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M. Com. Part IECONOMICS OF GLOBAL TRADE AND FINANCE

Semester –I

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MODULE - 1COMMERCIAL POLICY

1. MEANING OF COMMERCIAL POLICY:

Commercial or trade policy followed by a country can broadly be divided into protectionist and liberal.Classical economists were strong proponents of free trade which in reality meant liberal trade. They arguedtheir case on the basis of the positive effects of international trade. The positive aspects include largerproduction, employment, income, savings, investment, thus leading to enhanced world economic welfare.The above achievements are due to the specialisation inproduction on the basis of comparative.

All types of protection are aimed at improving the position of a domestic producer relative to his foreigncompetitor. This canbe done in following ways:

1. By increasing the home price of the foreign product.2. By decreasing the costs of domestic producers.3. By restricting the access of foreign producers to the home market.

Tariff and Non-tariff barriers are some of the standard ways of implementing protectionist policies.

Tariff barriers are the taxes imposed on goods and services entering a country from abroad and are themost common form of protection to domestic producers. Tariffs also generate significant revenues for thegovernment. Non-tariff barriers are trade barriers that restrict the import by using methods other than tax.

2. TARIFFS

The duties or taxes levied on goods imported or exported are called as tariffs. Generally, tariffs are aschedule of custom duties levied upon the imports. In a broader sense, however, tariffs include all customsduties: import duties, export duties and transit duties. Amongst these, as a restrictive measure, import dutiesare the most common.

Classification of tariffs:There are different ways of classifying tariffs or customs duties. Using the levy criterion, tariffs may beclassified into; i) specific duties, ii) ad valorem duties, iii) combined specific and ad valorem duties, and iv)

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sliding scale duties.

1. Specific duties are flat levies per physical unit (metro, kilo, ton, etc) of the commodity imported.

2. Ad valorem duties are, on the other hand, levied as fixed percentage of the value of the importedcommodity.

3. Combined specific and ad valorem duties, when imposed, specify that one or the other, usuallywhichever involves lower charge, is payable at the customs.

4. Sliding scale duties are those which tend to vary with the price of the commodity imported. These maybe either specific or ad valorem. Specific sliding scale duties are, however, common in practise.

Another important classification of tariffs is based on the purpose they serve. Using the objectivecriterion, tariffs are distinguished as: i) Revenue Duties, and ii) Protective Duties.

5. Revenue tariffs are those whose primary purpose is to provide revenue to the state. These are generallyat a lower rate and not intended to exclude imports. They are usually levied on imports of consumptiongoods.

6. Protective tariffs, on the other hand, are designed to curtail imports of certain goods to protectdomestic production.

Effects of tariffsTariffs can affect import volume, prices, production and consumption. They also affect the terms of trade,the balance payments etc. the various effects of tariffs have been discussed in the following sections. Forthis purpose, we may draw a diagram of partial equilibrium framework relating to the market for aparticular commodity. In the following diagram, we have assumed that demand and supply relationships ofcommodity X are given and remain unchanged throughout the analysis. Factors influencing demand such asincome, tastes , habits of consumers are constant and prices of substitutes remainunchanged.

Similarly, there is no change in technology, no change in factor prices, or no such other changes which mayaffect the supply position.

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Effects of Tariff

Y

S

D

Price and Tariff

P3

a b

P2

e d c f

P1 D

S

O M1 M2 M3 M4 X

Quantity

1. Price EffectAssuming that the foreign price of a commodity is unchanged, we find that the price in the tariff-imposed nation would rise by the full amount of the tariff duty. Increase in the price of a commodityimported due to imposition of tariff is called the price effect. Diagrammatically, thus P1P2 price-riseis the price effect in the above figure. In this case, the incidence of tariff falls on the domesticconsumers.

The exact price effect thus depends upon the volume and elasticity of supply and demand in the tradingcountries. The elasticity of supply, however, depends upon the costs conditions-constant, increasing ordecreasing-which play an important role in determining the price effect of the tariff.

2. The protective effectA tariff is a restrictive measure which seeks to control the quantity of import so that domestic industrymay be protected. a tariff duty is purely protective only if it is so high as to prohibit total imports of acommodity. In practise, however, in its restrictive effect upon the quantity of imports, tariffs, no matterhow high, need not prove absolutely protective. Obviously, any imports may flow in after the paymentof duties, unless regulated otherwise.

The protective effect of a tariff can be seen in the expansion of domestic production of acommodity which becomes possible due to rise in prices in the domestic market. High pricesenable the home producers to cover theirhigh rising marginal costs on a largeroutput.

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In the above figure, the tariff by raising domestic price to a higher level from P1 to P2 enables domesticproducers to increase production from M1 to M2.

This increased production M1M2 measures the protective effect of the tariff in terms of domesticproduction alone.

However, the protective effect in money terms can also be seen from the producer’s increased receipts.Out of the total increase in receipts P1P2 a d, the triangular areas a d e is the purely protective effect oftariff. This a d e portion of receipts enables producers to cover their marginal costs on the larger output.

3. Revenue effectTariffs which are not totally prohibitive certainly bring some revenue to the state. Usually, thegovernment collects customers’revenue equal to the duty multiplied by the volume of imports.Increase in the total revenue of the government due to imposition of tariff is called the revenueeffect.

In the above figure, if import duty is fixed at P1P3 which is extremely high and prohibits imports, it haszero revenue effect. But if it is reasonably put like P1P2, then the imports would be M2M3. Thus,revenue effect may be measuredby the rectangular area a b c d.

4. Transfer or redistribution effectAfter the imposition of a tariff, domestic prices will rise; hence receipts of producers will increase,while consumer’s surplus to that extent declines. This is called transfer effect or redistributioneffect. Thus the increase in receipts which is in excess of marginal costs is an “to the producers, whichis derived by subtractionfrom consumer’s surplus.

In the above figure, with the rise in domestic price by P1 P2 and expansion in the sale of domestic outputof X upto OM2, producers’additional revenue increases by P1P2 a d, out of which the area a d e is to bededucted to meet the increase in costs of increased output. Hence, the area P1P2 a e is the net excessearnings remaining with the producers. It may be described as “redistribution effect.”

5. Consumption effectA tariff generally reduces the total consumption of a commodity because of the rise in its price.Decrease in the total consumption of a commodity in the importing country due to imposition oftariff is called the consumption effect.

In the above figure, the consumption effect of the tariff is the reduction in total consumption by M3M4.

Thus, there is a loss in consumer’s satisfaction shown by the difference between the possible total utilityof larger quantity at a lower price, and the actual total quantity brought at a higher price after tariff. It isthe real cost of tariff out of the gross loss in consumer’s satisfaction, the revenue received by the state

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and transferred to producer should be deducted to find the society’s net loss in consumer satisfaction asa result of tariff. This net loss is represented by the areaa d e and b c f in the diagram.

6. Terms of trade effectThe imposition of a tariff may serve to improve a country’s terms of trade (i.e, the amount of imports itreceives in exchange for a given quantity of exports). Thus the tariff can do easily when the foreigndemand for the exports of the tariff imposing country is both large and inelastic. In such a situation, theeffect of tariff is to reduce imports to some extent, thereby making it difficult for foreigners to earn(through their exports to this country) for their imports from the country.

7. Balance of payments effectsWhen a tariff affects the volume of imports and prices, it also affects the country’s balance of paymentsposition. A country having a deficit balance of payments position can restore and maintain equilibriumby means of tariff restrictions upon imports.Tariffs restrict imports through price rise and contraction in demand, and may lead to improvement interms of trade also under appropriate circumstances, which helps in bringing about a balance ofmerchandise accounts.

8. Income and employment effectThe imposition of tariff would lead to expansion of employment and incomes. This is called as theincome and employment effect.By reducing imports, tariffs stimulate employment and output in the import-competing industries. Anew flow of income will be generated with its ‘multiplier effect’. In an expanding economy, morecapital goods investment will also be made which produces ‘acceleration effect’. Thus under conditionsof less than full employment, the interaction of multiplier-accelerator will lead to a cumulativeexpansion of investment, employment, output and income in the country.

Another possible impact of tariffs is that the imposition of tariff duties may attract foreign capital in thecountry concerned, when they find that they may lose market for their products in the country due tocontraction of import demand and expansion of home industries under the protective effects of tariffs.

3. NON TARIFF BARRIERS

Reduction in NTBs was one of the principles and also the objectives of the GATT. In late 1970s andduring 1980s due to slowing down of economic growth of industrial economies, each country by usingthe loopholes in the GATT provisions restricted imports from other advanced countries as well as fromthe developing countries specially of those products which disturbed the domestic market. Policy ofprotectionism was adopted by many countries by imposing NTBs. They have been imposed in the formof quotas, voluntary export restraints and manyother forms, which are disc used below:

1.Import Quotas: These typically specify the maximum quantity of a product that can be importedfrom a particular country over a specific period.

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The most famous example of a quota system is the multi-fibre-agreement ( MFA) under which theexecutive council allots to each of the major textile producers( India, China, Malaysia, Korea etc.) aspecific limit for each textile product.

With a quota, prices in the home market are higher than they otherwise would be-so that the effect issimilar to a tariff but less transparent and does not generate any revenue for the home government.Because of their lack of transparency they are likely to create more distortion than tariffs; hence theWTOhas emphasized their phased but rapid dismantling.

2. Voluntary export restraints: Advanced countries have attempted to restrict imports whenever theirdomestic industries are threatened. Such a threat arises when the home industries fail to adjustthemselves to face the competition from the industries abroad. The automobile industry agreementbetween the USA and Japan is an example of such a problem. The Japan announced voluntaryrestriction on its exports in order to avoid restrictive legislation by the USA government.Unfortunately the so called voluntary restraints are not voluntary at all.

3. Anti-dumping and countervailing duties: A number of countries both developed and developinghave resorted to anti-dumping and countervailing duties whenever their domestic industries arethreatened by other countries. WTO has provisions for anti-dumping measures which could beintroduced ina more restrictive situation and with rigid tests to prove the dumping.

4. Subsidies: An alternative form of protection is to subsidize domestic producers. 2 types of subsidiesmay be distinguished.

A). those which focus upon the industry in general (e.g. cheap credit, tax incentives and directsubsidies.).

B). those which focus upon the export activity of the industry (export credit, shipment credit, loanguarantees etc.). Unlike tariffs which generate revenues for the government, subsidies involveexpenditure for the exchequer.

5. Regulatory Barriers: In recent years several new forms of protectionism have emerged. These cangenerally take 3 forms.

i. Specifying standards for certain products, so that the products do not harm the health of domesticconsumers' standard example pertaining to leather products and pharmaceuticals.

ii. Specifying standards for certain products, so that the domestic environmentis not damaged. For e.g. pollution standards for imported cars.

iii. Specifying conditions under which certain products are produced. For e.g. child labour in thecarpets and clothing industry.

While very often these standards are levied with genuine considerations about the health of thedomestic consumers or general welfare concerns, there is the very genuine possibility that some timesthese regulatory barriers maybe intentionallyused to limit imports.

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6. EFFECTS OF NON-TARIFF BARRIERSONDEVELOPING COUNTRIES

Trade policies under the GATT and subsequently under the WTO was tilted against the developingcountries.Tariffs imposed by the advanced countries though over a period of time were reducedsubstantially, yet the effective tariffs remained very high. This has discouraged the industrialization ofdeveloping countries. Further the variety of Non-Tariff barriers created negative effects on developingcountries. Some of these effects are mentioned as below:· The developing countries could not reap the benefit of their changing comparative advantage as

the rich countries adopted a number of non-tariff barriers to restrict the entries of manufacturersfrom the developingnations.

· Voluntary export restraints were imposed wherever the advanced countries felt threatened withdeveloping countries exports.

· Many labour intensive goods which are favourable to developing countries were restricted underthe clause of social dumping.

· Subsidies granted to the domestic industries in developed countries made the developing countriesless or noncompetitive in the international market.

· The highly protected European agriculture under the common agriculture policy made thedeveloping countries non-competitive in primaryand agricultural products.

· All the provisions of TRIMS, TRIPS, GATS make the developing countries more and more openeconomies and force them to compete in the global economy. Developing countries are worriedabout their ability to compete in the global market.

· The world economic order under GATT and subsequently under WTO according to thedeveloping countries is tilted against them. In spite of the safeguards provided, the developingcountries feel their domestic industries will not have the requiredprotection.

· A sudden change in international economic environment under WTO makes the developingcountries feel unprepared to meet the new challenge. Earlier under GATT it was a case of notsecuring enough access to the markets of advanced countries. Now it is throwing them in the opento meet the challenge of competition.

The developing countries are required to strike balance of safe guard their economies from the newthreats and also at the same time to preparing themselves to face the challenges.

7. MISCELLANEOUS PROTECTION TECHNOLOGIES

A. DUMPING

Meaning of Dumping:Dumping, in economic terms, is when a country lowers the sales price of one of its exports for the expresspurpose of gaining unfair market share in that industry in another country. The exporter usually lowers theprice below what it would sell for at home, and sometimes even below its actual cost to produce.Objectives of Dumping:

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1. To capture the foreign market.2. To sell surplus commodity.3. To extend the market for the product.4. To establish the new trade rerlations.

Advantages of Dumping:1. The main advantage of dumping is being able to sell at this unfairly competitive lower price.

Generally a country will have to give the exporting businesses a huge subsidy to enable them to sellthe export below cost.

2. The country is willing to take a loss on the product to increase its comparable advantage in thatindustry. It maydo this because it wants to create jobs for its residents.

3. It often uses dumping as an attack on the other country's industry, in the hopes of putting thatcountry's producers out of business, and dominating that industry.

Disadvantages of Dumping:1. The main disadvantage of dumping is that it's very expensive to maintain. It can take years for

dumping to work. Meanwhile, the cost of subsidies canadd to the export country's sovereign debt.2. The second disadvantage is retaliation by the trade partner. This can lead to trade restrictions and 

tariffs.3. The third is censure by international trade organizations, such as the World Trade Organization

(WTO) or the European Union (EU).

Types of Dumping:1.Social dumping:A domestic country imports goods with lower cost from the foreign countries wherethere are low-standard labour legislations. The domestic country gains a competitive advantage by sellinggoods with lower cost in domestic market. The proliferation of social dumping over the world has madeknown to public long time ago.

Here are two examples to illustrate facts resulted from minimizing the cost of products imported:Nike, themost famous sports shoe company in the world, sells millions of shoes and clothes every year. However,Nike does not produce products by itself. The company made contracts with manufacturing bases inalmost every country in the world. Amongst these foreign countries, Indonesia, China and Vietnam aremajor places from where Nike products are made. The reason why Nike focuses on these countries is thatthese countries got poorly forced labour legislation and much cheaper labour.

 Another case of social dumping is child labour. Apart from being accuse of low wages and poor health andsafe circumstance, GAP, a popular apparel company, was also accused of using child labour in manycountries like Bangladesh, Indonesiaand Mexico. The disclosure of the sweatshop by Observer has becomea social scandal of GAP. Many young children who are as young as 10 work like slaves in terriblecircumstance in the factories in India. It has been released that many Indian children were bought from theirfamilies and work like 16 hours even without paid in the beginning. In terms of the working conditions,kids handcraft products with very simple tools and the working circumstance was dirty, unsafe. As forliving conditions, what employers provided them was dirty and crowded dormitory.

2.Spoaradic or Intermittent Dumping: It is adopted under exceptional circumstances when the domesticproduction of the commodity is more than the target or there are unsold stocks of the commodity even aftersales. In such a situation , the producer sells the unsold stocks at a low price in the foreign market without

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reducing the domestic price.

3.Persistent dumping: When a monopolist continuously sells a portion of his commodity at a high price inthe domestic market and the remaining output at a low price in the foreign market, it is called persistentdumping.

4.Predatory dumping: The predatory dumping is one in which a monopolist firm sells its commodity at avery low price or at a loss in the foreign market in order to drive out competition. But when the competitionends, it raises the price of the commodity in the foreign market.

Price output determination under dumping

Given the above assumption the Price output determination under dumping can be explained with the help offollowing diagram.

In the above diagram AR(H ) and MR(H ) are the respective average and marginal revenue curves for the homemarket. As perfect competition exists in the foreign market, the monopolist faces a horizontal straight linedemand or average revenue curve which coincides with the marginal revenue.

Therefore, P(F) = AR(F) = MR(F) for the foreign market. The marginal cost curve of the total output is representedby MC.

To decide the price and output" monopolist has to find out the equilibrium point, where MC equals thecombined marginal revenue (CMR = MC). The combined marginal revenue curve is obtained by adding MR(H )

and MR (F).

In the diagram NRD is the combined marginal revenue curve which intersects MC curve at point E. At this

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point, equilibrium level of output is OQ.

The firm distributes the OQ output between the home market and foreign market in such a way that MR (H ) =MR (F) = MC.

At point R, MR (H ) = MR (F), Where OM output is supplied and OP (H ) Price charged in the home market.

Impact of dumping

Negative impact ofdumping1. Violation of human rights: It can be seen that social dumping is concerned with the human rights andthe labour problems. The reason why there is social dumping is the difference of labour standards betweenthe importing country and the exporting country, which causes the difference of labour costs in these twocountries. For example, in Asian countries like India, the labour legislations are relatively weak; employerstake it granted to make people work overtime and hire young kids. These people do not know how tostruggle for their own rights and a large surplus of labour makes the labour cost lower than that in othercountries.

2.Exploitation of employees in exportingcountries: The unfair situation that the workers in the exportingcountries are confronted with has become one of the most severe ethical issues. It is unethical foremployers to take advantage of workers weak awareness of their own rights and poorly forced law. Theethical issue was mainly arisen in three aspects:

1) Low payment: Employees cannot afford the basic needs due to the low payment, not to mention the factthat they cannot afford the education for themselves and their kids. Social dumping obviously hasjeopardized the benefits of the large population of the workers and their families in terms of quality of lifeand education.

