and economic cooperation within the SAARC region through

the exchange of concessions.

The basic principles underlying SAPTA are:

overall reciprocity and mutuality of advantages so as to benefit equitably all Contracting

States, taking into account their respective level of economic and industrial development,

the pattern of their external trade, and trade and tariff policies and systems;


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negotiation of tariff reform step by step, improved and extended in successive stages

through periodic reviews;

recognition of the special needs of the Least Developed Contracting States and agreement

on concrete preferential measures in their favour; and

inclusion of all products, manufactures and commodities in their raw, semi-processed and

processed forms.

So far, four rounds of trade negotiations have been concluded under SAPTA covering over 5000

commodities. Each Round contributed to an incremental trend in the product coverage and the

deepening of tariff concessions over previous Rounds. The Member States are in the process of

completing the necessary procedural formalities to give effect to the concessions extended in the

Fourth Round.

SAFTA - South Asian Free Trade Area

In 1995, the Sixteenth session of the Council of Ministers (New Delhi, 18-19 December) agreed on

the need to strive for the realization of SAFTA and to this end an Inter-Governmental Expert Group

(IGEG) was set up in 1996 to identify the necessary steps for progressing to a free trade area. The

Tenth SAARC Summit (Colombo, 29-31 July 1998) decided to set up a Committee of Experts

(COE) to draft a comprehensive treaty framework for creating a free trade area within the region,

taking into consideration the asymmetries in development within the region and bearing in mind the

need to fix realistic and achievable targets.

What is SAFTA?

The Agreement on South Asian Free Trade Area (SAFTA), drafted by the COE, was signed on 6

January 2004 during the Twelfth SAARC Summit in Islamabad, calling for the creation of a free

trade zone covering India, Pakistan, Nepal, Sri Lanka, Bangladesh, Bhutan and the Maldives. The

Agreement is to enter into force on 1 January 2006.

The seven foreign ministers of the region signed a framework agreement on SAFTA with zero

customs duty on trade of practically all products in the region by end 2012. The new agreement is

subject to ratification by the seven governments. SAFTA requires the member countries to bring

their duties down to 20% in the first phase of the two year period ending in 2007. In the final five-

year phase ending in 2012, the 20% duty will be reduced to zero in a series of annual cuts.

Currently, the Sensitive Lists of products, Rules of Origin, Technical Assistance as well as a


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Mechanism for Compensation of Revenue Loss for Least Developed Member States are under

negotiation.

Under the Trade Liberalization Programme scheduled for completion in ten years by 2016, the

customs duties on products from the region will be progressively reduced. However, under an early

harvest programme for the Least Developed Member States, India, Pakistan and Sri Lanka are to

bring down their customs duties to 0-5 % by 1 January 2009 for the products from such Member

States. The Least Developed Member States are expected to benefit from additional measures

under the special and differential treatment accorded to them under the Agreement.

A serious obstacle to a successful completion of the SAPTA process, and eventually SAFTA, has

been lack of confidence in the benefits that the free trade regime is likely to bring to the region.

Further, the political circumstances within the region are also a barrier to stronger economic

linkages that could have developed within the region.

India - Thailand FTA

The Framework Agreement for India-Thailand FTA was signed by the Trade Ministers during Indian

PM’s visit to Thailand on 9th October 2003. The key elements of the Framework Agreement cover

FTA in Goods, Services and Investment, as well as Areas of Economic Cooperation. Thailand is

the second country with which India had signed the FTA; it’s a part of the look East policy”. The first

FTA was signed with Sri Lanka.

The Agreement also provides for an Early Harvest Programme with a common list of 82 items on

which tariff will be gradually eliminated by 1.9.2006. The India-Thailand FTA talks of phased tariff

reduction on 82 early harvest items (EHIs) — 50 per cent in 2004-05, 75 per cent in 2005-06 and

100 per cent from 2006-07 onwards. Under the EHS, which comes into effect from September 1,

2004, entrepreneurs from both the countries can import and export 82 items freely subject to duties

which will come down to zero in the next two years. These 82 items cover 7 per cent of the Indo-

Thai trade which was $1.44 billion in 2003-04.The full FTA between India and Thailand is expected

to come into force by 2010.

The framework agreement for establishing FTA between the two countries that was signed by the

trade ministers of both sides on October 9, 2003 in Bangkok had conceived that the process of

tariff reductions would begin from March 1, 2004 under the ‘early harvest scheme’ (EHS). But since

there was delay in finalizing the interim rules of origin by both parties the implementation was

subsequently delayed by six months.


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Delay was for better. It helped both the parties to carefully examine and subsequently amend the

framework agreement and finalize the interim rules of origin with due caution. The formulation of

these rules was achieved in a surprising short period of time and this has raised hope for the

successful implementation of the FTA, even before 2010 as stipulated in the original framework

agreement.

According to the amended framework both parties have decided to reduce their applied tariff by 75

per cent in the period September 1, 2005 to August 31, 2006 and by 100 per cent by September 1,

2006. The list of commodities has been reviewed and two items have been knocked out from the

earlier list of 84. Caution has been taken to avoid bringing sensitive agro commodities under the

early harvest scheme of FTA. Thai textile yarns, fabrics and made-up articles currently consists of

5.31 per cent of India imports. These items do not figure in the list, keeping in view the possible

emerging situation resulting from MFA quota phase out in December 31, 2004. Vegetable oil and

natural rubber are other sensitive commodity not included in the list. Vegetable oil from Thailand

consists of 3.56 per cent of India’s import while natural rubber consists of 2.26 per cent. The agro

products included in the list of commodities are fresh mangosteens, mangoes, apples, durians,

rambutans, longans, pomegranates, durum wheat, salmon, sardines, sardinella and bristling or

sparts, mackerel, crab, pure sodium, table and denatured salt. These commodities are not likely to

pose any problem in implementation of the bilateral trade agreement. Only thing required is to work

out acceptable quarantine and sanitary and phytosanitary standards for these commodities.

The protocol has successfully tackled the controversial issue of the ‘rules of origin’. It has come out

with an interim rules of origin which will be replaced in future by another set of rules to be

negotiated and implemented by parties under Article 3(6)(ii) of the agreement. The interim rules of

origin specifies local content to the extent of 40 per cent in a product eligible for tariff concession,

substantial transformation at the 4-digit HS level and simple operations defined as non-qualifying.

the rules also prescribe for ”product specific criteria” on 25 items, which are derogations from the

general principles.

The rules also prescribes remedies to the possible harm that may be caused. It says: “If any

product, which is covered under EHS, is imported into the territory of a party in such a manner or in

such quantities as to cause or threaten to cause, serious injury to the domestic producers of such

product in the importing party, the importing party may, after prior consultations, to be concluded

within 90 days or on any mutually agreed timeframe, from the date of notifying the other party,

suspend provisionally without discrimination the preferential treatment so accorded.”


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The WTO provisions relating to modification of commitments, safeguard actions and other trade

remedies like anti-dumping and subsidies and countervailing measures will be applicable to the

products covered under the Early Harvest Scheme till relevant disciplines are negotiated by parties

in future and shall be superseded and replaced by the relevant disciplines negotiated and agreed

to by the Parties under Article 3(6) of the Framework Agreement.

The framework agreement not only calls for free trade in goods and services, but also investment

and economic cooperation. In order to fully realize the potential benefits of the Early Harvest

Scheme, India and Thailand have also promote and facilitate trade on all products listed in the

Early Harvest Scheme. They have also decided to endeavor to refrain from using non-tariff

measures adversely affecting trade on early harvest products.