2) Bad working conditions: The harmful chemicals and the mechanical injuries accidents make workerssituation really tough. It is immoral and evil for the employers to make money at the price of employeeslives and abandon the workers who lost their working capacity due to the severe health problem. It is theantipode of virtue that the company saves the money from using the old and damaged equipment andproviding no welfare like health insurance and annual leave to the staff.

3) Overtime working: It is unethical to force workers to work for extra hours because when their bodies andminds are exhausted. They may have frequently faints, sudden death, and commitment of suicide or runaway from work. It seems that female workers were treated even worse because they had to face the genderdiscrimination in work.

3. Child labour in exportingcountries: Child labour caused many other ethical issues in the society. A lotunethical things like impoverished family sell its kids to factory as  bonded labour, manager inmanufacturing factories assault kids badly happened often. It is unethical for companies to abusechildren for gaining competitive advantages(low cost of commodities) in global market. It is a violation ofvirtues that companies in importing country sell the products which are at the price of childrens chance togo to school and good health. From exporting countries point, it is also immoral for the customers in theimporting countries to get the products made with children sweat and blood at a cheap price.

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4. Industry and environment in exporting country: To achieve the low price of the products, companiestry to minimize the cost of production through avoiding expenditure of new equipment. It is unethical forcompany to use poor-quality equipment because it led to inefficient production. Inefficient production isone of the reasons why employees had to work overtime and got health problems. Inefficient production notonly led to the waste of human resource but also the natural resource. Environment was heavily pollutedand natural resources were overly consumeddue tothe incorrect ways of productions. 5. Government in exporting countries: With the huge amount of exporting products, the export taxrebates is huge. Though it is good for making the cost of goods lower, lower cost of products increases thefinancial burden of the government. With the huge amount of exporting products, the export tax rebates ishuge. Though it is good for making the cost of goods lower, lower cost of products wins the competitiveadvantages for the exporting countries in the international trades.However, it is unethical for government to practice export tax rebates because tax is used for improve thewhole country’s wellbeing by building up the public facilities, constructing loads, investing funds innational market, founding public organizations for helping kids and females. Therefore the huge outflow oftax jeopardizes citizens benefits in exporting countries.

7. Employees in importing countries: Employees in the importing countries also are facing the toughsituation. It is unethical for the national company to set the manufacturing bases overseas because localpeople have fewer opportunities to get jobs. As the company can cost less by importing cheap productsinstead of manufacturing locally, foreign employees are preferred. Therefore local employees welfare goesdown because the demand of local labour declines. It is unfair for the local people to lose jobs and beconfronted with more stressed situation because of unfair overseas competitiveness. It is also unethical forlocal suppliers to decline the labour standards because other companies in the same industry got unfaircompetitive advantage of low cost.

8.Shareholders of the company in exporting countries: Though the social dumping may bring hugeprofit to the company in the short run, it may lead to the end of business to company in the long run due tothe terrible social reputation. A company’s social reputation is very important to the developmentof company and stands for the quality of products incertain extent. Customers do not buy the products fromthe company which is not reliable and criticized a lot in the public. It can be easily told that shareholderswould get more dividends from long-term operation. Therefore, it is unethical for the company to onlyfocus on short-run profit and harm the shareholders benefits from the long term. Positiveaspectsof dumpingHowever, some people recognize that dumping is beneficial to a certain group and it is just one of thebusiness strategies. In terms of business strategy, it is unavoidable to have side effects when the main goalsare achieved. It is business ethics that Companies should always obey when they set goals for the bestinterest of customers and shareholders. Thus, it is ethical from the standpoint of the company to maximizeits shareholders and customer’s benefits by practicing dumping.

1. Company in exportingcountry: Through selling products which are with lower prices, company gainscompetitive advantage in the domestic market. It is obviously good for the companywhich practices dumping. It can still win the huge profit and be more competitive than its competitors interms of price. Making huge profit is in this way is ethical for the employer because employer isresponsible for his company to gain the capital that is useful for the company to expand its market and

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increase its market shares.

2. Shareholders in exporting country: As for shareholders, they are better off when the company runswell. It is ethical for them to get more dividends since they made investment in the business. What is more,it did not violate ethics when the company wins a huge profit, which encourages more customers to buyshares in that company. From staff’s point, it would always be ethical for the whole company to get largerinvestment for its business and more customers. Apart from the different standpoints above, attracting morepeople to buy shares in that company also develop the economy in the local stock market, that is, it isethical for the sake of the stockmarket. 3. Customers in importing country: There is another group would not feel guilty of social dumping. It isthe group of customers in the importers country. Because there is nothing wrong for customers to getcommodities with their own money. For them, it is just a normal transaction. They would definitely be veryhappy when getting a pair of handcrafted gloves at low price. At the same time, they might wonder how thegloves could be thatcheap. However, theywould not think that muchabout social dumping.

4.Industry in importing country: Last good point for the domestic industry might be that the fiercecompetition result from dumping requires more advanced technology and human resource management. Inother words, it is good for other domestic companies and employees to get more motivations from thecompetition and make their best effort to survive in the industry, hence make the whole industry moreefficient and productive. From this point, dumping is not unethical for the development of national industry.

5. Employment in exportingcountry: When considering the situation in exporter’s country, we might findthat there is huge increase in the job positions. It should be considered ethical to help impoverished peopleget jobs. Another thing, for people who want experience, it is ethical for them to get more chances of work.An event should be considered ethical when it improves a group of people’s lives in certain extent andmakes people motivated. 6. Government and investment in exporting country: There is a reason why many governments inexporter’s countries made lax legislations. Because trade goods with relatively low costs make the exportercountries have a competitive advantage in the international trade.

Anti-dumpingA country prevents dumping through trade agreements. If both trade partners stick to the agreement, thenthey can compete fairly and avoid dumping. However, violations of the dumping rules can be difficult toprove and expensive to enforce. Unfortunately, trade agreements don't prevent dumping with countriesoutside of the agreements. Therefore, more extreme measures must be taken.

Anti-dumping duties or tariffs remove the main advantage of dumping. A country can add an extra duty, ortax, on imports of goods that it considers to be involved in dumping. However, if that country is a memberof the WTO or EU, it must prove that dumping existed before slapping on the duties. These organizationswant to make sure that countries don't use anti-dumping tariffs as a way to sneak in good old-fashioned trade protectionism.

The Role of the World Trade Organization in Anti-dumpingMost countries are members of the World Trade Organization. Member countries adhere to the GATT multi-lateral trade agreement. Countries agree that they won't dump, and that they won't enforce tariffs on any

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one industry or country. Therefore, to install an anti-dumping tariff, WTO members must prove thatdumping has occurred.

The WTOis very specific in its definition of dumping. First, a country must prove that its local industry hasbeen harmed by dumping. It must also show that the price of the dumped import is much lower than theexporter's domestic price. The WTOgives three ways to calculate this price:

1. The price in the exporter’s domestic market.2. The price charged by the exporter inanother country.3. A calculation basedon the exporter’s production costs, other expenses and normal profit margins.

The disputing country must also be able to demonstrate what the normal price should be. When all thesehave been put in place, then the disputing country can institute anti-dumping tariffs without violating theGATT multi-lateral trade agreement. (Source: WTO, Anti-dumping, subsidies, safeguards: contingencies,etc.)

The EU and Anti-DumpingThe EU enforces anti-dumping measures through its economic arm, the European Commission (EC). If amember country complains about dumping by a non-member country to the EU, then the EC conducts a 15-month investigation. Like the WTO, the EC must find that material harm has occurred to the industry.Unlike the WTO, the EC doesn't specifically define dumping by using a formula to determine that the priceis lower than in the exporter's market. In addition, the EC must find two other conditions must be metbefore it imposes duties:

1. Dumping is the causeof the material harm.2. Sanctions don't violate the best interests of the EU as a whole.

If found guilty, the exporter can offer to remedy the situation by agreeing to sell at a minimum price. If theEC doesn't accept the offer, it can impose anti-dumping duties. These can be in the form of an ad valoremtax, a product-specific duty, or it can impose its own minimum price.

Examples:China has beensuspected of dumping shrimp into the U.S. market todominate this industry.

B.SUBSIDIES

Meaning and definition

The most basic form of a subsidy, and the one that still defines a subsidy in some dictionaries, is a cashpayment or grant. Although few grants are paid out in currency any more (most are paid via cheque or banktransfer), it is still common torefer to them as "cash" grants, payments or subsidies.

A subsidy is assistance paid to a business or economic sector. Most subsidies are made by the government

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to producers or distributed as subventions in an industry to prevent the. decline of that industry (e.g., as aresult of continuous unprofitable operations) or an increase in the prices of its products or simply toencourage it to hire more labour (as in the case of a wage subsidy). Examples are subsidies to encourage thesale of exports; subsidies on some foods to keep down the cost of living, especially in urban areas; andsubsidies to encourage the expansion of farm production and achieve self-reliance in food production.Subsidy has been used by economists with different meanings and connotations in different contexts.

Subsidies are often regarded as a form of protectionism or trade barrier by making domestic goods andservices artificially competitive against imports. Subsidies may distort markets, and can impose largeeconomic costs.

Financial assistance in the form of a subsidy may come from one's government, but the term subsidy mayalso refer to assistance grantedby others, such as individuals, or non-governmental institutions.

Examples of industries or sectors where' subsidies are often found include utilities, gasoline in the UnitedStates, welfare, farm subsidies, and (in some countries) certain aspects of student loans.

Types of subsidies:

There are many different ways to classify subsidies, such as the reason behind them, the recipients of thesubsidy, the source of the funds (government, consumer, general tax revenues, etc.). In economics, one ofthe primary ways to classify subsidies is the means of distributing the subsidy.

1. Grants: Normally, a grant refers to a time-limited payment, either in connection with a specificinvestment, or to enable an individual, company or organization to cover some or all of its generalcosts, or costs of undertaking a specific activity, such as research. Many countries provide grants inorder to encourage people who are out of work to undergo training in new skills.

2. Bounties:Other direct payments may be linked to the volume of production or sales. In previouscenturies, and still in Australia, these types of subsidies were called bounties.

3. Cash payments: Cash payments to producers are also sometimes linked to prices. The main form isa deficiency payment, which makes up the difference between a target price for a good (typically anagricultural commodity) and the actual price received in the market. Various cash subsidies are paidto workers. Canada, for example, provides targeted wage subsidies to assist individuals to preparefor, obtainand maintain employment

4. Direct subsidies: In some states of the United States, for example, companies producing liquid bio-fuels receive direct subsidies for every gallon of ethanol they produce.

5. Vouchers: Consumers also benefit from vouchers, particularly for the purchase of necessities, likefood, medicine or heating fuels. Alternatively, a government may regulate the consumer price for agood or service, and instead pay a subsidy to the supplier of that good or service, to cover its losses.

6. Interest subsidies: Many developed Countries give low interest loans to exporters A very obvious

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example of this is the low interest loans provided by the US Export Import Bank. It was found thatcountries like Japan, France and Germany have been extending loans at very concessional rates.This became one of the most serious trade complaints which U.S. had against the otherindustrialized nations.The amount of subsidy can be measured by the difference between the interestrate that would have been paid on a commercial loan and what is in fact paid at the subsidized ratethe Unites States provided $1 billion by way of subsidies in 1996 and the amount given out bycountries like Japan, France and Germany Amounted to 3 times more than thatof U.S.

Export subsidies:

Export subsidies are direct payments or the granting of tax relief and subsidized loans to a nation'sexporters or' low interest loans to foreign buyers , so as to stimulate the nation's exports. Export subsidiescan be regarded as a form of dumping. In spite of the fact that export subsidies are illegal by internationalagreement, many nations provide them in disguised or undisguised forms.

Government helps to exporters, generally in two forms :

a) Servicesubsidy: trade information, trade shows, feasibility studies,foreign representation, etc.

b) Cash subsidy:

i)Indirect cash subsidy: Rebate on imported raw materials and duty-free import of manufacturingequipment is called indirect cash subsidy.ii) Indirect cash subsidy: The percentage of the value of exports is paid back to the exporters is calleddirect cash subsidy,Although World trade Organization (WTO, formerly GATT) recognizes that subsidies hinder faircompetition and distort trade practices, it has not been able to define precisely what kind of assistanceconstitutes a subsidy.

Positive effects of subsidy:1. A subsidy may be anefficient means of correcting a market failure..2. Subsidies are linked to the concept of economic transfers from one group to another, therefore it

maycreate equitable distribution of income in the country.3. In standard supply and demand curve diagrams, a subsidy will shift either the demand curve up or

the supply curve down. Both cases result in a new economic equilibrium.4. A subsidy that increases the production will tend to result in a lower price, and benefits the

consumers5. Subsidies may help the government to encourage domestic production and employment and thereby

overall development of the country.6. The export subsidies will encourage the exports of the country and helps in improving the balance

of payment situation of the country.

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Negative effects of subsidy:

1. Subsidies would generally be considered by economists to be bad, as economics is the study ofefficient use of limitedresources, but subsidies encourage inefficiency

2. Subsidy payments by the government mayincrease the tax burden on the taxpauers of the country.3. It always benefits rich countries to control the world market because they have resources to pay

subsidies to their producers.4. This discourages fair trade in the international market.5. It will have only short term benefits.

A subsidy may be an efficient means of correcting a market failure, however, the choice to enact asubsidy is a political choice. It is essential to consider elasticity when estimating the total costs of aplanned subsidy: it equals the subsidy per unit (difference between market price and subsidized price)times the newequilibrium quantity.

. The recipientof the subsidy mayneed to be distinguishedfrom the beneficiary of the subsidy, and this,analysis will depend on elasticity of supply and demand' as well as other factors.

C.INTERNATIONAL CARTELS

Meaning

An international cartel is an organization of suppliers of a commodity located in different nations (or agroup of governments) that agrees to restrict output and exports of the commodity with the aim ofmaximizing or increasing the total profits of the organization. Although domestic cartels are illegal in theUnited States and restricted in Europe, the power of international cartels cannot easily be counteredbecausethey do not fall under the jurisdiction of anyone nation.

An international cartel is a group of producers in the same industry located in different countries whichagrees to limit competition and to regulate the production and sales in order to earn high profits. Accordingto Kind1eberger, "Cartels are international business agreements to regulate price division of markets orother aspects of enterprise. They make agreements to restrictselling competition."

The most infamous of present-'day international cartels is OPEC (Organisation of Petroleum ExportingCountries), which by restricting production and exports, succeeded in quadrupling the price of crude oilbetween 1973 and 1974. Another example is the International Air Transport Association, a cartel of majorinternational airlines that meets annually to set international air fares and policies.An international cartel ismore likely to be successful if there are only a few international suppliers of an essential commodity forwhich there are no close substitutes.

Since the power of a cartel lies in its ability to restrict output and exports, there is an incentive foranyone supplier to remain outside the cartel or to "cheat" on it by unrestricted sales at slightly below thecartel price.

There have been many international cartels in such goods and services as sugar, coffee, steel, bauxite,tobacco, diamond, oil, air and rail services, but it is only OPEC (Organisation of Oil Exporting Countries)

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which. has beensuccessful.

The reasons for forming an international cartel are:First, cut-throat competition among producers of a world-traded commoditySecond, the fear of fall in world prices in the event of production of the commodity exceeding current

demand.Third, to have monopoly control in order to earn higher profits

Objectives of International CartelsInternational cartels aimat :(a) to fix the world price of the commodity above the competitive price;(b) to earn high monopoly profits;(c) to restrictproduction and supply of the commodity as per the quota allocation to each member;(d) to allocate a specific territory to each member for the supply of the commodity in order to avoid

competition;(e) to decide about the quality of the commodity;(f) to control technological research and development of the commodity; and(g) to adopt other measures to limit or alleviate competitive pressure among members.

Conditions for the Success of CartelsThe followingconditions are necessaryfor the success of a cartel :i) The world market for the commodity. has a fewlarge suppliers.ii) The commodity is produced on a large scale by members so that the cartel controls a major portion of thetotal supply.iii) The price elasticity of world demand for the commodity is low.iv) The commoditydoes not have any close substitutes.v) The cartel members followthe cartel price and the output quota allotted to them.

Merits of cartels:The following arguments are usually given in support of the formation of international cartels:i) Stable Prices : International cartels .encourage members to produce on a large scale and thus help in

stabilizing the prices of commodities.ii) Eliminate Cut-Throat Competition : The formation of a cartel eliminates cut-throat competition an~

price-war among producers of a commodity.iii) Low Tariffs : International cartel for a commodity can force an importing country to lower or

remo.ve tariffs on it. This will tend to maximize world welfare.iv) Saving in Advertisement. Expenditure : With the formation of a cartel, there is little need for

advertising its product in the world markets because the purchasing countries know about the suppliers.Thus there is saving in advertisement expenses.

v) No Excess Capacity: In a cartel, each producer of the commodity is allocated a fixed quota of thecommodity to be produced in keeping with the world demand for it. There is no excess capacity and wasteof production under a cartel. I

vi) Providing Technical Knowhow : International cartels provide their members with the most up to

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date and cost-saving technical knowhow for the production of goods. This helps in reducing costs andimproving the products.

vii) Promote Interactional Co-operation : International cartels are based on mutual agreements amongproducers of goods. Thus they are instruments of economic co-operation among nations.