However, with the signing of the India-Thailand free trade agreement (FTA) the Indian industries,

especially auto-parts and electronics, seem to be a worried lot. They feel that Thailand, with its

lower manufacturing costs, lower Customs duty on inputs and idle capacity, would resort to

dumping. In the post-FTA period, Indian auto-parts and electronics sectors, which largely depend

on Japanese assemblers in India, fear that these Japanese firms would shift to Thailand, seeking

cheaper components and parts. And they allege that with nil Customs duty, domestic industries

would be hit hard by Thai exports. However, these fears should ease when the tax reforms

proposed by Dr Vijay Kelkar are implemented. The Kelkar Task Force report, brought out after the

Framework Agreement on the India-Thailand was signed, has recommended a drastic reduction in

Customs tariff from 2005-06 and the duty differential will reduce substantially once the Kelkar

recommendations are implemented; also with the new tax regime, much of the cost disadvantages

are likely to be neutralized even when the FTA becomes fully operational. From a long-term

perspective, too, the impact of the FTA shall not be detrimental as predicted by some of the sectors

of the industry.

There are several positive aspects in the India-Thailand FTA. But these are being swamped by the

clamour by a few industries. Take the case of plastics. A number of plastic intermediates have

been included in the EHI, which are either not manufactured in India, or, if manufactured, not in

sufficient numbers to meet the domestic demand. For instance, polyacetals and polycarbonates in

primary form are not manufactured in India, but with the spurt in the growth of automobiles and

electronics, the demand for these plastic intermediates are surging in the domestic market. Hence,

importing these have become inevitable.

In such cases, tax-free imports from Thailand will not only be beneficial for product manufacturers,

but will also induce price competitiveness in the market.


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It is true that the India-Thailand FTA will cause some hiccups for domestic industries, but the

slashing of Customs duties and growing investment by Korea would cushion any Thai-Japanese

onslaught. Thus, the Indo-Thai FTA is not as harsh as it is being made out to be by a few industry

segments.

However to an extent the fears of the Indian industry are unfounded. Thailand can provide the

initial gateway for domestic industries to enter the ASEAN market. It

Shall emerge as a low-cost base to import both components and finished products (steering

assemblies). Several Indian auto and auto component majors are looking in this same direction,

and Thai bases may become the export hub for selling products across the globe.

Some sections of the industry are arguing that since it shall become cheaper for Indian firms to

either procure goods from that country or, even better, to produce them there and export to India

fresh investments shall shift to that country; however it may be countered that in that case the

Indian market will grow through imports. At the same time, Thailand shall be an ideal export base

for Indian firms that are thinking global or unable to thrive locally. At one end of the spectrum, you

have the auto component makers which think they can be global leaders in the near future. Hence,

they wish to make fresh investments in markets that can help cut costs and improve quality. Every

OEM in India is seeking a base in Thailand because of the advantages.

At the other end of the spectrum, there're the Indian firms in the consumer electronics segment,

which have failed to compete with the Koreans in the domestic market and are forced to make

inroads in other southeast Asian markets in a bid to survive. For them, setting up production bases

in Thailand is a lucrative option. In fact, the Thai government is wooing Indian investors by offering

attractive incentives and promising access to huge markets like China and Japan (with whom it

plans to sign FTAs) and the US and Europe (with whom it has already signed such agreements).

Just an indicator of how serious Thailand is in becoming a global export base: it exports 90 per

cent of its auto components and over 80 per cent of the colour TVs it makes.

Obviously, foreign MNCs are working out similar strategies. Instead of making goods in India, they

now wish to make them in Thailand and import them at a cheaper cost into India. Industry sources

hint that several Japanese electronics majors are hiking their production capacities in Thailand. A

few of them, which are already present in India, have reduced their activities to increase capacity

utilization of their Thailand-based units.

However, a bigger worry for India is that the FTAs can easily be misused by traders. Taking

advantage of the low import duties, they can re-route third-country imports through Thailand or

other nations with whom India has signed FTAs. Or, at a more general level, they can merely


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import cheaper Thai goods and kill the domestic industry. Therefore anti-dumping clause is

expected to be strictly enforced to radar pricing and value addition.

However, despite these problems, the FTA shall provide opportunities to Indian firms to globalize

and become full-fledged MNCs. In this tussle between economic diplomacy, domestic concerns

and the urge to transform Indian firms into global players, some firms (and sectors) are definitely

going to get hit.

India – Sri Lanka FTA

India – Sri Lanka Free Trade Agreement (FTA) was signed in December 1998 and became

operational from December 15, 2001. India is committed to provide immediate duty free concession

on 1012 items. A 50% duty concession applied on 400 items, which would become duty free in

three years. The FTA with Sri Lanka is evidence of India's success in trade expansion. Within four

years, India's trade with Sri Lanka has more than doubled, with exports surging by over 108 per

cent and imports by 187 per cent. The FTA has also become an FDI route in Sri Lanka. It

stimulated new FDI into Sri Lanka for rubber-based products, ceramics, electrical and electronic

items, wood-based products, agri-commodities and consumer durables. According to the United

Nations Conference on Trade and Development, 37 projects are now in operation with a total

investment of $145 million and India has emerged as the third largest investor in Sri Lanka

because of the FTA.

However, India-Thailand free trade agreement (FTA) has stirred a hornet’s nest in India. It is being

argued that India has shown unnecessary haste in signing the agreement without fully

comprehending its economic implications for Indian industry. The textile producers in Kerala, coffee

planters in Karnataka, and tea producers in the northeastern states have started protesting against

duty-free imports from Sri Lanka.

Indian authorities have also alleged huge loss of customs revenues on account of rules of origin of

goods not being drafted properly, leading to third-country imports. The finance ministry has found

cases where Chinese and European brands are being pushed into the Indian market by

repackaging them in Sri Lanka. In some cases, goods have arrived directly from east Asian nations

but shown as having originated from Sri Lanka.

On the positive side, the India-Sri Lanka FTA has led to India’s exports to Sri Lanka increasing

from Rs21.63 billion (US$490.4 million) to Rs60.67 billion between 1999-2000 and 2003-04.

Similarly, Sri Lanka’s exports to India moved up from Rs1.92 billion to Rs8.93 billion during the

same period.


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BIMST – EC

BIMST –EC was set up in June 1997 to foster socio-economic co-operation among Bangladesh,

India, Sri Lanka and Thailand. Myanmar was admitted as a full member in December 1997. Bhutan

and Nepal were admitted in 2004.

Initially the co-operation would be in six priority sectors, namely:

i. Fisheries

ii. Trade & Investment

iii. Technology

iv. Energy

v. Transport and Communications

vi. Tourism

The idea of this regional co-operation was first mooted by Bangladesh, India, Sri Lanka and

Thailand at a meeting in Bangkok in June 1997. The aim, purpose and principles are contained in

Bangkok Declaration of 6th June 1997 on the Establishment of the Bangladesh- India-Sri Lanka-

Thailand Economic Co-operation (BIST-EC).

At the special Ministerial meeting convened in Bangkok on 22 December 1997 the Union of

Myanmar was admitted to the grouping where it was decided to rename as BIMST-EC

(Bangladesh-India-Myanmar-Sri Lanka-Thailand – Economic Co-operation). At the Ministerial

meeting in February 2004, Bhutan and Nepal were also inducted as members.

The inter-regional grouping is supposed to serve as a bridge between the five SAARC countries

and two ASEAN countries. BIMST-EC will have a greater potential to increase the trade among

member countries by taking advantage of their geographical location in the region of the Bay of

Bengal and the Eastern coast of the Indian Ocean. Infact the eligibility criteria for countries seeking

membership is that they should satisfy the conditions of territorial contiguity to, or direct opening

into, or primary dependence on the Bay of Bengal for trade and transportation purposes. The

decision on admitting new members is taken on the basis of consensus by all the BIMST-EC

members

At the first meeting of BIMST-EC Economic/ Trade Ministers held in Bangkok on 7 August 1998, it

was decided that BIMST-EC would initially begin co-operation efforts in six areas. It was agreed


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that each country would play the lead role in planning and implementing programs in each of the

areas. The sectors and lead countries at the inception were: -

Trade & Investment - Bangladesh

Technology - India

Transportation & Communication - Thailand

Energy - Myanmar

Tourism - Sri Lanka

Fisheries - Sri Lanka

As the lead country status for each country was for a period of approximately 3 years, the lead

countries have changed. Since 2002 the lead countries are :

Trade & Investment – Bangladesh

Technology – Sri Lanka

Transportation and Communication – India

Energy – Myanmar

Tourism – India

Fisheries - Thailand

Since some of the sectors are very broad, for greater efficiency the six sectors have been further

divided into sub sectors with each sub sector having a chair country responsible for coordinating

activities of that sub sector, reporting to the lead country.