Demerits of cartels:

However, the majority of economists do not favour the formation of international cartels for the followingreasons:

i) Restrict Output: International cartels deliberately restrict the output of cartelized goods so as tocharge higher prices from the importing countries. This, is due to the absence of competition.

ii) Inferior Commodity: In the absence of competition, the cartel often produces and supplies aninferior commodity.

iii) Misallocation of Resources : In view of lack of competition, international cartels lead tounderutilization and misallocation of the world's resources when they restrict output and follow the systemof production quotas.

iv) Do not Reduce Tariffs: International cartels do not help in reducing or removing tariffs, as isgenerally argued. As pointed out by Haberler, "they are not a suitable instrument for demolishing tariffwalls within any measurable time. Many of the present international cartels owe their own existence totariffs. They are therefore scarcely adopted for destroying tariffs.

v) Short-Lived: Cartels are usually short-lived because of the mutual distrust,' threatening attitude oflarge producer-member~ and bargaining resorted to by them. Thus cartels tend to be unstable.

D. INTERNATIONAL COMMODITY AGREEMENTS

Introduction:International commodity market has been facing problems of fluctuating prices putting either producers orsuppliers at a disadvantage. Developing countries which export primary commodities usually complainabout adverse tcrm of trade. However there are cases, like that of petroleum products exported by OPECmembers charging high prices. To mitigate fluctuating prices, producers and at times both producers andconsumers (importers) entered intoagreements.

Meaning:Commodity agreements are international agreements designed to stabilise commodity prices in the

interest of producers and- consumers. They can include mechanisms to influence marketprices by adjustingexport quotas and production when marketprices reach certain trigger price levels. Theysometimes employbuffer stocks which release stocks of commodities onto the market when prices rise to a certain level andbuild them up when theyfall.

The term "international commodity agreement" (ICA) refers to a treaty agreement betweengovernments of both producing and consuming countries to regulate the terms of international trade in aspecified commodity. An international commodity agreement is an undertaking by a group of countries tostabilize trade, supplies, and prices of a commodity for the benefitof participating countries. An agreementusually involves a consensus on quantities traded, prices, and stock management. A number ofinternational commodity agreements serve solely as forums for information exchange, analysis, and

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policy discussion.

Following are some of the commodity agreements entered in :I. Wheat Agreement: It was signed in 1949 and was revised or extended in 1953,1956, 1959 and 1962.

It was replaced in 1967 in the form of Wheat Trade Convention. Subsequently it was revived in 1971.It was an agreement signed between a wheat exporting and wheat importing country with objective ofstabilising price:

II. The International Tin Agreement, 1954 : This agreement was a mixture of a buffer stock andexport control arrangement. It was not muchof a successful agreement and finally dissolved in 1990.

III. The International Coffee Agreement : It was established in 1963, with an export quota system. Theagreement was revived five times. The agreement was not much of a success due to differences ininterest between large and small producers and betweenproducers and consumers.

IV. The International Cocoa Agreement: It was signed in 1973. It involved buffer stock arrangement.The agreement was periodically extended till 1992. It could not operate successfully as it was unableto increase prices.

V. International Natural Rnbber Agreement: It was the tirst agreement under the UNCT ADintegrated programme. It was fairly. successful inmaintaining prices

VI. The International Sugar Agreement, 1954: It was by and large an unsuccessful one. According tomany economists, sugar producers would have been better off under free market without anyagreement.

There is also a large number of "study group" style agreements whose functions are information collectionand dissemination, market promotion and, in certain cases, the fostering of research and development. Withthe ending of international commodity control, where they have survived, the previously active agreementshave taken on this form and a market for manufacturer of advanced countries.Advantages of Commodity agreements:

1. They will stabilize the marketprices.2. The commodityagreements will protect the interests of both buyers and sellers.3. This will discourage the marketdistortion.4. The international commodity agreements encourage optimum utilization of resources internationally

Limitations of Commodity Agreements:Most of the commodity agreements except the cartel formed by OPEC were not very effective. Some ofthem did not last long. The reasons for unsuccessful functioningare :

Ø Non-inclusion of all the producers.Ø Failure to fix appropriate price.Ø Attempt to have a complete price stabilization whichwas neither possible nor desirable.Ø Failure tohave an effective management of buffer stock.Ø They constitute anobstacle to the effective operation of free market forces.

Buffer stocks and stabilization of price;Commodity agreements aims at stabilisation of price, hence it naturally requires to hold buffer stocks. It

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enables to control the world price of a commodity in question. The buffer stock operation requires holdingstock of the commodity and also the stock of money. Buffer stock requires to purchase the commoditywhen price is Iowan sell it when price is high. Here, unlike the private stockholder the intention is tostabilise the prices and also earn reasonable profit

Diagramatic explanation of buffer stock and price stability

YD S1

P3 E S2

P2 FP1 G

Price D

Q1 Q2 Q3 X

Quantity

In the diagram , the demand curve is assumed to be stable. Supply may turn out to be either S1 or S2.The target buffer stock price is OP2. The free market price is either OP1 or OP3.

If price is high i.e, OP3 because of less supply , an additional sale of Q1Q2must take place to bringdown the price to OP2. Similarly if prices are low at OP1, a purchase of Q2Q3 must be done to increase theprice to OP2.

The buffer stock operation , though aims at stabilization of prices, it very often end with destabilizingthe prices.

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MODULE-2ECONOMICS OF INTEGRATION

A. MEANING AND TYPES OF INTEGRATION

The term ‘economic integration has been in different ways : Timbergen defines economic integration as,“the creation of most desirable structure of international economy, removing artificial hindrances to theoptimum operation and introducingdeliberately alldesirable elements of coordination and unification.”

Types or forms of economic integration:There are five important types of economic integration theyare:

Ø Preferential Trading agreementØ Free trade areaØ Customs UnionØ Common marketØ Economic Union

1) Preferential trading agreement:It is the loosest form of economic integration. Under this, a group of countries have a formal ‘agreement’to allow each other’s goods to be traded on preferential However, the member countriesretain their original tariffs against the outside world. A good example of this type is common wealthpreference system (1932) between GreatBritain and its associate nations.

2) Free trade area:This allows for tariff-free trade, a complete removal of tariffs on goods traded between the membersof the free trade area. The member countries are free to levy their own tariffs on imports of countriesother than in free trade area (for example NAFTA). Sometimes, a free trade area is formed only forcertain classes of goods, such as an agricultural free trade area. An important problem faced by freetrade areas is that goods from outside the area may enter, a high-duty member through a low-dutymember country and thus avoid the high import duty.

3) Customs Union:A customs union is a mixture of both free-trade areaand an agreement to establishcommon barriers totrade with the rest of the world. Since they have a common tariff against the outside world, themembers need neither customs control on goods moving among themselves nor rules of origin. A

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good example of customs unions is the European community which was formed by the Treaty ofRome in 1857.

4) Common market: The important features of common market are :a) It has free movement of all factors of production (labour and capital) among the common market

countries.b) The countries under common market, abolish all trade restrictions on their mutual trade.c) It establishes a common external tariff, as a customs union.

Common markets are advantageous as they attract FDIs, allow large scale production and improveefficiency of member nations.

5) Economic Union:An economic union is the most complete form of economic integration between countries. Itinvolves a common market and also the harmonization of economic policies. The coordination ofeconomic policy requires a high-level of cooperation between the member governments, centralbanks and other institutions. The member countries in the economic union function as a singleeconomy. The “European Union”provides the best example.

Economic integration can thus be viewed as ‘a spectrum’. At one extreme-we can envision a trulyglobal economy in which all countries share a common currency and agree to a free flow of goods,services and factors of production. At the other extremes there would be a number of closedeconomies, each independent and self-sufficient. The various integrative agreements in effect today,lie along the middle of this spectrum. The important differences and similarities among the last fourtypes of economic integration canbe shown with the helpof following table:

Type ofIntegration

Important features of IntegrationAbolition of

tariffsamong

members

Commonbarriers of tradefor the rest of

the world

Free movementof factors

among members

Unificationof economic

policies

Free trade area YES NO NO NOCustoms Union YES YES NO NOCommon market YES YES YES NOEconomic Union YES YES YES YES

B. ARGUMENTS IN SUPPORT and AGAINST ECONOMIC INTEGRATION(Advantages & Disadvantages)

Advantages

The important arguments in support of economic integration are discussed below.

1. Trade Creation: The Economic integration tends to increase competition among the membercountries and this represents a movement towards free trade. This, may improve resource allocation

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and welfare, depending upon the respective strengths of trade creationTrade creation occurs when some domestic production in a country that is a member of the customsunion (or an economic integration) is replaced by lower-cost imports from another member country.This increases the welfare of member countries because it leads to greater specialization in productionbased on competitive advantage.

2. Production Effects:The formation of a customs union (economic integration) causes some products that were formerlyproduced domestically to be imported from other member country due to the elimination of tariffs. Inthis case, the shift in production is from a higher-cost domestic producer to a lower-cost producer of amember country.

3. Consumption Effects: Formation of customs union leads to increase in consumption. Trade creatingeconomic integration increases specialization in production and welfare in the member countries. Italso increases the welfare of non-members, since some of the increase in real income of membercountries spills over into increased imports from the rest of the world. On the other hand, a tradediverting economic integration leads to both trade creation and trade diversion and may increase ordecrease welfare, depending on the relative strength of these two opposing forces.

4. Increased competition: Economic integration is likely to result in increased competition. As tradebarriers are eliminated the market expands and the number of potential competitors increases.Inefficient firms must either become efficient or close down. The increased level of competition isalso likely to stimulate the development and utilization of new technology.

This creates a stimulus conducive to managerial efficiency and technology improvements. Thiscreates an environment for faster economic growth.

5. Economies of scale: Formation of customs union leads to expansion of the size of the market,increase in competition and greater degree of specialization. Firms will be able to exploit internal andexternal economics.

6. Technical change: Increased competition and expansion of the market encourage research anddevelopment, innovation and technical change. Economic integration will be conducive totechnological improvement since large scale economies canbe reaped.

7. Investment: The formation of customs union may stimulate investment. The increase in competitionand technical change leads to additional investment, which is necessary to take advantage of thenewly created opportunities.

8. Economic Growth: Increased competition, technical changes, economies of scale and increasedinvestment maylead to increase in income and employment among the member countries of the union.This may lead to higher economic growth which could be sustained with continuing changes inbusiness expectations, higher investment and new production technique in the union countries.

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9. Better Utilization of Resources: In a common market, the free movement of labour and capital islikely to result in better utilization of the economic resources of the entire community.

Disadvantages

1. Unhealthy competition: Economic integration tends to provide relatively more protection againsttrade and competition from the rest of the world and this represents a movement towards greaterprotection. This will provide undue advantage to the member countries and disadvantage to the non-member countries. This may worsen resource allocation and welfare, depending upon the respectivestrengths of trading countries

2. Trade diversion; Trade diversion occurs when lower-cost imports from outside the customs union (oreconomic integration) are replaced by higher cost imports from a union member. This results from thepreferential trade treatment given to member countries. This will be an injustice to the low cost non-member country..

3. Against global interest: The formation of a customs union (or economic integration) causes someproducts that were formerly imported from a lowest cost producer in a foreign country to be shifted toa higher cost producer of a member country. This results in trade diversion. Trade diversion worsensthe international allocation of resources and it works against the global interest.

4. Negative impact on political relations; The economic integration will work against the internationalpeace and harmony. There is a possibility og conflict among the various international associations.Here trade may lead to political rivalry among various countries.

5. Wastage of resources; Another negative outcome of economic integration can be wastage ofresources. The economic integration always beneficial to the member country even though thatcountry is cost ineffective. This will lead to wastage of resources in the cost effective countries duelack of demand.

6. Un ethical control over World economy; The economic integration will provide unwarrantedbenefits to the stronger association they may use this power to dominate the international agencieslike UNO ,IMF or WTO.

Thus economic integration may provide both positive and negative benefits to the member countries

C. EUROPEAN UNION:

Introduction:

The most complete form of economic integration is “Economic Union”. The European Union provides thebest example. In 1952The European Union (EU) started with 6 members, in 1995 it has become a union of15 independent states based on the European communities and founded to enhance political, economic andsocial co-operation. On December 2007 there are 27 members in the European Union. By far it is the mostsuccessful of the regional economic integration schemes.

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Origin and growth of European Union (EU)

The origin and growth of European union can be seen as below:v 1952- Immediately after Second World War, France, Belglum, West Germany, Italy Luxembourg,

and Nether lands formed the European Coal and Steel Company. This removed trade restrictions oncoal and steel.

v 1957- These six countries signed the treatry of Rome and created ‘European EconomicCommunity’(EEC)

v 1973 -UK, Denmark, Ireland joined the EEC .and total membershipbecomes 9.

v 1979- The first direct elections to the EuropeanParliament.

v 1981 -Greece joinedand total membership rose to 10

v 1986- Spain and Portugal and membership rose to 12. EEC was then made a European CommunityMarket (ECM)

v 1992- Maastricht Treaty was signed supporting single market act.

v 1st November 1993 –European Community was known as European Union.

v 1995 Austria, Sweden and Finland joined EUand membership rose to 15.

v Jan 1999 –Agreement for creating the common currency Euro for member countries making theprice system much more transparent and eliminating the exchange rate risk.

v 2002- Euro replaced the national currencies of 12 countries. Now 15 members accepted the Eurohas a common currency.

v 2004- Ten more countries joined total members became 25

v 2007- Two more countries Bulgaria and Romania became the member of European Union and thetotal membership became 27.

v 2009-The Lisbon Treaty comes into force, changing theway the EU works.

Aims of European Union (EU)

1. To establish the foundations of an ever-closer union among the European people.

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2. To establish a common market and closer economic cooperation betweenmembers.3. To harmonies national economic policies especially taxation and monetary policies.4. To achieve balanced regional development lf the economyas a whole.5. To establish a common agricultural policyand a commitment to free and fair competition.

The EU’s mission in the 21st century is to:1. Maintain and build on the peace established between its member states;2. Bring European countries together inpractical cooperation;3. Ensure that European citizens can live in security;4. Promote economic and social solidarity;5. Preserve European identity and diversity in globalised world;6. Promulgate the values that Europeans share.

Institutions of European Union

The basic institutional structure of European Union was developed during the Treaties of Paris and Rome.Institutional system of European Union is the only one of its kind in the world. It includes followingindependent yet interlinked institutions.

1. Council of the European Union: It is the main decision making legislative body of European Union.It is made up of ministers from each of the member governments. The presidency of the council ofMinisters rotates between member governments at six-monthly intervals. The council meets indifferent compositions such as foreign affairs, finance, education, telecommunications etc.

2. European Parliament: Members of European parliament are directly elected by citizens in theirrespective countries for every five years depending on their population. It exercises politicalsupervision over all other institutions. It represents the democratic will of people of the EuropeanUnion.

3. European Commission: It is the main administrative body responsible for day-to-dayadministration of European Union’s policies. It consists of commissioners nominated from membercountries. It acts as the executive body, drafting authority and as a guardian of the Treaties forEuropean Union.

4. Court of justice: It is the highest legal authority in the European Union. It consists of one judgefrom each state, appointed by consensus. It ensures that community law is uniformly interpreted andeffectively applied. It has jurisdiction in disputes involving member states European Unioninstitutions, businesses & individuals etc.

5. European Central Bank: It came into operation in 1998. It frames and implements European Union’s monetary policy. Primary objective is price stability. Its other responsibilities include control overthe issue of euro notes and coins, Foreignexchange operations and official reserves.

Apart from these institutions, other institutions are court of Auditors, Economic and Social Committee,Committee of the Regions, European investment Bank and ombudsman.

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Important policies of European Union :

The European Union acts in a wide range of policy areas where its action is beneficial to the member states.These include:

Innovation policies, which bring state-of-the art technologies to fields such as environmental protection,research and development (R & D) and energy;

Solidarity policies (also known as cohesion policies) in regional, agricultural and social affairs.

The Union funds these policies through an annual budget which enables it to complement and add value toaction taken by national governments. The EU budget is small by comparison with the collective wealth ofits member states: it represents no more than 1.23 % of their combined gross national income.

Some of the important policies are mentioned below:

1. Exchange Rate Policy: That aims at exchange rate stability in Europe.

2. Single market : It was inaugurated on January 1, 1993 in order to facilitate the free movement ofpeople and capital

3. Tax Policy: The policy aims at eliminating tax induced distortions of competition within EuropeanUnion.

4. Agricultural Policy: The policy aims to stabilize markets, to assume food supplies and to make foodavailable at reasonable prices.

5. Industrial Policy: It provides conductive environment to business development in European Union.

6. Competitive policy: It aims to preserve the benefits of choice, price, quality, efficiency andinnovation.

7. Transport Policy: It aims to create an integrated transport system which is safe, reliable andenvironmentally sustainable.

Benefits of European Union:

1. There will be gains from elimination of the transaction costs associated with Border patrols, customsprocedures and so on.

2. The member countries are going to enjoy the economies of scale due to the concentration of production

facilities.

3. The firms earlier with monopoly now has to face competition from the firms from other countries. This

will provide benefits of competition to all the member countries among EU.

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4. The introduction of euro has benefited all the member countries. Now all the member countries of

European union canenjoy the gains associated with the strong international currency.

5. The products of European Union can be freely sold across borders. In a borderless Europe; firms canhave access to many more millions of consumers.

6. The free movement of factors will allow the firms to sell securities, raise capital and recruit labourthroughout Europe. There can also be substantial economies of scale in production and marketing.

7. Multinational firms from non-member countries can take advantage of the new economies of scale bystandardis.ing their products and processes to exploit the new opportunities.

8. It has brought down the barriers to trade and business. The companies of the member states benefitfrom access to the largest single market for trade and investment in the world.

9. The economic reforms adopted by the new members increase their purchasing power and thus thedemand for EU goods and services.

10. The international competitiveness of ED companies has increased. They benefit from cheaper inputs,a larger and more diverse labour market, additional opportunities for technology transfers

11. The consumer from member countries will enjoy cheaper and a wider choice of imports.

12. The creation of a wider single markethas provided businesses with more export opportunities

Achievements:1. The single market is one of the European Union’s greatest achievements. Restrictions on trade and

free competition between member countries have gradually been eliminated, thus helping standardsof living to rise. The single markethas not yet become a single economy: some sectors (in particularservices of general interest) are still subject to national laws.

2. Freedom to provide services is beneficial, as it stimulates economic activity.3. The financial crisis in 2008-09 has led the EU to tighten up its financial legislation. Over the years

the EU has introduced a number of policies (on transport, competition, etc.) to help ensure that asmany businesses and consumers as possible benefit from opening up the single market.

4. Citizens of European Union countries can travel, live and work anywhere in the EU.

5. The EU encourages and funds programme, particularly in the fields of education and culture, tobring EU citizens closer together. A sense of belonging to the European Union will develop onlygradually, as the EU achieves tangible results and explains more clearly what it is doing for people.People recognize symbols of shared European identity such as the single currency and the Europeanflag and anthem.

6. A ‘European public sphere’is beginning to emerge, with Europe-wide political parties. Citizensvote every five years for a new European Parliament, which then votes on the new EuropeanCommission.

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Future Prospects and Challenges:

· Changing world scenario and European Union: The solidaritybetween Europe’s peoples and nationsmust constantly be adapted to deal with new challenges posed by a changing world. Completion of thesingle market in the early 1990s was a great achievement, but it was not enough.

· Coordination of national economic policies To make the market work effectively, the euro had to beinvented –making its appearance in 1999. To manage the euro and ensure price stability, the EuropeanCentral Bank was set up. but the financial crisis of 2008-09 and the debt crisis of 2010 showed that theeuro is vulnerable to attack by global speculators. What is needed, in addition to the ECB, iscoordination of national economic policies –a much closer coordination than currently provided bythe Euro group. So, will the EU soon be laying plans for genuinely sharedeconomic governance.

· Principle of equal rights and respected minorities: The European Union will soon have more than 30member states, with very different histories, languages and cultures. Can such a diverse family ofnations form common political ‘public sphere’? Can its citizens develop a shared sense of ‘beingEuropean’while remaining deeply attached to their country, their region and their localcommunity? Perhaps they can, if today’s member states follow the example of the very first EuropeanCommunity –the ECSC –which was born from the rubble of the Second World War. Its morallegitimacy was based on reconciliation and consolidating the peace between former enemies. It adheredto the principle that allmember states, whether large or small, had equal rights and respected minorities.

· Multiplication of arrangements: Will it be possible to keep pushing ahead with European integration,claiming that the EU’s member states and their peoples all want the same thing? Or will EU leadersmake greater use of ‘reinforced cooperation’arrangements, whereby ad hoc groups of memberstates can move ahead without the others in this or that direction? The multiplication of sucharrangements could lead to an à la carte or ‘variable geometry’Europe, with each member state free tochoose whether to pursue a particular policy or to be part of a particular institution. This solution mightappear attractively simple, but it would be the beginning of the end for the EU, which works byanticipating the common interests of its member states, in both the short and the long term. It is basedon the concept of solidarity –which means sharing the costs as well as the advantages. It means havingcommon rules and common policies. Exemptions, derogations and opt-outs should be exceptional andof short duration. Transitional arrangements and phasing-in periods may sometimes be necessary, butunless all the member states keep to the same rules and work towards the same goals, solidarity breaksdown and the advantages of being in a strong and united Europe are lost.

· International competition: Globalisation obliges Europe to compete not only with its traditional rivals(Japan and the US) but also with fast-rising economic powers such as Brazil, China and India. Can itcontinue restricting access to its single market inorder to protect its social and environmental standards?Even if it did so, there would be no escape from the harsh realities of international competition.The only solution is for Europe to become a real global player, acting in unison on the world stage andasserting its interests effectively by speaking with one voice. Progress in this direction can only beachieved by moving towards political union. At the same time, the EU needs to become moredemocratic.

· The European Parliament: The European Parliament has been given greater power with each new

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treaty is directly elected by universal suffrage every five years. But the percentage of the populationactually voting in these elections varies from country to country, and the turnout is often low. Thechallenge for the EU’s institutions and national governments is to find better ways of informing andcommunicating with the public

· European union and international affairs: Finally, Europe should punch its full weight ininternational affairs. One of the EU’s great strengths is its ability to spread European values beyond itsborders. Values such as respecting human rights, upholding the rule of law, protecting the environmentand maintaining social standards in the social market economy. Imperfect as it is, the EU can hardlyclaim to be a shining model for the rest of humanity. But to the extent that Europe is successful,other regions will look to it as an example. What would count as success for the EU in the yearsahead? Bringing its public finances back into balance. Coping with the ageing of its population in awaythat does not unfairly penalise the next generation. Finding ethical responses to the huge challengesposed by scientific and technological progress –particularly in biotechnology. Ensuring security for itscitizens without undermining their freedom. If it can do these things, Europe will continue to berespected and will

ConclusionTo conclude, the member countries of European Union have benefited in all aspects and will continue toenjoy cheaper transaction costs, reduced currency risks. Consumers and business will enjoy pricetransparency and increased price based competition. At the same time the unification of Europe can be adanger to many firms in other countries.

D. NORTH AMERICAN FREE TRADE AGREEMENT (NAFTA)

Introduction:

Economic integration refers to a process whereby two or more countries combine into a larger economicgroup by removing discriminations existing among national frontiers. One of the important types ofeconomic integration is free trade Area. The classic example of Free Trade Area is NAFTA i.e. NorthAmerican Free Trade Agreement between three countries viz., United States, Canada and Mexico. Thisprocess created a trade block based of the continent of North America. The North American Free TradeAgreement took place on January 1st,1994 and took in effect as the Canada superseded between the boarderof United States and Canada. This agreement will remove most of the barriers to trade and investmentsamong the three countries.

Origin of NAFTA

· 1988 –An agreement was signed between Canada and the US to drop all trade barriers on all goodsand most non-government services.

· 1993 –Canada and USA renegotiated to include Mexico and NAFTAwas formed.· 1. Jan 1994 –NAFTA was implemented to eliminate all tariffs on products moving among the three

countries and other barriers to services and investmentof capital within North America.

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NAFTA Agreements:

Agreement on Elimination of non- tariff barriers: Under the NAFTA, all non-tariff barriers to

agricultural trade between the United States and Mexico were eliminated. In addition, many tariffs were

eliminated immediately, with others being phased out over periods of 5 to 15 years.  This allowed for an

orderly adjustment to free trade with Mexico, with full implementation beginning January 1, 2008. 

Agreements on provisions under agriculture:The agricultural provisions of the U.S.-Canada Free Trade

Agreement, in effect since 1989, were incorporated into the NAFTA. Under these provisions, all tariffs

affecting agricultural trade between the United States and Canada, with a few exceptions for items covered

by tariff-rate quotas, were removedby January 1, 1998.

Agreement on market Access: Mexico and Canada reached a separate bilateral NAFTA agreement on

market access for agricultural products. The Mexican-Canadian agreement eliminated most tariffs either

immediately or over 5, 10, or 15 years. Tariffs between the two countries affecting trade in dairy, poultry,

eggs, and sugar are maintained.

Objectives:The objectives of this Agreement, as elaborated more specifically through its principles and rules, includingnational treatment, most-favored-nation treatment and transparency, are to:

a) Eliminate barriers to trade in, and facilitate the cross-border movement of, goods and services betweenthe territories of the Parties;b) Promote conditions of fair competition in the free trade area;c) Increase substantially investment opportunities in the territories of the Parties;d) Provide adequate and effective protection and enforcement of intellectual property rights in each Party'sterritory;e) Create effective procedures for the implementation and application of this Agreement, for its jointadministration and for the resolution of disputes; andf) Establish a framework for further trilateral, regional and multilateral cooperation to expand and enhancethe benefits of this Agreement.

Important Provisions under NAFTA:

1. Elimination of Trade barriers: On 1 January 1994, tariffs on many agricultural commoditiesbetween Mexico and the United Stated were immediately eliminated and other were to be phased outover a period of 5, 10 or 15 years. More than half the value of agricultural trade became duty freewhen the agreement went into effect. Both Mexico and United Stated protected their import-sensitive

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sectors with larger transaction periods, tariffs-rate, quotas and for certain products, special safeguardprovisions.

2. Protection for import sensitive crops : NAFTA contains special agricultural provisions to providerelief against import surges. These provisions allow only a specified quantity of a selected product toenter at low or preferential NAFTAduty rates. Higher tariffs are automatically triggered when importsreach a specified level. United States applies special safeguards on imports of onions, tomatoes,eggplants, chilli peppers and watermelons. Mexico applies special safeguard on three groups ofproducts i.e. live swine and most pork products, apples and potatoes products.

3. Sanitary and Phyto-sanitary Measures: The NAFTA imposes disciplines on the developmentadoption and enforcement of sanitary and phytosanitary measures. Theseare measures taken to protecthuman, animal or plant life or health from risks that they may arise from animal or plant pests ordiseases or from food additives or contaminants.

4. Export Subsidies: In order to achieve the elimination of export subsidies, United States and Canadawill be allowed to provide export-subsidies into the Mexican market to counter subsidized exportsfrom other countries. Both United States and Canada are required to consider Both United States andCanada are required to consider the export interests of the other whenever subsiding agriculturalexports to a third country.

5. Rules of Origin: NAFTA provides for though rules origin to ensure that maximum benefits accrueonly to those items produced in North America. The NAFTA rules of origin for agricultural productswere constructed to prevent Mexio from becoming an expert platform for processed products madefrom subsidized raw materials originating in Non-NAFTA Countries.

Committees of NAFTA

1. The NAFTA Committee on Agricultural Trade: The committee provides a forum for the threecountries to consult regularly on trade issues and other matters related to implementation of theagreements.

2. The NAFTA Committee on Sanitary and Phytosanitary measures (SPS) measures: It facilitatestechnical co-operation including consultations technical co-operation including consultationsregarding disputes involving SPS measures.

3. The NAFTA Advisory Committee on private Commercial Disputes Regarding Agricultural Goods: Itaims to achieve prompt and effective resolution of commercial disputes, with special attention toperishable items..

General Benefits of NAFTA

NAFTA created a free trade area among developed and developing economies. It is one of the firstagreements to include agriculture as well as other industries. The implementation of NAFTA has notalways proceeded smoothly and disputes continue to affect trade in some commodities. However, NAFTA

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has had significant impact on agricultural trade among the NAFTA countries. The important economicbenefits are explained below.

1. Access to markets of member countries: It has facilitated greater exports by increasing access to theUS, Mexican and Canadian markets and by ensuring a climate of greater openness, stability andcertainty for producers, importers, exporters and investors throughout the region.

2. Increase in trade: During 1993 and 2005, trade among the NAFTA nations rose by 173 percentfrom $ 297 billion to $ 810 billion. .

3. GDP growth: The dismantling of trade barriers and opening of markets have led to economic growthand rising prosperity in the US, Mexico and Canada. During the period 1993 to 2005, real GDPgrowth inUS and 48%, Mexico 40% and in Canada 49 percent.

4. Increase agricultural trade: Two-way agricultural trade between the US and Mexico increased by149 percent since 1993 reaching $ 15.8 billion in 2004. Trade in agriculture between US and Mexicohas been balanced. US agricultural exports to Mexico increased by $ 5.7 billion and US agriculturalimports from Mexico increased by 5.6 billion during 1993 and 2005. Two ways agricultural tradebetween the US and Canada increased by more than 112 percent since 1993 reaching 21.1 billion in2004.

5. Rise in productivity: The productivity has risen in the 3 countries during 1993 to 2003. Productivityrose 28% in US, 55% in Mexico and 23% in Canada. .

6. Intangible benefits: NAFTA has encouraged commitment to reforms and led to major advances ingovernment procurement and intellectual property rights.

7. Environmental provisions: NAFTAwas the first trade agreement toexplicitly include environmentalprovisions. For this purpose the North American Agreement on Environment till Cooperation wasdeveloped to address environmental concerns. Since then, all three countries have benefited fromcoordination on environmental issues.

Benefits to United States-

1. Free trade access to Mexico allows US industries to import labour-intensive components from Mexico.Some of the industries that have benefited from this include industries in computers, autos,petrochemicals, financial services and also agricultural sector.

2. The trade between the US and Mexico more than doubled.3. There is an increase in the employment.4. The consumers are benefited in USA due to reduced prices of the commodities and increased

competition.5. There is an expansionof trade not only with NAFTAmembers but also with other countries.

Benefits to Mexico:

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1. It has resulted in greater export-led growth resulting from increased access to huge US market.2. It has encouraged the return of the capital that left Mexico in search of higher and more secure return

abroad.3. It has fostered more rapid structural reforms in Mexico,4. It has encouraged higher regulatory standards inMexico and more cross border cooperation.5. It has helped speedup of Mexicos economic and political transformation.

Benefits to Canada:

1. There is an increased exports.2. There is an higher economic growth.3. There is also optimum utilization of the resources.

In this way, the free trade area called NAFTA between three North American countries helped grow themin lengthand width.

Achievements:

Despite its critics, NAFTA's record is clear: by lowering trade barriers, the agreement has expanded trade,increased employment, provided more choices for consumers at competitive prices, and increasedprosperity for all three countries.

1. Largest free trade area: NAFTA created the world's largest free trade area with about 450 millionpeople and $17 trillion worth of goods and services. Since it came into force in 1994, trade hasblossomed, investmenthas increased, and all three countries have become more competitive.

2. Employment generation: Over 39 million NAFTA related jobs have been created and the benefitsof expanding trade have flowed to businesses, farmers, workers, and consumers all over the region.

3. Trade creation: From 1993 to 2008, trade among the NAFTA countries more than tripled, from$288 billion to $902 billion. On average, each one of the NAFTA countries conducts nearly $1.9billion in daily trilateral trade.

4. Mutual benefits: NAFTA has beengood for Mexico but so it has beenfor the United States.5. Agricultural trade: An interesting success story for the United States is the role that NAFTA has

played in making US agricultural goods more competitive.6. Investment destination: U.S. investors have also found NAFTA an attractive destination for their

businesses.7. Trade facilitation: The tariff agreements scheduled at the time of NAFTA´s signature were

implemented either on time or ahead of schedule. As a result, NAFTAhas evolved to a more advancedstage of trade facilitation.

8. Most economically competitive region: In 2009 the governments of the three countries defined newand creative ways to further increase trade among themselves. To make North America one of the mosteconomically competitive regions in the world, trade officials agreed to push regulatory cooperationas the new top priority of the agreement. These actions have the potential to strongly reduce costs tobusinesses and prices to consumers by eliminating unneeded regulatory differences on standards.

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Looking to all the progress achieved in the past ten years, one is forced to agree that NAFTA works andincreases employment and competitiveness in the region. NAFTA´s progress and results underline theadvantages that a fuller integration would bring toall the countries in the North American region.

Failures:1. NAFTA Production Declines More ThanOther World Regions.2. Capacity UtilizationIs 30% Below 2008 Levels.3. The GreatRecession of 2008-2009 affected the Entire NAFTA Region.4. The “Great Recession”Has Technically Ended, But The U.S. Economy Still Faces Major

Challenges

Future Prospects and Challenges:

· Path of growth for future: Twenty years after NAFTA’s establishment, there is much evidence ofits positive effects on the agricultural sectors and economies of its members. Agricultural tradewithin the region rapidly expanded, accompanied by tremendous growth in FDI in the agri-foodvalue chains of all three countries. With NAFTA now fully implemented, it is of interest to ask whatpath NAFTA partners might choose to capitalize on opportunities that freer trade and globalmarkets offer.

· Regional trade agreements: NAFTA leaders have intermittently floated the idea of a free trade areathat would encompass all of the Western Hemisphere. NAFTA members have negotiated separatebilateral and regional trade agreements (RTAs) with countries outside the region. Despiteoccasional irritants, the overall consensus is that NAFTA has been beneficial for all threemembers.

· North American Competitiveness Council (NACC):Convinced that it was through private sectorcooperation that regional integration could progress at a faster pace, in March 2006 Mexico´sPresident, Vicente Fox, suggested the constitution of an important working group the NorthAmerican Competitiveness Council (NACC), composed of top businessmen from the region. TheNACC provides a voice for the trilateral business community and engages the private sector infinding solutions for better integration within NAFTA. No matter what form the future regionalpartnership may take, the experience over the past two years of the NACC demonstrates the clearbenefits of close cooperation on both strategic and specific issues among North America’s businesscommunities, as well as its governments. Other business organizations have extended thiscooperation over the past year in launching productive new initiatives addressing issues such asborder costs, sector

Conclusion:

The North American Free Trade Agreement (NAFTA) has enhanced prosperity in all three countriesthrough increased trade and investment, stronger economic growth, and lower prices for consumers.Nonetheless, NAFTA’s benefits are not universally understood and the current economic environment ofthe United States is creating public misperceptions about the value of further regional economic integration.This misperception is unfortunate because it limits possible cooperation between the governments of the

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three countries in making the region more competitive, its businesses more efficient and the offer of newjobs more sustainable.

A regional approach is the only opportunity that NAFTAcountries have to strengthen their competitivenessand security.

E. ASIA-PACIFIC ECONOMIC CO-OPERATION (APEC)

Introduction: Asia-Pacific Economic Co-operation (APEC) was established in 1989 to further enhanceeconomic growth and prosperity for the region. APEC is the premier forum for facilitating economicgrowth, co-operation, trade and investment in the Asia-Pacific region.