In March 1998 at a meeting organized by UN ESCAP in Bangkok the businessmen from the five

BIMST-EC countries formed an expert group known as BIMST-EC Business Forum. The aims of

this group are to enhance private sector co-operation among member countries in the BIMST-EC

region, in the identified sectors and sub sectors.

As a recognition of the fact that sub regional co-operation can progress only under the aegis of

inter-governmental co-operation and co-ordination, and that the private sector can act as a major

component in pushing the economic growth of the member countries , the BIMST-EC Economic

Forum was conceptualized at a meeting in Dhaka in 1999 for the purposes of enhancing interaction

between government bodies and the private sector representatives of the five BIMST-EC countries.

The BIMST-EC Economic Forum is a representative group of both the public and private sectors.

Their role is to discuss matters pertaining to achieving the objectives of BIMST-EC and make

recommendations to be taken up at the ministerial meetings each year.


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The 6th BIMSTEC Ministerial Meeting agreed to establish BIMSTEC Technical Support Facility

(BTSF) for a trial period of 2 years as coordinating mechanism of BIMSTEC’s general cooperation

as well as activities of BIMSTEC Working Group (BWG) and BIMSTEC Chamber of Commerce.

Thailand has supported the establishment of the BIMSTEC Center, seeing it as a pilot project that

shall be evaluated as a model for possible foundation of a permanent secretariat. BIMSTEC

Center, is located at the Institute for Trade Strategies, the University of the Thai Chamber of

Commerce, is already in operation.

Discussions have been held with regard to building a Trans Asia Highway linking the five countries

and also setting up a BIMST-EC Airline connecting the capitals and important cities of the member

countries. Member countries agreed to promote the long-term multiple entry visa to facilitate

business travel within BIMSTEC. Meanwhile, Thailand’s initiative of issuing the BIMSTEC Business

Travel Card (BBTC) or VISA Sticker was accepted and the project was referred to the BIMSTEC

Center and expected to be ready by October 2004

ASEAN - AFTA

The Association of Southeast Asian Nations or ASEAN was established on 8 August 1967 in

Bangkok by the five original Member Countries, namely, Indonesia, Malaysia, Philippines,

Singapore, and Thailand. Brunei Darussalam joined on 8 January 1984, Vietnam on 28 July 1995,

Laos and Myanmar on 23 July 1997, and Cambodia on 30 April 1999.

The ASEAN region has a population of about 500 million, a total area of 4.5 million square

kilometers, a combined gross domestic product of US$737 billion, and a total trade of US$ 720

billion.

The ASEAN Declaration states that the aims and purposes of the Association are: (i) to accelerate

the economic growth, social progress and cultural development in the region through joint

endeavors in the spirit of equality and partnership in order to strengthen the foundation for a

prosperous and peaceful community of Southeast Asian nations, and (ii) to promote regional peace

and stability through abiding respect for justice and the rule of law in the relationship among

countries in the region and adherence to the principles of the United Nations Charter.

In 1995, the ASEAN Heads of States and Government re-affirmed that “Cooperative peace and

shared prosperity shall be the fundamental goals of ASEAN.”


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When ASEAN was established, trade among the Member Countries was insignificant. Estimates

between 1967 and the early 1970s showed that the share of intra-ASEAN trade from the total trade

of the Member Countries was between 12 and 15 percent. Thus, some of the earliest economic

cooperation schemes of ASEAN were aimed at addressing this situation. One of these was the

Preferential Trading Arrangement of 1977, which accorded tariff preferences for trade among

ASEAN economies. Ten years later, an Enhanced PTA Programme was adopted at the Third

ASEAN Summit in Manila further increasing intra-ASEAN trade.

The Framework Agreement on Enhancing Economic Cooperation was adopted at the Fourth

ASEAN Summit in Singapore in 1992, which included the launching of a scheme toward an

ASEAN Free Trade Area or AFTA. The strategic objective of AFTA is to increase the ASEAN

region’s competitive advantage as a single production unit. The elimination of tariff and non-tariff

barriers among the member countries is expected to promote greater economic efficiency,

productivity, and competitiveness. The Fifth ASEAN Summit held in Bangkok in 1995 adopted the

Agenda for Greater Economic Integration, which included the acceleration of the timetable for the

realization of AFTA from the original 15-year timeframe to 10 years.

In addition to trade and investment liberalization, regional economic integration is being pursued

through the development of Trans-ASEAN transportation network consisting of major inter-state

highway and railway networks, principal ports and sea lanes for maritime traffic, inland waterway

transport, and major civil aviation links. ASEAN is promoting the interoperability and

interconnectivity of the national telecommunications equipment and services. Building of Trans-

ASEAN energy networks, which consist of the ASEAN Power Grid and the Trans-ASEAN Gas

Pipeline Projects are also being developed.

ASEAN cooperation has resulted in greater regional integration. Within three years from the

launching of AFTA, exports among ASEAN countries grew from US$43.26 billion in 1993 to almost

US$80 billion in 1996, an average yearly growth rate of 28.3 percent. In the process, the share of

intra-regional trade from ASEAN’s total trade rose from 20 percent to almost 25 percent. Tourists

from ASEAN countries themselves have been representing an increasingly important share of

tourism in the region. In 1996, of the 28.6 million tourist arrivals in ASEAN, 11.2 million or almost

40 percent, came from within ASEAN itself.

The ASEAN Free Trade Area (AFTA) has now been virtually established. ASEAN Member

Countries have made significant progress in the lowering of intra-regional tariffs through the

Common Effective Preferential Tariff (CEPT) Scheme for AFTA. More than 99 percent of the

products in the CEPT Inclusion List (IL) of ASEAN-6, comprising Brunei Darussalam, Indonesia,


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Malaysia, the Philippines, Singapore and Thailand, have been brought down to the 0-5 percent

tariff range.

ASEAN’s newer members, namely Cambodia, Laos, Myanmar and Viet Nam, are not far behind in

the implementation of their CEPT commitments with almost 80 percent of their products having

been moved into their respective CEPT ILS. Of these items, about 66 percent already have tariffs

within the 0-5 percent tariff band. Viet Nam has until 2006 to bring down tariff of products in the

Inclusion List to no more than 5 percent duties, Laos and Myanmar in 2008 and Cambodia in 2010.

Products that remain out of the CEPT-AFTA Scheme are those in the Highly Sensitive List (i.e.

rice) and the General Exception List. ASEAN Member Countries have also resolved to work on the

elimination of non-tariff barriers. A work programme on the elimination of non-tariff barriers, which

includes, among others, the process of verification and cross-notification; updating the working

definition of Non-Tariff Measures (NTMs)/Non-Tariff Barriers (NTBs) in ASEAN; the setting-up of a

database on all NTMs maintained by Member Countries; and the eventual elimination of

unnecessary and unjustifiable non-tariff measures, is currently being finalized.

Today, ASEAN economic cooperation covers the following areas: trade, investment, industry,

services, finance, agriculture, forestry, energy, transportation and communication, intellectual

property, small and medium enterprises, and tourism.

Thus all the countries of the world, including the Asian countries are mounting on the bandwagon

of FTAs. The South Asian countries are exchanging tariff preferences under SAPTA. G-77

countries are also exchanging preferences under GSTP (Global System of Trade Preferences).