APEC has 21 member countries, viz., Australia, Brunei, Canada, Chile, China, HongKong, Indonesia,Japan, Republic of Korea, Malaysia, Mexico, New Zealand, Paupa New Guinea, Peru, Philippines, RussianFederation, Singapore, Chinese Taipei, Thailand, United States and Vietnam. These 21 member countiesaccount for 41% of the world’s population, about 55% of the world GDP, and about 49% of world trade. Itis also the most economically dynamic region in the world having generated about 70% of global economicgrowth in its first 10 years.

APEC is the only inter governmental grouping in the world operating on the basis of non-bindingcommitments, open dialogue and equal respect for the views of all participants. Unlike the WTO orother multilateral trade bodies, APEC has no treaty obligations required of its participants Decisions madewithin APEC are reached by consensus and commitments are undertaken on a voluntary basis.

India has requested membership in APEC and has received initial support from US, Japanand Australia.

In addition to India, Mongolia, Pakistan, Laos, Columbia and Ecuador are also seeking membership ofAPEC by 2008.

Goals of APEC:

APEC was established in 1989 to further enhance economic growth and prosperity for the region and tostrengthen the Asia-Pacific community. Since its inception, APEC has worked to reduce tariffs and othertrade barriers across the Asia-Pacific region, creating efficient domestic economies and increasing exports.The imports goals of APEC are specified in the “Bogor Goals”for free and open trade and investments inthe Asia-Pacific by 2010 for industrialized economies and 2020 for developing economies. These goalswere adopted by Leaders at their 1994 meeting in Bogor, Indonesia.

1. According to Bogor goals, free and open trade and investment helps economies to grow, creates jobsand provides greater opportunities for international trade and investment.

2. APEC also tries to create an environment for the safe and efficient movement of goods, services andpeople across borders in the region through policyalignment and economic and technical co-operation.

3. APEC leaders meeting in Bangkok, Thailand in 2003 has considered counter-terrorism as acomplementary mission toBogor Goals.

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4. It has also agreed to strengthen efforts to build knowledge-based economies and to promote sound andefficient financial systems and to accelerate regional structural reform.

Operation of APEC:

The APEC secretariat is based in Singapore and it operates as the core support mechanism for the APECprocess It provides co-ordination, technical and advisory support as well as information management,communications and public outreach services.

The APEC secretariat performs a central project management role, assisting APEC Member Economics andAPEC forum with overseeing more than230 APEC funded projects. APEC’s budget is also administered bythe APEC secretariat.

The APEC secretariat is headedby an Executive Director and a Deputy Executive Director. These positionsare filled by officers of Ambassadorial rank from the current and incoming host economies respectively.The positions rotate annually.

Growth and Achievements of APEC:

The Asia-Pacific region has consistently been the most economically dynamic region in the world. SinceAPEC's inception in1989, APEC's total trade has grown 395%, significantly outpacing the rest of the world.1 In the same period, GDP (in purchasing power parity terms) in the APEC region has tripled, while GDPin the rest of the world has less than doubled.

APEC's work under its three main pillars of activity, Trade and Investment Liberalisation, BusinessFacilitation and Economic and Technical Cooperation, has helped drive this economic growth and improveemployment opportunities and standards of living for the citizens of the region.

The important growth of APEC are:

1) Exports increased by 113 percent toover US$ 2.5 trillion.

2) Foreign direct investment grew by 210 percent overall, and by 475 percent in lower income APECcountries.

3) Real goals national product grow by about a third overall, and by 74 percent in lower income APECcountries.

4) Gross domestic product per person in lower incomeAPEC economies grew by 61 percent.

5) Over 30 bilateral free trade agreements (FTAs) have been concluded between APEC MemberEconomies.

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6) APEC is also pursuing trade and investment liberalisation through its Regional Economic Integration agenda. Progress to date includes:

7) Investigating the prospects of and options for a Free Trade Area of the Asia-Pacific.

8) The development of 15 model measures for RTAs/FTAs that serve as a reference for APEC membersto achieve comprehensive and high-quality agreements.

9) APEC has also acted as a catalyst in the advancement of World Trade Organisation multilateral tradenegotiations over the past 20 years.

10) APEC is strategically important to the United States because it is a primary venue for multilateralengagement with the Asia-Pacific on economic and other key interests. APEC’s growing economicimportance is clear. The 21 APEC members account for 55 percent of world GDP; 45 percent ofglobal trade; and 40 percent of the world’s population.

11) The Asia-Pacific economies are leading the global recovery, with recent forecasts suggesting thatemerging Asian economies could grow by at least 5 percent in 2009 while the G-7 economies contractby 3.5 percent.

The achievements of APEC can be mentioned as below:

A. Economic Growth: Since its inception in 1989, the APEC region has been the most economicallydynamic part of the world. During its first decade, APEC member countries generated about 70% ofglobal economic growth.

B. Benefit to the People in APEC Region:

Consumers in Asia-Pacific have both directly and indirectly benefited from the collective andindividual actions of APEC member countries. Important direct benefits are increased jobopportunities, more training programmes, stronger social safety nets and poverty alleviation.

C. Improvements in Information and Telecommunications: In 1990, an average of only 0.6% of thoseliving in APEC member countries were cellular subscribers and only 008 percent used internet. Withina space of 15 years those figures rose to 55 percent and 30 percent, respectively. Since 1990.

D. Benefits to Low Income APEC Countries: Economic growth leads to social advancement. During thefirst decade of APEC’s existence the low income APEC countries had the following benefits.

a. The United Nations Development Programme (UNDP) Human Development Index for lowerincome APEC countries improved by about 18 percent.

b. Poverty in East Asian APEC countries has fallen by about a third (165 million people), mostly onaccount of strong economic growth.

c. About 195 million new jobs have been created in APEC member countries, including 174 millionsin lower income countries.

d. Infant mortality has fallen and life expectancy has improved in lower income APEC countries onaccount of significant improvement in access to sanitation and safe water, and expanding public

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expenditure on health.e. There has been heavy investment in human capital with rising education enrolment ratios and

growing expenditures on education.

E. Regional priorities: APEC has also been able to evolve its agenda to include pressing regionalpriorities. Examples include: counter-terrorism (The Shanghai Statement in 2001, and the Counter-Terrorism Task Force); human security (Health Working Group); emergency preparedness (Task Forcefor EmergencyPreparedness); climate change, energy security and clean development (The SydneyDeclaration in 2007); and the global financial crisis (The Lima Statement in 2008).

F. APEC initiatives to facilitate trade:

a. The introduction of electronic/paperless systems by all member economies, covering the paymentof duties, and customs and trade-related document processing

b. The Single Window Strategic Plan, adopted in 2007, provides a framework for the development ofSingle Window systems which will allow importers and exporters to submit information togovernment once, insteadof tomultiple government agencies, through a single entry point.

c. Providing business with a concise one-stop repository of customs and trade facilitation relatedinformation for allAPEC economies through the APEC Customs and Trade Facilitation Handbook

d. The APEC Tariff Database provides users with easy access to APEC member economies' tariffschedules, concessions, prohibitions and other information.

e. In 2008, a groundbreaking Investment Facilitation Action Plan was endorsed; it aims to improve theinvestment environment in Member Economies.

f. The APECPrivacy Framework provides guidance and direction to both APEC Member Economiesand businesses on implementing information privacy protection policies and procedures. Byfacilitating information flows it will facilitate trade and e-commerce.

g. The APECBusiness Travel Card (ABTC) provides substantial time and cost savings to businesspeople and facilitates their travel in the region, by allowing visa free travel and express lane transitat airports in participating economies.

h. APEC is also removing behind-the-border barriers to trade through its Structural Reform agenda,which focuses on reforming domestic policies and institutions that adversely affect the operation ofmarkets, and the capacity of businesses to access markets and to operate efficiently.

Major Challenges:

v APEC process may be moving too slowly, because of flexibility.v APEC could be focusing on too manyissues.v APEC process may be too expensive with costs greater than benefits.v APEC’s progress is not clear, as performance indicators are not provided.v APEC continues to be criticized for not doing enough for business and for not convincingly achieve the

Bogor Goals.

Future prospects:· APEC’s role is particularly important in the current economic environment. Although nations on

both sides of the Pacific have taken individual steps to respond to the economic crisis.

· APEC is unique in that it already has the tools and focus to ensure regional economic prosperity by

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promoting policies that will spur long-term economic growth, and ensure all the citizens have theopportunity to thrive in the global economy. It promotes free and open trade and investment, andinitiatives to build healthy and resilient economies by tackling such issues as energy security, foodsecurity, and preparing workforces for an increasingly competitive global economy.

· On the economic front, APEC provides the best and most established regional mechanism for practicalcooperation and action. 

· With almost half of the G-20 being APEC members, APEC has an important role to play in supporting,reinforcing, and implementing G-20 principles for global economic recovery and future economicgrowth.

· APEC is already leading efforts to facilitate reforms that will prevent future crises and improve thebusiness environment throughout the region. Reform efforts include initiatives aimed at improvingcorporate governance and promoting regulatory reform.

· APEC is also using the World Bank’s “Ease of Doing Business”indicators to spur progress on makingit faster, cheaper, and easier to do business in APEC economies, covering such areas as starting abusiness, obtaining credit, the efficiency of conducting trade, and enforcing contracts.

· APEC provides a forum for leaders of these economies to coordinate on macroeconomic, financialand structural policies that will promote strong and balanced global demand, led by thriving privatesectors.

· Regarding sustainable growth, including efforts to stem the impact of climate change APEC has anincreased role for in advancing energy security and "green" development.

· APEC’s “human security”agenda can make a vital contribution to ensuring the prosperity andresiliency of societies against a multitude of threats. 

· APEC is fostering closer collaboration among regional emergency management agencies, examiningthe impact of climate change on disaster management, and helpingschool children prepare for disasters.Going forward, APEC will continue to strengthen public-private partnerships and capacity building foremergency preparedness.

· APEC is also working to protect the region’s financial and economic system from attack and abuseby terrorists.

F. ASSOCIATION OF SOUTH EAST ASIAN NATIONS (ASEAN)

Introduction: The Association of South East Asian Nations (ASEAN) contains several of the so calledAsian “tiger-economies”most of which have suffered in the Asian financial crisis. Its number nations lieclose to the sea lanes between Europe China and Japan. ASEAN is sometimes seen as political counterweight to China’s dominancein the region.

ASEAN established in 1967 to address the following issues:

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- No regional group in SoutheastAsia before- Conflict-resolution: Indonesia-Malaysiaconflict called Konfrontasi.- Communist rebellions (backed by China and USSR) against pro-Western governments in Thailand,

Malaysia, Singapore, Indonesia and Philippines- Superpower intervention during the Cold War- Indochina- Economic Nationalism and underdevelopment

Origin of ASEAN

8 August 1967 –ASEAN was established in Bangkok by five original member countries viz. Indonesia,Malaysia, Philippines, Singapore and Thailand.

8 January 1984 –Brunei, Darussalam joined ASEAN

28 July 1995 –Vietnam joinedASEAN

23 July 1997 –Laos and Myanmar joinedASEAN

30 April 1999 –Cambodia joined ASEAN.

Peculiarities of ASEAN :

ASEAN does not function as a regional trade arrangement, but it has become an effective means forcooperation in economic matters and foreign affairs with Organization for Economic Cooperation anddevelopment (OECD).

There are significant political and religious differences among the countries for example Democracy iswell established in the Philippines, Burma (now Myanmar) still continues with its militarydictatorship. Theregions religions are also varied, consisting of Islam, Buddhism, Christianity and animism. In addition,several countries have a less homogenous population.

Despite their political, economic and cultural diversity the countries are recognize their mutual needs topromote the regions’development and thus respect each other’s independence in internal politics.

• Diverse cultures: Muslim, Buddhist, Christian, Confucian• Divergent colonial history:

- British (Malaysia, Singapore, Myanmar)- Dutch (Indonesia)- French (Vietnam, Cambodia, Laos)- Spanish/American (Philippines)- Portugese (East Timor)

• Different political systems:- Military Myanmar), communist (Vietnam, Laos), soft-authoritarian (Malaysia and

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Singapore), stable democracy (Indonesia), unstable democracy (Thailand and Philippines)- parliamentary democracy, presidential democracy

Objectives of ASEAN

The ASEANdeclaration in Bangkok on 8 August 1967 stated the following aims and objectives of ASEAN:

1. To accelerate economic growth, social progress and cultural development in the region in order tostrengthen the foundation for a prosperous and peaceful community in Asia.

2. To promote regional peace and stability in the region.

Fundamental Principles :At the first Asian Summit in Bali in February 1976, the member countries signed the Treaty of Amity andspelled followingfundamental principles of ASEAN

1) Mutual respect for the independence, sovereignty, equality, territorial integrityand national identify ofall nations,

2) The right of every state to lead its national existence free from external interference, subversion orcoercion.

3) Non interferencein the internal affairs of one another.4) Settlement of differences or disputes by peaceful means.5) Renunciation of the threat or use of force.6) Effective co-operation among themselves.

Structure and Organisation:The highest decision-making organ of ASEAN is the meeting of the ASEAN Heads of state andgovernment. The ASEAN summit takes place every year. Ministerial meetings on several sectors such aseconomy energy environment etc, are also held. To support these ministerial bodies there are 29committees of senior officials and 122 technical working groups. The secretary, General of ASEAN isappointed on merit and accorded ministerial status for five years. ASEAN also consists of other specializedbodies such as ASEAN University Network, ASEANcentre for Energy etc.

Achievements ASEAN:

1. Political co-operation: The ASEAN security community is formed to bring ASEAN’s political andsecurity co-operation to a higher plane to ensure that countries in the region live at peace. At the 1992Singapore summit, the SEANleaders declared thatASEAN will move towards a higher planof political co-operation to secure regional peace and prosperity.

2. Economic co-operation: When ASEAN was established, trade among the member countries wasinsignificant. To tackle this, the Preferential Trading Agreement (PTA) was established in 1977 and further,ASEAN Free Trade Area (AFTA) was launched in 1992. The elimination of tariffs and non-tariff barriersamong the member countries promoted greater economic efficiency productivity and competitiveness. In1997 the ASEAN Leaders adopted the ASEAN vision 2020, which aimed at creating a stable, prosperous

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and highly competitive ASEAN Economic Region in which there is free flow of goods, service,investments, capital etc.

3. Other achievements:o No major conflict among members since foundingo Inclusive membership: Vietnam joining in 1995 key developmento Key role in the resolution of Cambodia conflicto Engaging all the major powers of the world –China, US, Japan, India, Russia, EU) through dialogue

and cooperation

In this way, as a result of this greater regional integration ASEAN has helped the member countries inall directions.

Problems:

1. Economic Cooperation: intra-ASEAN trade still around 25% of total trade, mechanisms for financialcrisis untested

2. Persisting Intra-ASEAN Conflicts: Thailand-Cambodia, Singapore-Malaysia, Maritime disputes3. South China Sea Dispute: China, Vietnam, Philippines, Malaysia, Brunei, and Taiwan4. Transnational Threats: Environmental degradation, Deforestation and haze problem, Piracy,

Terrorism, Drug trafficking, People Smuggling, Natural disasters

Challenges:

• Rise of China and India, a multipolar world• Increasing burden: scope of issues, and membership, and partnerships• Sovereignty and non-Interference in an age of globalization and transnational challenges• Compliance with new rules and the Charter: National interest version regional interest• ASEAN’s unity and cohesion

G. SOUTH-ASIAN ASSOCIATION FOR REGIONAL CO-OPERATION.

Introduction:To bring about regional co-operation among South Asian Countries, The South Asian Association forRegional Co-operation (SAARC) was formally launched on 7-8 December 1985, through the idea was firstmarked in November 1980. The SAARC comprises of eight countries of South Asia that is Bangladesh,Bhutan, India, the Maldives, Nepal, Pakistan, Sri Lanka and Afghanistan.

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Objectives of SAARC:

SAARC was established to achieve the following objectives:

1) To promote the welfare of the people of South Asia and to improve their quality of life.2) To accelerate economic growth, social progress.3) To promote and strengthen collective self-reliance among the countries of South Asia.4) To contribute to mutual trust, Understanding and appreciation of one another’s problems.5) To promote active collaboration and mutual assistance in the economic, social, cultural, technical and

scientific fields.6) To strengthen co-operation with other developingcountries.7) To strengthen co-operation among themselves in international forms on mattes of common interest.8) To cooperate with international and regional organizations with similar aims and purposes.

Principles of SAARC:

Among the various programmes of the SAARC, the two most important are:

1) Poverty Eradication: Poverty Eradication has been placed high on the social Agenda of SAARC sincethe 6th SAARC summit (Colombo, 1991). A consensus on poverty eradication was adopted at the 7th

SAARC summit (Dhaka, 1993). The summit expressed its commitment to eradicate poverty from southAsia preferably by the year 2002. It is through an agenda of action which would include a strategy ofsocial mobilization and human development. The summit also stressed that within the conceptualapproach of “Dhal-Bhaat”, the right to work and primary educationshould receive priority.

2) Trade and Economic Co-operationSAARC has taken important steps to expand co-operation among member countries in the coreeconomic areas.

A committee on economic Co-operation (CEC) comprising the commerce secretaries of member stateswas established in July 1991 to acts as the forum to address economic and trade issues. The committeeis charged with the responsibility of monitoring the progress in the implementation of decisions relatingto expansion of trade and economic co-operation under the frame work of SAARC.

Achievements :

SAARC was not able to play a very important role in integrating South Asia due to political and militaryrivalry between India and Pakistan. However, at the same time SAARC has made some achievementswhich are stated below.

a. SAFTA: The signing of the frame work agreement on South Asia Free Trade Area was a major milestone. This is bound to increase inter-regional trade.

b. SAARC Social Charter: It is another important achievement. The charter aims at bringing neededsocial change in the living conditions of South Asians.

c. Environmental Plan: The SAARC also recognized the importance of undertaking regional

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cooperation in conservation of water resources, environment, pollution prevention, etc. Thus it hasstressed the need for effective implementation of environmental plan of action.

d. Anti-terrorist stand: SAARC summits categorically condemned terrorist violence in all its form andmanifestations. The SAARC declaration envisages South Asia to be a peaceful and stable region.

e. Active collaboration: SAARC tries to strengthen cooperation among the member states ininternational forums on matters of common interest.

f. Asian Development Bank (ADB) assistance: ADB and SAARC singed a MOU in 2004 tostrengthen the co-operation between the ADB & SAARC. The MOU provides a frame work for ADBassistance to SAARC’s regional co-operative activities such as transport, energy, trade, investmentand private sector development.

g. South Asia Development Fund : The South Asia Development Fund has been established to serve asan umbrella financial institution for all SAARC projects and programmes. It comprises of threewindows –the social window, infrastructure window, and economic window.

Future Prospects :

South Asia needs increased co-operation among its countries to face challenges posed by hikes in foodprices, recurrent disasters and climate change. Due to geographic, economic, cultural and other strategicreasons. South Asia has distinct advantages to co-operate in many areas including cross-borderinfrastructure and services, health trade, finance, and regional public goods.

1. Due to its strategic geographic location, South Asia can play an important role in the wider Asianintegration. Through there are significant achievements in co-operation and integration has been slow.The SAARC has tremendous prospectus to expediate the integration process.

2. Regional co-operation can help to achieve economic and social development. Cross-borderdevelopment of basic infrastructure, such as highways, railways, shipping and air-connectivity, inlandwaterways, power grids, and telecommunication links, can reduce physical barriers to the movementof goods and people across national boundaries. It can in turn help to expand regional trade andtourism, increase in foreign exchange earning capacities, generating employment opportunities etc.

3. SAARC has a vital role to play in poverty reduction and building a more integrated and prosperousAsian region.

4. To change the functioning of SAARC in to a more vibrant and result oriented body, there is a need toover come the differences and disputes among the member countries and create a climate of mutualtrust and confidence.

5. The recent steps such as social charter, SAFTA etc. are in the positive direction and their goals appearachievable. The political will to do so appears forthcoming now. This looks good for the future of theSAARC.

Conclusion :

The absence of conflicts and the beginning of normal relations among the member states are the minimum,not the maximum expectation of the people of the region. Ideally friendship among them is a priorrequirement to enable and sustain friendly co-operation among the SAARC member governments.

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To achieve economic integration in South Asia, it is necessary for member countries to give priority to theserious socio-economic problems and at the same time reducing the political tensions. India can help theother members by providing technology in all the sectors, specially in agriculture and service sector and therequired administration expertise.

A serious attempt is required by all the member countries to make the SAARC an effective economicregion rather than only a political and cultural gathering.

H. REGIONALISM VS MULTILATERALISM

Introduction: The debate on regionalism versus multilateralism is growing as economists and politicalscientists try to manage with the question whether regional integration arrangement (RIA) are good or badfor the multilateral system. Are regional integration arrangements (RIA) building blocks, or stumblingblocks or stepping stones towards multilateralism? Due to the emergence of large number of regionalintegration arrangements (such as the EU, NAFTA, APEC, the ASEAN Free Trade Area (AFTA) theSAFTA and so on) there arises a question among the economist about the ability of the WTO to maintainthe momentum towards global free trade.

Meaning of Regionalism: Regionalism refers to any policy designed to reduce trade barriers between asubset of countries regardless of whether those countries are actually contiguous or even close to each other.

Rationale and Benefits of RTAs:

1) Unresolved issues in WTO negotiations: Everybody would agree that multilateral agreement is thepreferred instruments for liberalizing international trade. Such agreements ensure a non-discriminatory approach, which provides political and economic benefits for all. But the currentpolitical environment is not particularly favourable for multilateral trade negotiations.

Countries are taking RTAs route because such agreements are often a more practical and feasible wayto liberalize trade. RTAs can bring faster results than multilateral process. RTAs can be valuable indealing with different issues such as services, government procurement etc. which often causedeadlocks on the multilateral negotiations.

2) Promote Freer Trade: Regional arrangements promote freer trade and multilateralism. According tothem, on account of regional integration trade creation has generally exceeded trade diversion. Further,regionalism has contributed to both internal and international dynamics that enhance rather thanreduce the prospects of global liberalization.

3) Create Interest in Multilaterism: According to the proponents of regionalism, regional initiativescan accustom officials, governments and countries to the liberalization process and thus increase theprobability that they will subsequently move to similar multilateral actions.

4) Positive Political Effects: Trade and broader economic integration has bought about peace betweenneighbouring countries and thus has positive rather thannegative political effects.

5) More Practical and Feasible: Everybody would agree that multilateral agreements are the preferred

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instruments for liberalizing international trade. There are many important and unresolved issues.Under this background, more and more countries have turned to RTAs. Countries are taking RTAsroute because such agreements are 'often a more practical and feasible way to liberalize trade. RTAscan bring faster results than multilateral process. RTAs can be valuable in dealing with differentissues such as services, government procurement, etc. whichoften cause deadlocks on the multilateralnegotiations.

6) Contribute to Multilateralism: They seem to be contradictory, but often regional trade agreementscan actuallysupport the WTO's multilateral trading system. Regional agreements have allowed groupsof countries to negotiate rules and commitments that go beyond what was possible at the timemultilaterally. In turn, some of these rules have paved the way for agreement in the WTO. In otherwords, regional integration should complement the multilateral trading system and not threaten it.

7) Demonstration Effects: The proponents of regionalism note that it often has important demonstrationeffects. Regional initiatives can accustom officials, governments and nations to the liberalizationprocess and thus increase the probability that they will subsequently move on to similar multilateralactions.

8) Positive Political Effects: Trade and broader economic integration has brought about peace betweenneighbouring countries and thus has positive rather than negative political effects. The supporters ofregionalism contend that it has had positive rather than negative political effects. Trade and broadereconomic integration has created

9) Compatibility: The supporters of regionalism note that Article 24 of the GATT, and now the WTO,explicitly permits regional agreements and thus acknowledges their compatibility with the multilateraltrading system.

Costs and Consequences of RTA’s are:

1. Trade Diversion: Regional agreements divert trade by creating preferential treatment for membercountries vis-à-vis non-members. They can divert trade away from lower cost producers outside thebloc.

2. Undermine the Multilateral System: Countries may lose interest in the multilateral system whenthey engage actively in regional initiatives. RTA’s

3. Geopolitical Impact: Extensive and intensive regional ties may lead to conflicts that range beyondeconomics to broader spheres of international relations.

4. Prevents developing countries from active participation: There are concerns that RTAs areincomplete, unequl or counter-productive. The volume of RTA activity stretches negotiationcapacities to their limit, and in the case of developing countries, prevents them from activelyparticipating in all proceedings. The WTO has partnerships with the United Nations and the WorldBank to build capacity in smaller countries and give aid money to support participation in tradenegotiations.Further, there is a fear that in agreements formed outside the WTO, developing countriesdo not have the power of collective bargaining to negotiate RTAs.

5. Hurt the interest others : Under some circumstances regional trading arrangements could hurt thetrade interests of other countries. Normally, setting up a customs union or free trade area would

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violate the WTO's principle of equal treatment for all trading partners ,that is "most-favoured-nationagreement".

Meaning of Multilateralism: Multilateralism is a characteristic of the world economy or worldeconomic system. It ultimately depends on the behaviour of individual countries, that is, the extent towhichthey behave in a multilateral fashion. For any one country, the multilateralism is a positive function of:

a) The degree to which discrimination is absent, that is the proportion of trade partners that receiveidentical treatment, and

b) The extent to which the trading regimeapproximates free trade.

There are problems in the world that cannot be confronted with any success by a single state, no matter howpowerful. Big environmental issues and world hunger and poverty, along with many regional peacekeepingneeds and most economic and trade-related problems, etc., canbe tackled effectively through the process ofmultilateralism.

The multilateralism is the consensus-driven process that democratically pulls countries together forcollective problem solving, usually under the auspices of an umbrella organisation such as the UnitedNations or the World Trade Organisation.

Advantages of Multilateralism:

1. Cannot be dominated by the major players: In this process, when priorities are set, they cannot bedominated by the major players.

2. Best for liberalizing an economy: A free and fair multilateral trading system serves best the interests ofany liberalizing economy. Although there has been a huge proliferation of bilateral/regional free tradeagreements in recent years, no one questions the primacy of the multilateral trading system.

3. Contributed to India's growth: India's engagement with the multilateral trading arrangement helped itto sustain the trade liberalisation process which was started in 1991. The inclusion of agriculture in theWTO agreement helped India bring about some policy changes even in the agricultural sector, which hadremained highly protected after the initial round of reforms. While the agricultural sector is still reasonablyprotected with high tariffs, the phasing out of quantitative restrictions (QRs) has arguably been the singlemost successful area of trade liberalisation in this sector and has happened mainly because of India's WTOcommitments.

4. Better Economic performance: The protagonists of trade liberalisation claim that open trade policieslead to better economic performance. Virtually all growth miracles are associated with rapid expansion oftrade rather than wholesale substitution of imports by domestic production

5. Other advantages: Beyond the. welfare gains achieved through the reduction of tariffs in manufacturingand agriculture, additional gains tend to accrue with the introduction of scenarios that incorporate tradeliberalisation in the services sector, reduction of non-tariff barriers, trade facilitation, effective utilisation ofdispute settlement mechanism etc.

Disadvantages of Multilateralism:

1.Slow process: The biggest disadvantage to multilateralism is that in the process every country has theright to have their opinions taken into account, and they usually take advantage of it. It can slow thingsdown a lot. .

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2. Increasing use of Non- Tariff Barriers (NTBs): Another important problem in the multilaterism is theincreasing use of Non- Tariff Barriers (NTBs) to restrict trade from developing countries. The term 'Non-Tariff Barriers' has not been defined under the WTO but its usage and understanding broadly refers to any'border measure' other than a tariff, which acts as a barrier to trade. This includes internal measures that,despite in several instances being in line with WTO rules and serving legitimate policy objectives maydiscriminate or unnecessarily restrict access to markets, translating in additional costs for the exporters orimporters. Nontariff barriers (NTBs) are trade barriers that restrict imports but are not in the usual form of atariff.

Some common examples of NTB's are antidumping measures and countervailing duties. Some non-tarifftrade barriers are expressly permitted in very limited circumstances, when they are deemed necessary toprotect health, safety, or sanitation, or to protect depletable natural resources. Their use has risen sharplyafter the WTO rules led to a very significant reduction in tariff use. They are being used by developedcountries against developingcountries.3. Domination of rich developed countries: The multilateral arrangements are dominated by richdeveloped countries. This creates groupism and works against poor developing countries and restricts thesuccess of such arrangements.

In general the disadvantages of multilateralism can be considered as the advantages of regionalism.

Conclusion:More and more countries are joining preferential arrangements at the same time the pace of multilateraltrade negotiations has solved markedly in the recent years.

According to some estimates there are about 250 regional or bilateral free trade agreements either in forceor under negotiation. Asian countries such as Japan and China, whichhave traditionally shunned RTAs, areactively negotiating such agreements with their neighbours and even more distant trading partners. The EUhas beenactive in this areafor years.

The US has now joined the parade of signing more RTAs. Until2001, the US had only three RTAs namely,Israel, Canada and NAFTA. Since then, the US concluded and put into effect RTAs with Jordan, Chile andSingapore. It has concluded negotiations on other agreements with Australia, the five Central Americancountries plus the Dominican Republic and Morocco Talks are underway with many other countries.

The multilateral trading system, as embodied in the GATT-1947 and now the WTO, has completed morethan 60 years of existence. The basic philosophy behind multilateralism is that open markets, non-discrimination and global competition in international trade are conducive to the national welfare of allcountries. The key guiding principles of this system is non-discrimination, which is embodied in the MFNclause and National Treatment.

WTO rules require that each member accord Most Favoured Nation (MFN) status to other WTOmembers.However, GATT Article XXIV allows exceptions to the MFN principles for RTAs so long as they meetcertain conditions. Theseconditions are:

1. The agreement must lower trade barriers within the regional group.2. The agreement cannot raise trade barriers against non-participating members.

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3. The agreement is supposed tocover substantially all trade among the RTA partners.

In reality, RTA participants do not meet all these conditions very often, the trade coverage of many RTAsis incomplete with many “sensitive”sectors exemptedfrom trade liberalization.

The focus of debate shifts from the immediate consequences of regionalism for the economic welfareof the integrating partners to the questions of whether the regionalism integration sets up forces thatencourage or discourage evolution towards globally freer trade. The EU is the only RTA that is both bigenough to affect the multilateral system and long-enough lived to have currently observable consequences.However, the EU does not accept the hypothesis that one act of regionalism necessary leads to the collapseof the multilateral system.

RTAs are a reality and will not go away. What is needed is to ensure that RTAs conform to WTO rules asfar as possible.

MODULE-3TRENDS IN WORLD TRADE, WTO AND DEVELOPING COUNTRIES

A. RECENT TRENDS IN GLOBAL TRADE

International trade plays very important role in economic development The global economy has growncontinuously since the Second World War. Global growth has been accompanied by rise in global trade and achange in the pattern of trade, which reflects ongoing changes in structure of the global economy.

The past few decades have seen important changes in trends and pattern of global trade In recent years, theexpansion in trade is mostly in non commodity exports, especially of high-technology products such ascomputers and electronics. It is also characterized by growing regional concentration and an ongoing shift oftechnology content. The following trends highlights the changing trends in global trade.1. Expansion in global trade:

World trade has grown steadily since World War II, with the expansion accelerating over the past decade.

The world merchandise exports have increased from US $ 3395.4 billion in 1990 to US $ 15763.3 billion in2008, i.e. by 4.6 times, and it has fallen to US $ 12177.6 billion in 2009 due to financiall crisis. The same trendis seen with respect to developed and developing countries. The merchandise exports of developed countrieshave risen from US $ 2496.6 billion in 1990 to US $ 9044.7 billion in 2008 i.e. by 3.6 times, but fell to US $7019.4 billion in 2009. The merchandise exports of developing countries increased from US $ 793.4 billion in

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1990 to US $ 6015.9 billion in 2008 i.e. by 7.6 times, but declined to US $ 4706.7 billion in 2009. This is shownin the following table 1.

Table .1 : World Merchandise Exports (US $ billion)

Year World .Developed Countries .Developing Countries

1990 3395.4 2496.6 793.4

1995 5017.7 3536.2 1284.02000 6277.2 4212.4 1919.12008 15763.3 9044.7 6015.92009 J2177.6 7019.4 4706.7

The following factors are responsible for expansion in global trade.

1. The rise of emerging market economies (EMEs) as systemically important trading partners.2. The growing importance of regional trade.3. The shift of higher technology exports toward dynamic EMEs; (iv) the growing role of global supply

chains.4. The rising trade liberalization since the early 1950s.5. Decline in shipping, transportation and communication costs.

2. Growth in Merchandise trade:During the period 1999-2009, the average annual growth of merchandise trade in volume (real terms) in theworld was 9.6 percent. The average annual growth of merchandise trade was below the world average in highincome countries (8.1 per cent) and the European Union (9.1 per cent). On the other hand, it was above theworld average in low- and middle-income countries (14.6 per cent). China experienced an average annualgrowth of 21.9 percent in merchandise trade during 1999-2009, while India had 17.2 per cent annual averagegrowth in merchandise trade in the same period.

The leading Exporters and Importers in Merchandise trade in 2010 is shown in Table 2.Table 2 : Leading Exporters and Importer in Merchandise Trade in 2010

Rank Exporters Value(in US$ billion)

Share(%)

Rank Importers Value(in US $billion)

Share(%)

1 China 1578 10.4 1 US 1968 12.82 US 1278 8.4 2 China 1395 9.13 Germany 1269 8.3 3 Germany 1067 6.94 Japan 770 5.1 4 Japan 693 4.520 India 216 1.4 13 India 323 2.1

Source: World Trade Report 2011, WTO

If we ignore trade between the 27 European Union members and treat the EU as a single entity, the leadingexporters were the European Union (US $ I. 79 trillion, or 15 per cent of the total), China (13 per cent), theUnited States (II per cent), Japan (6.5 per cent) and the Republic of Korea (4 per cent).

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The top importers excluding trade within the EU were the European Union (US $ 1.98 trillion or 16.5 per centof world imports), the United States (16 per cent), China (12 per cent), Japan (6 per cent) and die Republic ofKorea (US $ 425 billion, 3.5 per cent).

3. Trade between high income economies and low-and middle income economies:Developing economies are becoming increasingly important in the global trading system. Since the early 1990strade between high-income economies and low- and middle-income economies has grown faster than tradeamong high-income economies. The trade among low- and middle-income economies (i.e. developing countries)accounted for about 9.2 % of the world's merchandise trade in 2009, compared with 4.5% in 1996. The share oftrade from low- and middle income economies to high-income economies increased from 14.1 per cent in 1996to 19.7 per cent in 2009.

Trade flows between high-income and low- and middle-income economies reflect the changing mix of exportsto and imports from developing economies. While food and primary commodities have continued to fall as ashare of high-income economies'- imports, manufactures as a share ofgoods imports trom both low- and middle-income economies have grown. And trade between developingeconomies has grown substantially over the past decade, a result of their increasing share of world output andliberalization of trade.