Bangladesh, Bhutan, India, Nepal, Sri Lanka and Thailand are also members of other economic

groupings like BIMST-EC. India has signed Framework agreements for PTAs/FTAs - ASEAN,

BIMST-EC, MERCOSUR, SAFTA, Singapore and Thailand.

REGIONAL TRADING ARRANGEMENTS – REASONS FOR POPULARITY

Regional trading arrangements and FTAs have increasing become the preferred mode of trade

liberalization amongst the countries of a region even though they may be members of WTO. The

reason for this can be traced to freedom that such arrangements provide for addressing the trade

issues peculiar to a region or the member countries of an FTA.

In a nutshell FTAs/RTAs can be used as a tool for –

Material management


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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.

The coverage and depth of preferential treatment varies from one FTA/RTA to another. Modern

FTAs/RTAs, and not exclusively those linking the most developed economies, tend to go far

beyond tariff-cutting exercises. They provide for increasingly complex regulations governing intra-

trade (e.g. with respect to standards, safeguard provisions, customs administration, etc.) and they

often also provide for a preferential regulatory framework for mutual services trade. The most

sophisticated FTAs/RTAs go beyond traditional trade policy mechanisms, to include regional rules

on investment, competition, environment and labour.

Regionalism A Necessity

Also one of the primary reason for the increase in the regional Free Trade Agreements is that

regionalism and regional FTAs are the only path available for many developing countries to

integrate into the world economy, as the best way to learn to compete is by competing. Initial

competition between neighboring states that understand the needs of weaker states leads to

strengthening of the economies of the weaker states so as to be able to face global competition.

Inadequate national capacity to produce and sell on world markets is the real reason for the

increasing importance of regionalism. For weak economies the pooling of regional resources such

as land, livestock and agricultural products and development of intra-regional trade is the only

practical method for building the required capacity. A higher level of cooperation would enable

countries in a region to cope with development problems and with a complex business

environment. The restructuring of productive sectors would be more feasible on a regional than on

a national basis. Individual countries don't possess enough bargaining clout at multilateral forums.

Group effort and cooperation on negotiating table will undoubtedly enhance the Bargaining

strength. Hence regional trade groupings can successfully protect the trade interests of their

member countries at multilateral trade forums like WTO.


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POTENTIAL NEGATIVE EFFECTS OF REGIONAL TRADE AGREEMENTS

Still, while regionalism had much to contribute, it was not an easy substitute for multilateralism. In

some instances, regional trading arrangements could even impede or divert, rather than promote,

trade. However in order for regional economic integration to be a useful tool in economic

development, it must not be used as an excuse for protectionism. Regionalism and multilateralism

are complementary notions that reinforce each other as long as regionalism is open.

FTAs/RTAs can complement the multilateral trading system, help to build and strengthen it. But by

their very nature FTAs/RTAs are discriminatory: they are a departure from the MFN principle, a

cornerstone of the multilateral trading system. Their effects on global trade liberalization and

economic growth are not clear given that the regional economic impact of FTAs/RTAs is ex ante

inherently ambiguous. Though FTAs/RTAs are designed to the advantage of signatory countries,

expected benefits may be undercut if distortions in resource allocation, as well as trade and

investment diversion, potentially present in any RTA process, are not minimized, if not eliminated

altogether. For example, India today finds itself in a mess in the case of the Indo-Sri Lanka FTA.

Since the rules of origin were not given the due importance in the FTA, India has not only lost

revenue but it has also been victim of rampant dumping, causing several domestic units to turn

sick.

The increase in FTAs/RTAs, coupled with the preference shown for concluding bilateral free-trade

agreements, has produced the phenomenon of overlapping membership. Because each FTA/RTA

will tend to develop its own mini-trade regime, the coexistence in a single country of differing trade

rules applying to different FTA/RTA partners has become a frequent feature. This can hamper

trade flows merely by the costs involved for traders in meeting multiple sets of trade rules.

The proliferation of FTAs/RTAs, especially as their scope broadens to include policy areas not

regulated multilaterally, increases the risks of inconsistencies in the rules and procedures among

FTAs/RTAs themselves, and between FTAs/RTAs and the multilateral framework. This is likely to

give rise to regulatory confusion, distortion of regional markets, and severe implementation

problems, especially where there are overlapping FTAs/RTAs.

The most powerful economic arguments against regional and bilateral trade agreements are that

they can cause trade diversion and trade distortions and ultimately undermine the multilateral

system because of their discriminatory nature. In some cases, preferential rules of origin have

proven to stifle technological developments, networks and joint manufacturing, and to unduly

restrict third-country sourcing, leading to trade diversion. Moreover, they can create obstacles to

trade facilitation by increasing administrative complexity at customs. One specific example is the


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proliferation of different preferential rules of origin - a prominent source of trade costs and

complexity in today's global marketplace in which companies depend on the rapid delivery of

products and components from multiple overseas sources. Such effects are costly to business and

detrimental to the regional trading areas. Harmonization and simplification of preferential rules of

origin and the cumulation of origin could alleviate some of these obstacles to trade facilitation.

Another problem with turning down freer trade for fear of trade diversion is that it is very difficult,

before the fact, to determine whether thwarted wealth creation caused by trade diversion will offset

new wealth creation that results from more open markets. That is because it is not possible to

predict which enterprises will best serve the needs of consumers at any given time. Indeed, the

whole point of having competition in a market is to separate successful from unsuccessful

producers.

The regulatory baggage that a regional FTA might carry can involve a real loss of economic liberty

as the price for freer trade. In such a case, a potential member must make a pragmatic judgment

about whether the benefits in the short and medium term outweigh the drawbacks and whether the

prospects in the future are for freedom from regulations or a heavier regulatory burden.

In any case an FTAs'/RTAs net economic impact will certainly depend on its own architecture and

the choice of its major internal parameters (in particular, the depth of trade liberalization and

sectoral coverage). Concurrent MFN trade liberalization by FTA/RTA parties, either unilaterally or

in the context of multilateral trade negotiations, can play an important role in defusing potential

distortions, both at the regional and at the global level. Hence a the most of negative effects of an

FTA can either be offset by proper policy formulation or their benefits far outweigh the their

negative effects.

In fact, there is no contradiction between greater regional integration and fully taking part in global

trade liberalization. Contractual trade relations between neighboring countries, strengthened

political ties and exchanges between civil society could all bolster the multilateral process and

reinforce political stability. In reality regional trade arrangements hold out better prospects for

dealing with difficult trade problems that are peculiar to a region than does the GATT/WTO

mechanism. But the danger that deepening trade will simply deepen failed regulatory policies is

also greater.

Bilateral or regional trade agreements that simply remove tariffs and traditional trade barriers are

generally acceptable even if they divert some trade. This is because first, such agreements

increase economic freedom. Second, they actually hold less danger of being a vehicle for the


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export of failed regulatory policies. Third, it is difficult to determine before the fact what

arrangements will be more trade diverting in the long term than the status quo.

V. THE INTERRELATION BETWEEN FTAS AND WTO

When a WTO member enters into a regional integration arrangement through which it grants more

favorable conditions to its trade with other parties to that arrangement than to other WTO members’

trade, it departs from the guiding principle of non-discrimination embodied in the various WTO

agreements.

However, even though they seem to be contradictory, but often regional trade agreements can

actually support the WTO’s multilateral trading system. Regional agreements have allowed groups

of countries to negotiate rules and commitments that go beyond what was possible at the time

multilaterally. In turn, some of these rules have paved the way for agreement in the WTO. Services,

intellectual property, environmental standards, investment and competition policies are all issues

that were raised in regional negotiations and later developed into agreements or topics of

discussion in the WTO.

Normally, setting up a customs union or free trade area would violate the WTO’s principle of equal

treatment for all trading partners (“most-favoured-nation”). But GATT’s Article 24 allows regional

trading arrangements to be set up as a special exception, provided certain strict criteria are met.

Article 24 says if a free trade area or customs union is created, duties and other trade barriers

should be reduced or removed on substantially all sectors of trade in the group. Non-members

should not find trade with the group any more restrictive than before the group was set up.

Similarly, Article 5 of the General Agreement on Trade in Services provides for economic

integration agreements in services. Other provisions in the WTO agreements allow developing

countries to enter into regional or global agreements that include the reduction or elimination of

tariffs and non-tariff barriers on trade among themselves.

A key rule of the multilateral trade system is that reductions in trade barriers should be applied, on

a most-favoured nation basis, to all WTO members. This means that no WTO member should be

discriminated against by another member's trade regime. However, an important exception to this

rule is allowed for regional trade agreements (RTAs), under which reductions in trade barriers only

apply to the countries that form the arrangement. This exception is contained in Article XXIV of the


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General Agreement on Tariffs and Trade (GATT) for trade in goods and in Article V of the General

Agreement on Trade in Services (GATS) for Trade in Services.

There are two major types of regional trade agreements under the WTO - customs unions and free

trade areas, with interim agreements being arrangements in place during the transition period,

ultimately leading to the creation of a customs union or a free trade area.

Customs Union

A customs union means that a group of countries agree to have a common external tariff. That is,

the same customs duties, quotas, preferences or other non-tariff barriers to trade apply to all goods

entering the area, regardless of which country within the area they are entering.

The reason it becomes necessary is that if a free trade area exists without a customs union, non-

members could easily route all their exports to any country in the FTA through the one with the

lowest tariffs.

If for instance, SAFTA were to come into being and India had an import duty of, say, 100% on

automobiles, but Nepal levied only 30% on them. A third country like Japan, which is not part of

SAFTA could simply export cars to Nepal which could then sell them to India without facing any

duties, thereby making the 100% duty meaningless. Other reasons for establishing a customs

union normally include increasing economic efficiency and establishing closer political and cultural

ties between the member countries. Under a customs union, parties to the agreement eliminate

tariffs and other trade barriers between themselves and also maintain a common external tariff

against non-parties. The most well known customs union is the European Union. Customs unions

are more complex to negotiate than free trade areas, because all countries in the union must agree

on joint external trade policies. However, because they generally lead to a greater degree of

economic integration between the parties, there can be important benefits as well.

Free trade Areas

Parties to a free trade area agree to eliminate tariffs and other trade barriers between themselves.

However, each individual country maintains its own tariff policy against non-parties to the

agreement.


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Committee on Regional Trade Agreements

The Committee on Regional Trade Agreements (CRTA) was established following the Uruguay

Round of negotiations as a mechanism for checking the consistency of RTAs with the WTO Rules.

The CRTA has an important role to play in ensuring regional agreements do not undermine the

multilateral system. It has the following terms of reference:

To carry out examinations of bilateral and regional preferential trade agreements and

report on them;

To consider how the required reporting on the operation of regional agreements should be

carried out;

To develop procedures to facilitate and improve the examination process;

To consider the systemic implications of regional agreements for the multilateral trading

system.

Thus WTO Members permitted to enter into such arrangements under specific conditions which are

spelled out in three sets of rules:

1. Paragraphs 4 to 10 of Article XXIV of GATT (as clarified in the Understanding on the

Interpretation of Article XXIV of the GATT 1994) provide for the formation and operation of

customs unions and free-trade areas covering trade in goods;

2. The so-called Enabling Clause (i.e., the 1979 Decision on Differential and More Favorable

Treatment, Reciprocity and Fuller Participation of Developing Countries) refers to

preferential trade arrangements in trade in goods between developing country Members;

and

3. Article V of GATS governs the conclusion of RTAs in the area of trade in services, for both

developed and developing countries.

Other non-generalized preferential schemes, for example non-reciprocal preferential agreements

involving developing and developed countries, require Members to seek a waiver from WTO rules.

Such waivers require the approval of three quarters of WTO Members.


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The Rules Spelled Out

GATT: Article XXIV

Territorial Application — Frontier Traffic — Customs Unions and Free-trade Areas

1. The provisions of this Agreement shall apply to the metropolitan customs territories of the contracting

parties and to any other customs territories in respect of which this Agreement has been accepted under

Article XXVI or is being applied under Article XXXIII or pursuant to the Protocol of Provisional Application.

Each such customs territory shall, exclusively for the purposes of the territorial application of this Agreement,

be treated as though it were a contracting party; Provided that the provisions of this paragraph shall not be

construed to create any rights or obligations as between two or more customs territories in respect of which

this Agreement has been accepted under Article XXVI or is being applied under Article XXXIII or pursuant to

the Protocol of Provisional Application by a single contracting party.

2. For the purposes of this Agreement a customs territory shall be understood to mean any territory with

respect to which separate tariffs or other regulations of commerce are maintained for a substantial part of the

trade of such territory with other territories.

3. The provisions of this Agreement shall not be construed to prevent:

(a) Advantages accorded by any contracting party to adjacent countries in order to facilitate frontier traffic;

(b) Advantages accorded to the trade with the Free Territory of Trieste by countries contiguous to that

territory, provided that such advantages are not in conflict with the Treaties of Peace arising out of the Second

World War.

4. The contracting parties recognize the desirability of increasing freedom of trade by the development,

through voluntary agreements, of closer integration between the economies of the countries parties to such

agreements. They also recognize that the purpose of a customs union or of a free-trade area should be to

facilitate trade between the constituent territories and not to raise barriers to the trade of other contracting

parties with such territories.

5. Accordingly, the provisions of this Agreement shall not prevent, as between the territories of contracting

parties, the formation of a customs union or of a free-trade area or the adoption of an interim agreement

necessary for the formation of a customs union or of a free-trade area; Provided that:

(a) with respect to a customs union, or an interim agreement leading to a formation of a customs union, the

duties and other regulations of commerce imposed at the institution of any such union or interim agreement in

respect of trade with contracting parties not parties to such union or agreement shall not on the whole be

higher or more restrictive than the general incidence of the duties and regulations of commerce applicable in


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the constituent territories prior to the formation of such union or the adoption of such interim agreement, as the

case may be;

(b) with respect to a free-trade area, or an interim agreement leading to the formation of a free-trade area, the

duties and other regulations of commerce maintained in each of the constituent territories and applicable at

the formation of such free-trade area or the adoption of such interim agreement to the trade of contracting

parties not included in such area or not parties to such agreement shall not be higher or more restrictive than

the corresponding duties and other regulations of commerce existing in the same constituent territories prior to

the formation of the free-trade area, or interim agreement as the case may be; and

(c) any interim agreement referred to in sub-paragraphs (a) and (b) shall include a plan and schedule for the

formation of such a customs union or of such a free-trade area within a reasonable length of time.

6. If, in fulfilling the requirements of sub-paragraph 5 (a), a contracting party proposes to increase any rate of

duty inconsistently with the provisions of Article II, the procedure set forth in Article XXVIII shall apply. In

providing for compensatory adjustment, due account shall be taken of the compensation already afforded by

the reduction brought about in the corresponding duty of the other constituents of the union.

7. (a) Any contracting party deciding to enter into a customs union or free-trade area, or an interim agreement

leading to the formation of such a union or area, shall promptly notify the Contracting Parties and shall make

available to them such information regarding the proposed union or area as will enable them to make such

reports and recommendations to contracting parties as they may deem appropriate.

(b) If, after having studied the plan and schedule included in an interim agreement referred to in paragraph 5

in consultation with the parties to that agreement and taking due account of the information made available in

accordance with the provisions of sub-paragraph (a), the Contracting Parties find that such agreement is not

likely to result in the formation of a customs union or of a free-trade area within the period contemplated by the

parties to the agreement or that such period is not a reasonable one, the Contracting Parties shall make

recommendations to the parties to the agreement. The parties shall not maintain or put into force, as the case

may be, such agreement if they are not prepared to modify it in accordance with these recommendations.