Low-income economies specialize in labor-intensive sectors, but their share in the global market of laborintensive products is very small. Lower middle income economies provided most of the textiles, clothing, andfootwear traded globally in 2009. High-income economies accounted for the majority of trade in agriculturalproducts and manufactured goods.4. Rising importance of developing countries in global trade:Developing economies are an increasingly important part of the global trading system. Their share of worldtrade rose from 15 percent in 1990 to 30 percent in 2009. Developing economies' share of world exports iscontinuing a rising trend from 19 percent in 2000 to 27 percent in 2009. It is observed that developing countriesare increasingly becoming an important destination for the exports of developed countries.

5. Trade in services:Trade in services makes up 22 percent of world Trade in 2010, up from 20 percent in 2000. In developingeconomies the nominal value of trade in services grew 16 percent a year over 2000-09, doubling the rate ofgrowth over 1990-2000. It has surpassed that of high-income economies, which grew at 11 percent a year over2000-09.

The leading exporters in world trade in commercial services in 2010 are US, Germany, UK and China and theleading importers in world trade in services in 2010 are US followed by Germany, China, and UK. India rankstenth in exports and 7th in imports.

The leading Exporters and Importers in World Trade in Commercial Services in 2010 is shown in Table 3.

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Table 3 : Leading Exporters and Importer in World Trade in Commercial Services in 2010Rank Exporters Value(in US

$ billion)Share(%)

Rank Importers Value(in US $billion)

Share(%)

1 US 515 14.1 1 US 358 10.22 Germany 230 6.3 2 Germany 256 7.33 UK 227 _ 6.2 3 China 192 5.54 China 170 4.6 4 UK 156 4.510 India 110 3.0 7 India 117 3.3

Source: World Trade Report 2011, WTO

6. Terms of trade of developing and transition economies:

The large terms-of-trade fluctuations of the past few years have had large effects on national income and thebalance of trade of many economies. Countries lacking the means (such as adequate foreign-exchange reservesor stabilization funds) to cope with swings of this magnitude tend to suffer adverse long-term growthconsequences because of the macroeconomic volatility caused by these shocks.

B. TRENDS IN GLOBAL TRADE DURING THE FINANCIAL CRISIS AND THE POSTCRISIS

The financiall crisis that struck high-income economies in 2008 reached low- and middle-income economies in2009. Th low income group countries and developing countries recovered much faster after the financial crisisthan the rich and developed countries The changing trends during the financial crisis and post financial crisiscan be discussed as below:

· World exports of goods and services fell 20 percent, from $ 19.6 trillion in 2008 to $ 15.6 trillion in2009, more in high-income economies and somewhat less in low- and middle-income economies.Imports of goods and services by high-income economies fell 22 percent, from $ 14.0 trillion in 2008to $ 10.9 trillion in 2009; imports by low and middle income economies fell 19 percent. World tradehad declined by more than 11 per cent in 2009.

· The global output grew by 3.6 per cent in 2010 and it was accompanied by expansion of the worldwidevolume of exports and imports of goods and services. The turnaround in trade took place in mid-2009. The recovery was particularly strong between mid-2009 and mid-2010 when the tradevolume increased at an annualized rate of nearly 20 per cent. World trade recorded its largest everannual increase in 2010 as merchandise exports surged 14.5 per cent, Since then, however, world tradegrowth has lost steam along with the slowdown in the recovery of the world economy.

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· Both trade and output grew faster in developing economies than in developed ones in 2010.Exports in volume terms ( in real terms) were up 13 percent in developed economies while the increasefor developing economies was nearly 17 per cent. The difference between trade of developed anddeveloping economies was even greater on the import side, where developed economies' imports roseby 11 per cent compared with 18 per cent in the rest of the world.

· Developing countries have been leading the recovery in international trade in 2010, in line withthe stronger expansion of their economies. By September 2010, the trade volume of this group as awhole had already surpassed the pre-crisis peak of April 2008 by 7 per cent, owing in particular tostrong trade growth in developing Asia. At the same time, trade by developed economies was still 9per cent below the pre-crisis peak. As a result, the developing countries' share in global trade increasedfrom about one third to more than 40 per cent-between 2008 and 2010.

· World trade in services has been severely hit by the financial and economic crisis. It is presumedto have recovered during 2010.UNCTAD data indicate that the value of international trade in servicesfell by 12 per cent in. 2009. But it was less than the 23 per cent decline in merchandise trade during thesame year. The weaker downturn in services trade during the global crisis could reflect a lesserdependence on intermediate inputs as much as a lesser reliance on trade finance of certain servicessectors like communications. During 2009, international trade in services decreased by 13 per cent indeveloped countries, by 10 per cent in developing countries and by 17 per cent in the economies intransition. The worst performance of the economies in transition reflects a greater contraction inall services sectors, but especially those related to construction, travel and transportation.

· Primary commodity prices have fluctuated strongly compared with prices of manufactures in 2009 and2010. As a result, countries specializing in exports of primary commodities and those with highshares of imports of energy, food and industrial raw materials have had large swings in theirterms of trade.

· During 2010, the terms of trade of the fuel exporters and exporters of minerals and mining productsimproved significantly along with rebounding commodity prices, but remained below the peaksreached in 2008 and 2007, respectively. On the other hand, exporters of manufactures saw part ofthe gains in their terms of trade.

· In 2010, exporters of agricultural products experienced an increase in the unit prices of both theirexports and imports but, on balance, saw a modest improvement in their terms of trade. The countriesthat are net food importers and that do not export oil or mining products on a significant scalesuffered a slight deterioration in their terms of trade during 2010..

· The economies in transition, Africa, Western Asia and Latin America and the Caribbean saw asignificant rebound in their terms of trade in 2010.. They had suffered important losses in 2009following trends in primary commodity prices.

· The predominantly manufactured exports in East and South Asia, in contrast, saw stagnant orslightly declining terms of trade in 2010. They had a modest improvement during the globalrecession in 2009. Similarly, developed countries saw little movement, on average, in their terms oftrade.

· Trade imbalances Of leading economies widened in 2010, as exports and imports bounced backfrom their depressed levels of 2009. However, for most countries the gap between exports andimports was smaller after the crisis than before.

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· The trade deficit of US for the year 2010 increased 26 per cent compared with 2009. However, the2010 deficit of roughly US $ 690 billion was 22 per cent less than.the corresponding deficit of US $882 billion in 2008.

· China's merchandise trade surplus for 2010 totalled US $ 183 billion, roughly 7 per cent less thanthe US $ 196 billion it recorded in 2009, and 39 per cent less than the nearly US $ 300 billionsurplus of 2008.

· The European Union had a trade deficit with the rest of the world of US$ 190 billion in 2010,which was up 26 per cent from 2009 but down 49 per cent from the US$ 375 billion it recorded in2008.

· Japan was an exception to the trend towards smaller trade deficits/surpluses after the financialcrisis . In 2008 the country recorded a US$ 19 billion surplus of exports over imports, but this nearlyquadrupled to US$ 77 billion in 2010.

C. CHANGING PATTERNS OF GLOBAL TRADE

The world trade has grown steadily since World War II. As a share of global output, trade is now at almost threetimes the level in the early 1950s. A large part of it is dlriven by the integration of rapidly growing emergingmarket economies (EMEs). The expansion in trade is mostly accounted for by the growth in non-commodityexports, especially of high-technology products such as computers and electronics. These developments inglobal trade are changing the global trade patterns. According to IMF studies, the following patterns in globaltrade is observed :

1. Emergence of new players in global trade:Emerging market economies have moved from peripheralplayers to major centers of global trade. In the early 1970s, trade was largely confined to a handful of advancedeconomies, notably the United States, Germany, arid Japan. They together accounted for more than a third ofglobal trade in the early 1970s. By 1990, the global trading landscape had become more diversified to includeseveral EMEs, especially in East Asia. By 2010, China became the second largest trading partner after theUnited States, overtaking Germany and Japan.

2. The structure of trade: The structure of trade has been characterized by a rising share of higher technologygoods. The contribution of high-technology and medium-high-technology exports such as machinery andtransport equipment increased, whereas that of lower technology products such as textiles declined. Technology-intensive export structures generally offer better prospects for future economic growth. Trade in high-technology products tends to grow faster than average, and has larger spillover effects on skills and knowledgeintensive activities.

3. Growing Trade Interconnectedness: Growth in trade interconnectedness has increased the cross-bordertransmission of shocks through the trade channel.The IMF study shows the following important trends underlying the global trade network during 1999 and

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2009.

· There has been a marked shift in the relative rankings of individual countries, with China moving to firstplace in 2009 up from ninth in 1999.

· China has emerged as a major systemically important trading center 'along with the United States,gaining prominence not only in terms of size but also by increasing the number of its significant tradingpartners.

· There has been a marked shift in the roles of China and Japan as strategic export destinations, withChina surpassing Japan as a more significant regional and. global consumer.

· European countries have retained their importance as "central" in the global trade network, owing moreto their interconnectedness than size.

4. Strong interconnectedness between trade and financial sectors: There is strong overlapbetween countries with trade and financial sectors of systemic importance. The IMF study shows there is analmost perfect overlap between the top 25 jurisdictions with systemic financial sectors and the top 25jurisdictions with systemic trade sectors in 2009. The only exceptions are Luxembourg and Ireland, whosesystemic importance is limited only to the financial sector, and Malaysia and Thailand, whose systemicimportance is limited only to the trade sector.5. The Growing Role of Global Supply Chains: It has been observed countries that are part of a global supplychain are expected to have a higher share of imported content in their exports because their exports rely onimporting intermediate inputs from other supply chain partners.6.Change in Technology composition of Exporters : Changes in the technology composition of exportsconfirm the rise of merging markets in global trade in high-technology products. Between 1995 and 2008, thecontribution of high-technology exports to overall export growth was more than 30 percent for China, comparedwith 26 percent for the United States, 17 percent for Germany, and only 11 percent for Japan. However,adjusting exports to exclude foreign content and show more clearly the domestic content of exports yields asomewhat different picture. In (his case the contribution of high-technology exports to overall export growth isnow much lower in China (24 percent), whereas that of the United States rises to 29 percent and Germany to 20percent.7. Rising uniformity in Exports: Export structures of EMEs are becoming increasingly similar to those ofadvanced economies. As China and other EMEs increasing their presence in sectors traditionally dominated byadvanced countries, the similarity in export structures has increased. This has increased the competitive pressure.8. The impact of relative price change: The emergence of global supply chains is likely to change the waytrade responds to relative price changes. Higher imported content in exports is likely to lower the sensitivity oftrade to changes in the exchange rate. For instance an appreciation of the domestic currency against all tradingpartners implies that while exports become more expensive, imported intermediates also become cheaper,mitigating the impact of relative price changes on trade. Advanced countries whose exports tend to beconcentrated in medium-high-technology goods are therefore likely to be more sensitive to relative pricechanges because of higher domestic value added (DVA), whereas those of EMEs are likely to be less sensitive.7. Changes in global order : The integration of rapidly growing EMEs is likely to induce a gradual shift in thesources of global demand away from advanced economies to EMEs. Since China has overtaken Japan as thesecond largest economy in the world in 2010, East Asian countries are likely to emerge as the largest tradingbloc by 2015, surpassing NAFTA and the Euro area.

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The global trade has changed over the past few decades. It has lead to increased interconnectedness andstrengthened trade new trade relations. The numbers of new key players has increased, but there has been ashift in their importance in global Trade. The relative importance has changed from advanced economies suchas Japan and the United Kingdom to EMEs like China and India.The growing role of global supply chains isassociated with increased in interconnectedness. There is also strong interconnectedness between trade andfinancial centers.

D.CONTENTIOUS ISSUES

On January 1ST 1995 GAAT was transformed into ‘the World Trade Organisation’(WTO) This transformationturned GATT from a trade agreement into a membership organization responsible for governing the contract oftrade relations among its members. The WTO’s work is not confirmed to specific agreements with specificobligations. Member countries also discuss a range of other issue in Ministerial conferences, committees orworking groups. Some are old and some are new to the GATT-WTO system. The issues become contentiousdue to disagreement between, mainly, developed and developing countries. They cover a wide range of subjectsincluding trade and investment, competition policy, transparency in government procurement, trade facilitation,trade and labour standards, trade and environment, and electronic commerce. Some of the issues are discussedbelow:

1. The Environment: The WTO has no specific agreement dealing with environment However, a number ofWTO agreements include provisions dealing with environment concerns. In the recent years there is anincreased emphasis on environmental policies. At the end of the Uruguay Round in 1994, trade ministersfrom participating countries decided to begin a comprehensive work programme on trade and environmentalin the WTO. They created the Trade and Environment Committee. This has brought environmental andsustainable development issues into the mainstream of WTO work.

When the issue is not covered by an environmental agreement, WTO rules apply. The WTO agreements areinterpreted to say two important things. First, trade restrictions cannot be imposed on a product purelybecause of the way it has been produced. Second, one country cannot reach out beyond its own territory toimpose its standards on another.

A number of developing countries are worried that certain hazardous or toxic products are being exported totheir markets without them being fully informed about the environmental or public health dangers theproducts may pose.

Developing countries want to be fully informed so as to be in a position to decide whether or not to importthem.

2. Investment and Competition: The Ministerial Conferences in Singapore in 1996 decided to set up TwoWorking Groups to look at how trade relates to investment and competition policies. The working groups’tasks were analytical and exploratory. They are not to negotiate new rules or commitments without a clearconsensus.

3. Transparency in Government purchases: The WTO has an Agreement on Government Procurement. Itis plurilateral i.e. only some WTO members have signed it so far. The agreement covers such issues astransparency and non-discrimination.

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The first phase of the group’s work was to study transparency in government procurement practices, takinginto account national policies. The second phase was to develop elements for inclusion in an agreement.

4. Trade facilitations: Cutting red-tape at the point where goods enter a country and providing easier access tothis kind of information are two ways of “facilitating”trade.

The 1966 Singapore Ministerial Conference has instructed the WTO Goods Council to start exploratory andanalytical work on the simplification of trade procedures in order to assess the scope of WTO rules in thisarea.

5. Electronic Commerce: This area of trade involves goods crossing borders electronically. The most obviousexamples of products distributed electronically are books, music and videos transmitted down telephonelines or through the internet.

The Second Ministerial Conference in Geneva in 1998 urged the WTO General Council to establish acomprehensive work programme to examine all trade-related issues arising from global electronic commerce.The General Council has adopted the plan for this work programme. In the meantime, WTO members haveagreed to continue their current practice of not imposing customs duties on electronic transmissions.

6. Labour Standards: This is the most controversial issue discussed so extensively in the WTO. It isconcerned with “core labour standards”, that is, essential standards applied to the way workers are treated.The term covers a wide range of things from use of child labour and forced labour, to the right to organizetrade unions and to strike.

At the Singapore Conference in 1996, WTO members have identified the International Labour Organization(ILO) as the competent body to deal with labour standards. There is currently no work on the subject in theWTO. The WTO agreements do not deal with any core labour standards.

7. TRIPs:The WTO’s Agreement on Trade Related Aspects of Intellectual Property Rights (TRIPs) introducedintellectual property rules into the multilateral trading system for the first time.

Inspite of its possible benefits, it is generally believed that the short-run impact of the TRIPs agreement onthe developing it likely to be negative.

Under TRIPs many countries have been seeking grater flexibility and clarity on the interpretation of theAgreement on TRIPs in order to ensure affordable access to essential medicines and life saving drugs, inkeeping with the public health concern of developing countries. Developing countries have demanded thatthe WTO should ensure that the TRIPs Agreement does not undermine the right of the WTO members toformulate their own public health policies and adopt measures for providing affordable access to medicines.The Doha declaration affirms that the TRIPs Agreement can and should be interpreted and implemented in amanner supportive of WTO members right to project public health and in particular to promote access tomedicines for all.

8. GATS:The General Agreement on Trade in services (GATs) is the first and only set of multilateral rules governinginternational trade in services. It was incorporated in response to the huge growth of the services economyover the past 30 years and the greater potential for trading services brought about by the communicationsrevolution.

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The important controversies attached to GATs are:

1) Positive list does not prevent an increase in restrictions on categories that have not been included.2) The leeway given to governments to specify different types of restrictions according to modes of supply

could create incentives to design restrictions so as to divert

9. TRIMs:The Trade related Investment Measure (TRIMs) Agreement applies only to measure that affect trade ingoods. Investment decisions exert indirect influences via the industrialization policy, trade policy, employmentpolicy etc.

The Agreement on TRIMs has been criticized for the following reasons;

1) There is no provision in the agreement to deal with the restrictive business practices of foreign investors.2) The provisions of the TRIMs agreement, when applied to developing countries are likely undermining

the strategy of self-reliant growth based on technology, capital goods, etc.While reviewing the implementation of the agreement on TRIMs developed countries are bound to makeattempts to extend the frontiers of TRIMs prohibited in the list of the agreement.

E. AGRICULTURE AND MARKET ACCESS

Introduction: Before the conclusion of the Uruguay Round, multilateral discipline did not govern trade inagricultural products, and the agricultural sector remained one of the most protected in several industrialcountries. Farm price supports and quantitative restrictions resulted in the production of large surpluses whichwere exported with heavy subsidies, thereby depressing international prices. Some developing countries havealso pursued distortional policies toward this sector.

Agreement on Agriculture: The Uruguay Round Agreement on Agriculture aims to establish a market-oriented agricultural trading system. A reform process should be initiated for this through negotiation ofcommitments on support and protection and through the establishment of strengthened and more operationalrules especially through three types of measures, viz.

· The elimination of non-tariff border measures such as quantitative restrictions and variables levies,· minimum market access commitments, and· Reduction of subsidies.The main features of the agreement on agriculture relate to improving transparency and market access, andreducing export subsidies and domestic support. Distinctions are also made between the commitments requiredof developed and developing countries. A significant achievement of the Uruguay Round is to arrive at anagreement to reduce export subsidies and domestic support to agriculture.