(c) Any substantial change in the plan or schedule referred to in paragraph 5 (c) shall be communicated to the

Contracting Parties, which may request the contracting parties concerned to consult with them if the change

seems likely to jeopardize or delay unduly the formation of the customs union or of the free-trade area.

8. For the purposes of this Agreement:

(a) A customs union shall be understood to mean the substitution of a single customs territory for two or more

customs territories, so that

(i) duties and other restrictive regulations of commerce (except, where necessary, those permitted under

Articles XI, XII, XIII, XIV, XV and XX) are eliminated with respect to substantially all the trade between the

constituent territories of the union or at least with respect to substantially all the trade in products originating in

such territories, and,


27


(ii) subject to the provisions of paragraph 9, substantially the same duties and other regulations of commerce

are applied by each of the members of the union to the trade of territories not included in the union;

(b) A free-trade area shall be understood to mean a group of two or more customs territories in which the

duties and other restrictive regulations of commerce (except, where necessary, those permitted under Articles

XI, XII, XIII, XIV, XV and XX) are eliminated on substantially all the trade between the constituent territories in

products originating in such territories.

9. The preferences referred to in paragraph 2 of Article I shall not be affected by the formation of a customs

union or of a free-trade area but may be eliminated or adjusted by means of negotiations with contracting

parties affected.* This procedure of negotiations with affected contracting parties shall, in particular, apply to

the elimination of preferences required to conform with the provisions of paragraph 8 (a)(i) and paragraph 8

(b).

10. The Contracting Parties may by a two-thirds majority approve proposals which do not fully comply with the

requirements of paragraphs 5 to 9 inclusive, provided that such proposals lead to the formation of a customs

union or a free-trade area in the sense of this Article.

11. Taking into account the exceptional circumstances arising out of the establishment of India and Pakistan

as independent States and recognizing the fact that they have long constituted an economic unit, the

contracting parties agree that the provisions of this Agreement shall not prevent the two countries from

entering into special arrangements with respect to the trade between them, pending the establishment of their

mutual trade relations on a definitive basis.*

12. Each contracting party shall take such reasonable measures as may be available to it to ensure

observance of the provisions of this Agreement by the regional and local governments and authorities within

its territories.

Ad Article XXIV

Paragraph 9

It is understood that the provisions of Article I would require that, when a product which has been imported

into the territory of a member of a customs union or free-trade area at a preferential rate of duty is re-exported

to the territory of another member of such union or area, the latter member should collect a duty equal to the

difference between the duty already paid and any higher duty that would be payable if the product were being

imported directly into its territory.

Paragraph 11

Measures adopted by India and Pakistan in order to carry out definitive trade arrangements between them,

once they have been agreed upon, might depart from particular provisions of this Agreement, but these

measures would in general be consistent with the objectives of the Agreement.


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B. Understanding on the Interpretation of Article XXIV of the General Agreement on Tariffs and Trade 1994

Members,

Having regard to the provisions of Article XXIV of GATT 1994;

Recognizing that customs unions and free trade areas have greatly increased in number and importance

since the establishment of GATT 1947 and today cover a significant proportion of world trade;

Recognizing the contribution to the expansion of world trade that may be made by closer integration between

the economies of the parties to such agreements;

Recognizing also that such contribution is increased if the elimination between the constituent territories of

duties and other restrictive regulations of commerce extends to all trade, and diminished if any major sector of

trade is excluded;

Reaffirming that the purpose of such agreements should be to facilitate trade between the constituent

territories and not to raise barriers to the trade of other Members with such territories; and that in their

formation or enlargement the parties to them should to the greatest possible extent avoid creating adverse

effects on the trade of other Members;

Convinced also of the need to reinforce the effectiveness of the role of the Council for Trade in Goods in

reviewing agreements notified under Article XXIV, by clarifying the criteria and procedures for the assessment

of new or enlarged agreements, and improving the transparency of all Article XXIV agreements;

Recognizing the need for a common understanding of the obligations of Members under paragraph 12 of

Article XXIV;

Hereby agree as follows:

1. Customs unions, free-trade areas, and interim agreements leading to the formation of a customs union or

free-trade area, to be consistent with Article XXIV, must satisfy, inter alia, the provisions of paragraphs 5, 6, 7

and 8 of that Article.

Article XXIV:5

2. The evaluation under paragraph 5(a) of Article XXIV of the general incidence of the duties and other

regulations of commerce applicable before and after the formation of a customs union shall in respect of

duties and charges be based upon an overall assessment of weighted average tariff rates and of customs

duties collected. This assessment shall be based on import statistics for a previous representative period to be

supplied by the customs union, on a tariff-line basis and in values and quantities, broken down by WTO


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country of origin. The Secretariat shall compute the weighted average tariff rates and customs duties collected

in accordance with the methodology used in the assessment of tariff offers in the Uruguay Round of

Multilateral Trade Negotiations. For this purpose, the duties and charges to be taken into consideration shall

be the applied rates of duty. It is recognized that for the purpose of the overall assessment of the incidence of

other regulations of commerce for which quantification and aggregation are difficult, the examination of

individual measures, regulations, products covered and trade flows affected may be required.

3. The "reasonable length of time" referred to in paragraph 5(c) of Article XXIV should exceed 10 years only in

exceptional cases. In cases where Members parties to an interim agreement believe that 10 years would be

insufficient they shall provide a full explanation to the Council for Trade in Goods of the need for a longer

period.

Article XXIV:6

4. Paragraph 6 of Article XXIV establishes the procedure to be followed when a Member forming a customs

union proposes to increase a bound rate of duty. In this regard Members reaffirm that the procedure set forth

in Article XXVIII, as elaborated in the guidelines adopted on 10 November 1980 (BISD 27S/26-28) and in the

Understanding on the Interpretation of Article XXVIII of GATT 1994, must be commenced before tariff

concessions are modified or withdrawn upon the formation of a customs union or an interim agreement

leading to the formation of a customs union.

5. These negotiations will be entered into in good faith with a view to achieving mutually satisfactory

compensatory adjustment. In such negotiations, as required by paragraph 6 of Article XXIV, due account shall

be taken of reductions of duties on the same tariff line made by other constituents of the customs union upon

its formation. Should such reductions not be sufficient to provide the necessary compensatory adjustment, the

customs union would offer compensation, which may take the form of reductions of duties on other tariff lines.

Such an offer shall be taken into consideration by the Members having negotiating rights in the binding being

modified or withdrawn. Should the compensatory adjustment remain unacceptable, negotiations should be

continued. Where, despite such efforts, agreement in negotiations on compensatory adjustment under Article

XXVIII as elaborated by the Understanding on the Interpretation of Article XXVIII of GATT 1994 cannot be

reached within a reasonable period from the initiation of negotiations, the customs union shall, nevertheless,

be free to modify or withdraw the concessions; affected Members shall then be free to withdraw substantially

equivalent concessions in accordance with Article XXVIII.

6. GATT 1994 imposes no obligation on Members benefiting from a reduction of duties consequent upon the

formation of a customs union, or an interim agreement leading to the formation of a customs union, to provide

compensatory adjustment to its constituents.

Review of Customs Unions and Free-Trade Areas

7. All notifications made under paragraph 7(a) of Article XXIV shall be examined by a working party in the light

of the relevant provisions of GATT 1994 and of paragraph 1 of this Understanding. The working party shall


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submit a report to the Council for Trade in Goods on its findings in this regard. The Council for Trade in Goods

may make such recommendations to Members as it deems appropriate.

8. In regard to interim agreements, the working party may in its report make appropriate recommendations on

the proposed time-frame and on measures required to complete the formation of the customs union or free-

trade area. It may if necessary provide for further review of the agreement.

9. Members parties to an interim agreement shall notify substantial changes in the plan and schedule included

in that agreement to the Council for Trade in Goods and, if so requested, the Council shall examine the

changes.

10. Should an interim agreement notified under paragraph 7(a) of Article XXIV not include a plan and

schedule, contrary to paragraph 5(c) of Article XXIV, the working party shall in its report recommend such a

plan and schedule. The parties shall not maintain or put into force, as the case may be, such agreement if

they are not prepared to modify it in accordance with these recommendations. Provision shall be made for

subsequent review of the implementation of the recommendations.

11. Customs unions and constituents of free-trade areas shall report periodically to the Council for Trade in

Goods, as envisaged by the CONTRACTING PARTIES to GATT 1947 in their instruction to the GATT 1947

Council concerning reports on regional agreements (BISD 18S/38), on the operation of the relevant

agreement. Any significant changes and/or developments in the agreements should be reported as they

occur.

Dispute Settlement

12. The provisions of Articles XXII and XXIII of GATT 1994 as elaborated and applied by the Dispute

Settlement Understanding may be invoked with respect to any matters arising from the application of those

provisions of Article XXIV relating to customs unions, free-trade areas or interim agreements leading to the

formation of a customs union or free-trade area.

Article XXIV:12

13. Each Member is fully responsible under GATT 1994 for the observance of all provisions of GATT 1994,

and shall take such reasonable measures as may be available to it to ensure such observance by regional

and local governments and authorities within its territory.

14. The provisions of Articles XXII and XXIII of GATT 1994 as elaborated and applied by the Dispute

Settlement Understanding may be invoked in respect of measures affecting its observance taken by regional

or local governments or authorities within the territory of a Member. When the Dispute Settlement Body has

ruled that a provision of GATT 1994 has not been observed, the responsible Member shall take such

reasonable measures as may be available to it to ensure its observance. The provisions relating to

compensation and suspension of concessions or other obligations apply in cases where it has not been

possible to secure such observance.


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15. Each Member undertakes to accord sympathetic consideration to and afford adequate opportunity for

consultation regarding any representations made by another Member concerning measures affecting the

operation of GATT 1994 taken within the territory of the former.

Decision of 28 November 1979 (L/4903)

Following negotiations within the framework of the Multilateral Trade Negotiations, the CONTRACTING

PARTIES decide as follows:

1. Notwithstanding the provisions of Article I of the General Agreement, contracting parties may accord

differential and more favourable treatment to developing countries(1), without according such treatment to

other contracting parties.

2. The provisions of paragraph 1 apply to the following(2):

a) Preferential tariff treatment accorded by developed contracting parties to products originating in

developing countries in accordance with the Generalized System of Preferences(3),

b) Differential and more favourable treatment with respect to the provisions of the General Agreement

concerning non-tariff measures governed by the provisions of instruments multilaterally negotiated under the

auspices of the GATT;

c) Regional or global arrangements entered into amongst less-developed contracting parties for the

mutual reduction or elimination of tariffs and, in accordance with criteria or conditions which may be

prescribed by the CONTRACTING PARTIES, for the mutual reduction or elimination of non-tariff measures, on

products imported from one another;

d) Special treatment on the least developed among the developing countries in the context of any

general or specific measures in favour of developing countries.

3. Any differential and more favourable treatment provided under this clause:

a) shall be designed to facilitate and promote the trade of developing countries and not to raise barriers

to or create undue difficulties for the trade of any other contracting parties;

b) shall not constitute an impediment to the reduction or elimination of tariffs and other restrictions to

trade on a most-favoured-nation basis;

c) shall in the case of such treatment accorded by developed contracting parties to developing countries

be designed and, if necessary, modified, to respond positively to the development, financial and trade needs

of developing countries.


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4. Any contracting party taking action to introduce an arrangement pursuant to paragraphs 1, 2 and 3

above or subsequently taking action to introduce modification or withdrawal of the differential and more

favourable treatment so provided shall:(4)

a) notify the CONTRACTING PARTIES and furnish them with all the information they may deem

appropriate relating to such action;

b) afford adequate opportunity for prompt consultations at the request of any interested contracting party

with respect to any difficulty or matter that may arise. The CONTRACTING PARTIES shall, if requested to do

so by such contracting party, consult with all contracting parties concerned with respect to the matter with a

view to reaching solutions satisfactory to all such contracting parties.

5. The developed countries do not expect reciprocity for commitments made by them in trade

negotiations to reduce or remove tariffs and other barriers to the trade of developing countries, i.e., the

developed countries do not expect the developing countries, in the course of trade negotiations, to make

contributions which are inconsistent with their individual development, financial and trade needs. Developed

contracting parties shall therefore not seek, neither shall less-developed contracting parties be required to

make, concessions that are inconsistent with the latter's development, financial and trade needs.

6. Having regard to the special economic difficulties and the particular development, financial and trade

needs of the least-developed countries, the developed countries shall exercise the utmost restraint in seeking

any concessions or contributions for commitments made by them to reduce or remove tariffs and other

barriers to the trade of such countries, and the least-developed countries shall not be expected to make

concessions or contributions that are inconsistent with the recognition of their particular situation and

problems.

7. The concessions and contributions made and the obligations assumed by developed and less-

developed contracting parties under the provisions of the General Agreement should promote the basic

objectives of the Agreement, including those embodied in the Preamble and in Article XXXVI. Less-developed

contracting parties expect that their capacity to make contributions or negotiated concessions or take other

mutually agreed action under the provisions and procedures of the General Agreement would improve with

the progressive development of their economies and improvement in their trade situation and they would

accordingly expect to participate more fully in the framework of rights and obligations under the General

Agreement.

8. Particular account shall be taken of the serious difficulty of the least-developed countries in making

concessions and contributions in view of their special economic situation and their development, financial and

trade needs.

9. The contracting parties will collaborate in arrangements for review of the operation of these provisions,

bearing in mind the need for individual and joint efforts by contracting parties to meet the development needs

of developing countries and the objectives of the General Agreement.


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Notes:

1. The words “developing countries” as used in this text are to be understood to refer also to developing

territories.

2. It would remain open for the CONTRACTING PARTIES to consider on an ad hoc basis under the GATT

provisions for joint action any proposals for differential and more favourable treatment not falling within the

scope of this paragraph.

3. As described in the Decision of the CONTRACTING PARTIES of 25 June 1971, relating to the

establishment of “generalized, non-reciprocal and non discriminatory preferences beneficial to the developing

countries” (BISD 18S/24).

4. Nothing in these provisions shall affect the rights of contracting parties under the General Agreement.

GATS: Article V: Economic Integration

1. This Agreement shall not prevent any of its Members from being a party to or entering into an

agreement liberalizing trade in services between or among the parties to such an agreement, provided that

such an agreement:

(a) has substantial sectoral coverage(1), and

(b) provides for the absence or elimination of substantially all discrimination, in the sense of Article XVII,

between or among the parties, in the sectors covered under subparagraph (a), through:

(i) elimination of existing discriminatory measures, and/or

(ii) prohibition of new or more discriminatory measures,

either at the entry into force of that agreement or on the basis of a reasonable time-frame, except for

measures permitted under Articles XI, XII, XIV and XIV bis.

2. In evaluating whether the conditions under paragraph 1(b) are met, consideration may be given to the

relationship of the agreement to a wider process of economic integration or trade liberalization among the

countries concerned.

3. (a) Where developing countries are parties to an agreement of the type referred to in paragraph 1,

flexibility shall be provided for regarding the conditions set out in paragraph 1, particularly with reference to


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subparagraph (b) thereof, in accordance with the level of development of the countries concerned, both

overall and in individual sectors and subsectors.

(b) Notwithstanding paragraph 6, in the case of an agreement of the type referred to in paragraph 1

involving only developing countries, more favourable treatment may be granted to juridical persons owned or

controlled by natural persons of the parties to such an agreement.