Domestic policies that have a direct effect on production and trade have to be cut back. Developed countriesagreed to reduce the domestic support by 20% over 6 years starting in 1995. Developing countries agreed tomake 13% cut over 10 years. Least-developed countries do not need to make any cuts.

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There are three types of provisions in the Agreement which are related to agriculture. They are:1. Trade in agricultural goods,2. Agricultural policies which have a bearing on trade and3. Patenting of seed plants and micro organisms.

Market access to Agriculture and provisions under WTO: In many cases, tariffs were the onlyform of protection for agricultural products before the Uruguay Round - the Round led to the "binding" in theWTO of a maximum level for these tariffs. For many other products, however, market access restrictionsinvolved non-tariff barriers. On the market access to Agriculture, the Uruguay Round resulted in a key systemicchange: the switch from a situation where a myriad of non-tariff measures impeded agricultural trade flows to aregime of bound tariff-only protection plus reduction commitments.The key aspects of this fundamental change have been to stimulate investment, production and trade inagriculture by(i) Making agricultural market access conditions more transparent, predictable and competitive,(ii) Establishing or strengthening the link between national and international agricultural markets, and thus(iii) Relying more prominently on the market for guiding scarce resources into their most productive uses

both within the agricultural sector and economy-wide.The important provisions under WTO agreement on agriculture are mentioned below:

1.Tarrification : The Uruguay Round negotiations aimed to remove barriers to agricultural trade. For thispurpose, a "tariffication" package was agreed which, amongst other things, provided for the replacement ofagriculture-specific non-tariff measures with a tariff which afforded an equivalent level of protection. Thetariffs resulting from the tariffication process account, on average of the developed country Members, foraround one fifth of the total number of agricultural tariff lines. For the developing country Members, this shareis considerably smaller. Following the entry into force of the Agreement on Agriculture, there is now aprohibition on agriculture-specific non-tariff measures, and the tariffs on virtually all agricultural productstraded internationally are bound in the WTO.2.Schedule of tariff concessions: Each WTO Member has a "schedule" of tariff concessions covering allagricultural products. These concessions are an integral part of the results of the Uruguay Round. The schedulesets out for each individual agricultural product, or, in some cases agricultural products defined more generally,the maximum tariff that can be applied on imports into the territory of the Member concerned. The tariffs in theschedules include those that resulted from the tariffication process, which, in many cases, are considerablyhigher than industrial tariffs, reflecting the incidence of agriculture specific non-tariff measures prior to theWTO. Many developing countries have bound their previously unbound tariffs at "ceiling" levels, i.e. at levelshigher than the applied rates prior to the WTO.Developed country Members have agreed to reduce, over a six-year period beginning in 1995, their tariffs by 36per cent on average of all agricultural products, with a minimum cut of 15 per cent for any product. Fordeveloping countries, the cuts are 24 and 10 per cent, respectively, to be implemented over ten years. Thosedeveloping country Members which bound tariffs at ceiling levels did not, in many cases, undertake reductioncommitments. Least-developed country Members were required to bind all agricultural tariffs, but not toundertake tariff reductions .3.Tariff quota commitments and minimum access opportunities :As part of the tariffication package, WTOMembers were required to maintain, for tariffied products, current import access opportunities at levelscorresponding to those existing during the 1986-88 base period. Where such "current" access had been less than5 per cent of domestic consumption of the product in question in the base period, an (additional) minimumaccess opportunity had to be opened on a most-favoured-nation basis. This was to ensure that in 1995, currentand minimum access opportunities combined represented at least 3 per cent of base period consumption and are

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progressively expanded to reach 5 per cent of that consumption in the year 2000 (developed country Members)or 2004 (developing country Members), respectively.The current and minimum access opportunities are generally implemented in the form of tariff quotas. In caseof minimum access, the applicable duty was required to be low or minimal, low that is either in absolute termsor, at least, in relation to the "normal" ordinary customs duty that applies to any imports outside the tariff quotaIn total, there are 1,374 individual tariff quotas. These tariff quotas constitute binding commitments as opposedto autonomous tariff quotas which Members may establish at any time, for example, in order to stabilize thedomestic price after a poor harvest.4. The prohibition of non-tariff barrier measures: Article 4.2 of the Agreement on Agriculture prohibits theuse of agriculture specific non-tariff measures. Such measures include quantitative import restrictions, variableimport levies, minimum import prices, discretionary import licensing procedures, voluntary export restraintagreements and non-tariff measures maintained through state-trading enterprises. All similar border measuresother than "normal customs duties" are also no longer permitted.5. Special treatment : The Agreement on Agriculture contains a "special treatment" clause under which fourcountries were permitted, subject to strictly circumscribed conditions, to maintain non-tariff border measures oncertain products during the period of tariff reductions (with the possibility of extending the special treatment,subject to further negotiations). As one of the conditions, market access in the form of progressively increasingimport quotas has to be provided for the products concerned. The products and countries concerned are: rice inthe case of Japan, Korea and the Philippines; and cheese and sheep meat in the case of Israel. As of 1 April1999, Japan has ceased to apply special treatment.6. The special safeguard provisions: As a third element of the tariffication package, Members have the right toinvoke for tariffied products the special safeguard provisions of the Agreement on Agriculture (Article 5),provided that a reservation to this effect ("SSG") appears beside the products concerned in the relevantMember's schedule. The right make use of the special safeguard provisions has been reserved by 38 Members,and for a limited number of products in each case. The special safeguard provisions allow the imposition of anadditional tariff where certain criteria are met. The criteria involve either a specified surge in imports (volumetrigger), or, on a shipment by shipment basis, a fall of the import price below a specified reference price (pricetrigger). In case of the volume trigger, the higher duties only apply until the end of the year in question. In caseof the price trigger, any additional duty can only be imposed on the shipment concerned. The additional dutiescannot be applied to imports taking place within tariff quotas.7. Notification obligations: The bound agricultural tariffs and the tariff quota commitments are contained inMembers' schedules. There is no requirement for Members to notify their tariffs to the Committee onAgriculture. Applied tariffs are, however, to be submitted to other bodies of the WTO, including the Committeeon Market Access and in the context of the Trade Policy Review mechanism. Members with tariff quotas andthe right to use the special safeguard provisions are required to make both ad hoc and annual notifications to theCommittee on Agriculture. At the beginning of the implementation period, an "up-front" notification was due,setting out how each tariff quota is to be administered.Members with the right to use the special safeguard provisions must notify its first use in order to allow itstrading partners to establish the parameters of the special safeguard action, such as the volume or price used totrigger the special safeguard action. In the case of the price trigger, an upfront notification of the relevantreference prices has also been possible. In addition, an annual summary notification of the use of the specialsafeguard is required.

F. TRADE AND ENVIRONMENTAL ISSUES

Introduction: Sustainable development and protection and preservation of the environment are fundamentalgoals of the WTO. They are enshrined in the Marrakesh Agreement, which established the WTO, andcomplement the WTO’s objective to reduce trade barriers and eliminate discriminatory treatment in international

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trade relations. While there is no specific agreement dealing with the environment, under WTO rulesmembers can adopt trade-related measures aimed at protecting the environment provided a number ofconditions to avoid the misuse of such measures for protectionist ends are fulfilled.

The WTO contributes to protection and preservation of the environment through its objective of tradeopenness, through its rules and enforcement mechanism, through work in different WTO bodies, andthrough ongoing efforts under the Doha Development Agenda. The Doha Agenda includes specificnegotiations on trade and environment and some tasks assigned to the regular Trade and EnvironmentCommittee.

Sustainable development and environmental protection: Allowing for the optimal use of the world’s resources in accordance with the objective of  sustainable development and seeking to protect and preservethe environment are fundamental to the WTO. These goals, enshrined in the Preamble of the  MarrakeshAgreement, go hand in hand with the WTO’s objective to reduce trade barriers and eliminate discriminatorytreatment in international trade relations. For WTO members, the aims of upholding and safeguarding an openand non-discriminatory multilateral trading system, on the one hand, and acting for the protection of theenvironment and the promotion of sustainable development, on the other, can and must be mutually supportive.

Trade liberalization and the environment: An important element of the WTO’s contribution tosustainable development and protection of the environment comes in the form of furthering trade opening ingoods and services to promote economic development, and by providing stable and predictable conditionsthat enhance the possibility of innovation. This promotes the efficient allocation of resources, economicgrowth and increased income levels that in turn provide additional possibilities for protecting the environment.

WTO rules and environmental protection: The commitment of WTO members to sustainabledevelopment and the environment can also be seen in WTO rules. In general terms the rules, with theirfundamental principles of non-discrimination, transparency and predictability, help set the frameworkfor members to design and implement measures to address environmental concerns. Moreover, WTO rules,including specialized agreements such as the Agreement on Technical Barriers to trade and the agreementof Sanitary and Phytos sanitary measures, provide scope for environmental objectives to be followed and fornecessary trade-related measures to be adopted. WTO rules set up the appropriate balance between the right ofmembers to take regulatory measures, including trade restrictions, to achieve legitimate policy objectives (e.g.,protection of human, animal or plant life or health, and natural resources) and the rights of other members underbasic trade disciplines.

WTO Dispute settlement body and environment related trade measures:Since the entry intoforce of the WTO in 1995, the WTO Dispute Settlement Body has had to deal with a number of disputesconcerning environment-related trade measures. Such measures have sought to achieve a variety of policyobjectives.

WTO institutions of trade and environment linkages: The WTO also supports sustainabledevelopment and the environment through its specialized committees and bodies. One unique institutionalvenue is the Committee on trade and environment (CTE). As a forum for dialogue on trade and theenvironment, the Committee is an incubator for ideas on how to move the discussion forward. Already, this isbearing fruit. Some issues first raised in the CTE have become fully-fledged negotiations — for instance, onfisheries subsidies and on the relationship between the WTO and multilateral environmental agreements(MEAs). Other WTO bodies are also important. For example, the committee administering the Technical (whichdeals with regulations, standards, testing and certification procedures) is where governments share information

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on actions they are taking and discuss how some environmental regulations may affect trade.

International efforts on the environment:Since environmental problems often transcend nationalborders, the response must involve concerted action at the international level. WTO members have longrecognized the need for coherence amongst international institutions in addressing global environmentalchallenges. The current negotiations on the WTO-MEA relationship provide a unique opportunity for creatingpositive synergies between the trade and environment agendas at the international level. In addition, there isregular and routine contact between the WTO Secretariat and secretariats of multilateral environmentalagreements.

The Doha Development Agenda and the environment:The Doha round negotiations givesmembers a chance to achieve an even more efficient allocation of resources on a global scale through thecontinued reduction of obstacles to trade. The Round is also an opportunity to pursue win-win-win results fortrade, development and the environment. For example, the Doha Round is the first time environmental issueshave featured explicitly in the context of a multilateral trade negotiation and the overarching objective is toenhance the mutual supportiveness of trade and environment. Members are working to liberalize trade in goodsand services that can benefit the environment. They are also discussing ways to maintain a harmonious co-existence between WTO rules and the specific trade obligations in various agreements that have been negotiatedmultilaterally to protect the environment. Other parts of the Doha negotiations are also relevant to theenvironment, for example aspects of the agriculture negotiations and also disciplines on fisheries subsidies. TheDoha Development Agenda also has a section specifying the priority items in the CTE’s regular work.

Situation after Doha round:

1. Greater market openings for environmental goods and services :As part of the Doha mandate, theWTO members agreed to negotiate greater market opening in environmental goods and services, therelationship between WTO rules and trade obligations set out in multilateral environmental agreements(MEAs) and on the exchange of information between those institutions. Agreement in these areas wouldundoubtedly help address climate change.

2. A more open market for environmental goods and services: The elimination or reduction of barriers totrade in this area will benefit the environment by improving countries’ability to obtain high qualityenvironmental goods. It will facilitate access to these types of goods and foster a better dissemination ofenvironmental technologies at lower costs. According to a recent World Bank study on trade and climatechange, elimination of both tariffs and non-tariff barriers to clean technologies could result in a 14%increase in trade in these products.The goods which fall within a broad range of environmental categories,are air pollution control, renewable energy, waste management and water and wastewater treatment. Someof these products are also relevant to climate change mitigation. They include products generatingrenewable energy such as wind and hydropower turbines, solar water heaters. Members are alsoconsidering issues related to non-tariff barriers, transfer of technology, special and differential treatment.

3. More coherence between trade and environment rules :To bring more coherence between trade andenvironment rules, members have made a number of proposals highlighting the importance of nationalcoordination between trade and environment experts, particularly in the context of the negotiation andimplementation of MEAs. Proposals have also underscored the value of national experience-sharing in thisarea, which can enhance the mutually supportive relationship of the trade and environment regimes.

4. Better cooperation between the WTO and MEAs :There is a strong support for consolidating some

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practices and mechanisms for co-operation between the WTO and the MEAs. Concrete suggestions havebeen made regarding information exchange sessions with MEAs possibly through annual sessions,document exchange and future collaboration in the context of technical assistance and capacity buildingactivities. The proposals set out criteria that could guide WTO committees in their consideration ofrequests for observer status by MEAs.

5. Fisheries subsidies: Reducing fisheries subsidies is also part of the Doha mandate and could significantlyreduce overfishing which fosters species preservation. Members agreed to eliminate subsidies that distorttrade and seriously undermine the sustainable exploitation of fish stocks. Members are currently discussinghow this reduction could be defined and applied. An agreement would constitute a triple-win for trade,environment and development which is at the centre of this negotiation.

G. DISPUTE SETTLEMENT MECHANISMDispute settlement is the central pillar of the multilateral trading system. The WTO’s unique contribution to thestability of the global economy is its dispute settlement mechanism. Without a means of settling disputes, therules-based system would be less effective because the rules-based system would be less effective because therules could not be enforced. The WTO’s procedure makes the trading system more secure and predictable. Thesystem is based on clearly defined rules, with timetables for completing a case. The priority is to settle disputes,through consultations if possible.

Disputes in the WTO are essentially about broken promises. A dispute arises when one country adopts a tradepolicy measure or takes some action that one or more fellow WTO members considers to be breaking the WTOagreements, or to be a failure to live up to the obligation. A third group of countries can declare that they havean interest in the case and enjoy some rights.

Settling DisputesSettling disputes is the responsibility of the Dispute Settlement Body (the General Council in another guise).The Dispute Settlement Body has the sole authority to establish “panels”of experts to consider the case, and toaccept or reject the panels finding or the results of an appeal.

It monitors the implementation of the rulings and recommendations and has the power to authorize retaliationwhen a country does not comply with a ruling. The dispute settlement involves various stages.

First stage: ConsultationBefore taking any other actions the countries in dispute have to talk to each other to see if they can settle theirdifferences by themselves.

Second Stage: The PanelIf consultations fail, the complaining country can ask for a panel to be appointed. The country “in the dock”canblock the creation of a panel once, but when the Dispute Settlement Body meets for a second time, theappointment can no longer be blocked.

The panel’s final report should normally be given to the parties to the dispute within 6 months and in case ofurgency within 3 months.The agreement describes in some detail how the panels are to work. The main stages are:

1) Before the first hearing: Each side in the dispute presents its case in writing to the panel.

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2) First hearing: the case for the complaining country and defence : The complaining country (or countries),the responding country, and those that have announced they have an interest in the dispute, make their case atthe panel’s first hearing.3) Rebuttals (disapprovals): The countries involved submit written rebuttals and present oral arguments at ehpanel’s second meeting.

4) Experts: If one side raises scientific or other technical matters, the panel may consult experts or appoint anexpert review group to prepare and advisory report.

5) First Draft: The panel submits the descriptive (factual and argument) sections of its report to the two sides,giving them two weeks to comment. This report does not include findings and conclusions.

6) Interim Report: The panel then submits an interim report; including its findings and conclusions, to the twosides, giving them one week to ask for a view.

7) Review: The period of review must not exceed two weeks. During that time, the panel may hold additionalmeetings with the two sides.

8) Final Report: A final report is submitted to the two sides and three weeks later, it is circulated to all WTOmembers.

If the panel decides that the disputed trade measure does break a WTO agreement or an obligation, itrecommends that the measures be made to confirm with WTO rules. The panel may suggest how this could bedone.

9) The Report Becomes a Ruling: The report becomes the Dispute Settlement Body’s ruling orrecommendation within 60 days unless a consensus rejects it. Both sides can appeal the report (and in somecases both sides do).

Third Stage: The AppealsEither side can appeal a panel’s ruling. Sometimes both sides do so. Appeals have to be based on points of lawsuch as legal interpretation –they cannot reexamine evidence or examine new issues.

Each appeal is heard by three members of a permanent seven-member Appellate Body set up by the DisputeSettlement Body and broadly representing the range of WTO membership.

The appeal can uphold, modify or reverse the panel’s legal findings and conclusions. Normally appeals shouldnot last more than 60 days, with an absolute maximum of 90 days.

The Dispute Settlement Body has to accept or reject the appeals report within 30 days –and rejection is onlypossible by consensus.

The Procedure after the case has been decided:If a country has done something wrong, it should swiftly correct its fault. It must state is intension to do so at aDispute Settlement Body meeting held within 30 days of the report’s adoption. It it fails to act within this periodit has to enter into negotiations with the complaining country (or countries) in order to determine mutually–acceptable compensation.

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If after 20 days, no satisfactory compensation is agreed, the complaining side may ask the Dispute SettlementBody for permission to impose limited trade sanctions against the other side. The Dispute Settlement Body mustgrant this authorization within 30 days of the expiry of the “reasonable period of time”unless there is aconsensus against the request. In any case, the Dispute Settlement Body monitors how adopted rulings areimplemented.