4. Any agreement referred to in paragraph 1 shall be designed to facilitate trade between the parties to

the agreement and shall not in respect of any Member outside the agreement raise the overall level of barriers

to trade in services within the respective sectors or subsectors compared to the level applicable prior to such

an agreement.

5. If, in the conclusion, enlargement or any significant modification of any agreement under paragraph 1,

a Member intends to withdraw or modify a specific commitment inconsistently with the terms and conditions

set out in its Schedule, it shall provide at least 90 days advance notice of such modification or withdrawal and

the procedure set forth in paragraphs 2, 3 and 4 of Article XXI shall apply.

6. A service supplier of any other Member that is a juridical person constituted under the laws of a party to

an agreement referred to in paragraph 1 shall be entitled to treatment granted under such agreement,

provided that it engages in substantive business operations in the territory of the parties to such agreement.

7. (a) Members which are parties to any agreement referred to in paragraph 1 shall promptly notify

any such agreement and any enlargement or any significant modification of that agreement to the Council for

Trade in Services. They shall also make available to the Council such relevant information as may be

requested by it. The Council may establish a working party to examine such an agreement or enlargement or

modification of that agreement and to report to the Council on its consistency with this Article.

(b) Members which are parties to any agreement referred to in paragraph 1 which is implemented on the

basis of a time-frame shall report periodically to the Council for Trade in Services on its implementation. The

Council may establish a working party to examine such reports if it deems such a working party necessary.

(c) Based on the reports of the working parties referred to in subparagraphs (a) and (b), the Council may

make recommendations to the parties as it deems appropriate.

8. A Member which is a party to any agreement referred to in paragraph 1 may not seek compensation for

trade benefits that may accrue to any other Member from such agreement.

Article V: Labour Markets Integration Agreements

This Agreement shall not prevent any of its Members from being a party to an agreement establishing full

integration(2) of the labour markets between or among the parties to such an agreement, provided that such

an agreement:


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(a) exempts citizens of parties to the agreement from requirements concerning residency and work

permits;

(b) is notified to the Council for Trade in Services

Thus FTAs/RTAs are permitted under Article XXIV of GATT 1994, and such a permission amounts

to exception to MFN treatment as prescribed by the WTO Rules, but as already shown in the Rules

given above such an exception/permission is subject to fulfillment of conditions, i.e.

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.

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.

In particular, the arrangements should help trade flow more freely among the countries in the group

without barriers being raised on trade with the outside world. In other words, regional integration

should complement the multilateral trading system and not threaten it. The groupings that are

important for the WTO are those that abolish or reduce barriers on trade within the group. The

WTO agreements recognize that regional arrangements and closer economic integration can

benefit countries.

However WTO also recognizes that under some circumstances regional trading arrangements

could hurt the trade interests of other countries. Many consequences of RTA activity bolster the

case for a strengthened multilateral framework. This applies particularly to the contribution of

regionalism to divergence from the rules of the multilateral system, to the effects which the

patchwork of regionalism can have on non-members of those agreements and to the role of

regionalism in raising transaction costs for business. These elements are compounded by the fact

that regionalism has often failed to crack the hardest nuts. In some particularly sensitive areas,

regional initiatives have been no more successful – and in some cases less successful – than

activity at the multilateral level. It needs to be acknowledged, however, that even if multilateral

disciplines were to be strengthened, RTAs, and the provisions embodied in them, would not

disappear.


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There has been ongoing debate as to whether regional trade agreements contribute to, or detract

from the multilateral system. Critics of regional trade agreements argue that such arrangements

are 'stumbling blocks' and undermine the multilateral trading system.

The question then arising is how regional arrangements might impinge upon, or co-exist with, any

multilateral disciplines?

However, there are a number of benefits that suggest regional agreements have assisted global

trade liberalisation. Such agreements can be seen as 'stepping stones' to multilateralism and free

trade, however, much depends on the way these are designed. Many consequences of RTA

activity contribute to the case of strengthening the multilateral framework, there are features of

regional approaches that may nevertheless complement such strengthening or even be drawn

upon in designing strengthened multilateral rules. The scope for complimentarity arises from the

contribution which regional initiatives can make towards harmonisation of rule making; the scope

for drawing upon arises from the extent to which RTAs go beyond the WTO. Together, these two

elements have yielded highly effective synergies between approaches at the regional and the

multilateral levels.

Compliance with the WTO rules is an important means of ensuring an agreement is beneficial to

the parties in the multilateral system.

FTAs are a modern way to expand global trade, and regional trade arrangements and FTAs hold

out better prospects for dealing with intractable trade problems than does the GATT/WTO

mechanism, which usually must cater to the lowest common policy denominator.

VI. CULMINATION

Free Trade Agreements & Regional trade agreements (RTAs) have come to stay as a hard reality

on the global economic scenario with the establishment RTAs like the ASEAN Free Trade Area,

SAPTA,SAFTA, BIMSTEC etc.. It is to be expected that trading partners and neighbours will try to

advance liberalization through regional and bilateral trade agreements. There is an array of such

initiatives in progress or contemplated at the present time. A total of 162 regional trade agreements

notified under the GATT and the WTO are in force today. Between 100 and 200 new regional trade

formations are anticipated by 2005.


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But the crucial question that arises in the wake of the rapid growth of these FTAs/ RTAs is that do

such regional trading arrangements pose a possible challenge to the WTO's objective of global free

trade since technically regional trading arrangements breach multilateralism? I don’t think so for the

prime objective of these RTAs is to promote intra-regional trade among the member countries and

thereby economic cooperation and development which indirectly strengthens the WTO agenda. As

discussed earlier, RTAs are legally permitted under Article XXIV of the General Agreement on

Tariffs and Trade (GATT) and Article V of the General Agreement on Trade in Services (GATS).

Regional Trade Agreements As Building Blocks

RTAs are viewed by most countries as building blocks towards eventual global free trade. Nearly

all the members of WTO are participating in one or another RTA (PTA or FTA). Recent

development in the number and geographic coverage of RTAs has drawn interest to the role

played by regionalism within the multilateral trading system. The first nine years (1995-2003) of the

WTO have been paralleled by a near tripling of RTAs officially notified to the WTO from 58 to 1697.

More than 200 RTAs have been notified to GATT/WTO.150 of these are still in force. 250 RTAs

are expected by 2005. One estimate suggests that more than half of international trade could be

covered under RTAs by 2005.

Regional or bilateral agreements may bring faster results than the multilateral process, may enable

parties to conclude levels of liberalization beyond the multilateral consensus, and may be able to

address specific issues that do not register on the multilateral menu. The resulting achievements in

trade liberalization can be substantial complements to the WTO system, and they can be important

building blocks for future multilateral liberalization.

Conclusion While bilateral agreements offer opportunities to handle issues that cannot be addressed through

multilateral agreements, WTO members should be circumspect about creating the potential for

precedents on non-commercial, domestic governance issues that will hamper multilateral trade

liberalization.

7 These figure include RTAs notified under the Article XXIV of the GATT 1994 covering goods (including agriculture), the Enabling Clause covering RTAs between developing and least developed economies, but not those notified under GATS Article V regarding services. See: WTO (2003), Regional Trade Agreements Notified to the GATT/WTO and in Force: By date of entry into force – As of 13 October 2003.


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Recognizing that regional trade agreements will continue in view of the considerable potential

benefits that they can bring, the overarching goal of WTO negotiations in this area should be to

minimize the scope for such agreements to divert trade with or discriminate among non-parties.

Yet unilateral, bilateral, regional, and multilateral trade liberalization are all valid means to open

world markets. Each has its place, and no arrangement promising freer trade should be rejected

without good cause.

Regional trade agreements, could serve as a stepping stone towards multilateral trade agreements

such as those in the World Trade Organization (WTO) and while continued reduction of barriers to

trade under the WTO will erode preferential trade arrangements over time, regional trade

agreements must maintain and strengthen momentum towards global economic integration.


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