regionalism as against globalization part 3 by hemant k batra

8/8/2019 Regionalism as Against Globalization Part 3 by Hemant K Batra

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Regionalism As Against Globalization Part 3 by Hemant K

Batra

Regional trading arrangements ± reasons for popularity: Regional trading arrangements andFTAs have increasingly become the preferred mode of trade liberalization amongst thecountries of a region even though they may be members of WTO. The reason for this can betraced to freedom that such arrangements provide for addressing the trade issues peculiar to aregion or the member countries of an FTA.

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

q Material management

q Cheaper imports ± domestic prices in control

q Better quality products at competitive price

q Better market access

q Investments flow ± JVs

q Coverage of Services

q Mutual recognition of standards & laboratories

q Trade facilitation, Harmonisation of Customs procedures etc.

The coverage and depth of preferential treatment varies from one FTA/RTA to another. ModernFTAs/RTAs, and not exclusively those linking the most developed economies, tend to go far beyond tariff-cutting exercises. They provide for increasingly complex regulations governingintra-trade (e.g. with respect to standards, safeguard provisions, customs administration, etc.)and they often also provide for a preferential regulatory framework for mutual services trade.The most sophisticated FTAs/RTAs go beyond traditional trade policy mechanisms, to includeregional rules on investment, competition, environment and labour.

Regionalism a Necessity: Also one of the primary reason for the increase in the regional FreeTrade Agreements is that regionalism and regional FTAs are the only path available for manydeveloping countries to integrate into the world economy, as the best way to learn to compete isby competing. Initial competition between neighboring states that understand the needs of weaker states leads to strengthening of the economies of the weaker states so as to be able toface global competition. Inadequate national capacity to produce and sell on world markets isthe real reason for the increasing importance of regionalism. For weak economies the pooling of regional resources such as land, livestock and agricultural products and development of intra-regional trade is the only practical method for building the required capacity. A higher level of cooperation would enable countries in a region to cope with development problems and with acomplex business environment. The restructuring of productive sectors would be more feasibleon a regional than on a national basis. Individual countries don¶t possess enough bargainingclout at multilateral forums. Group effort and cooperation on negotiating table will undoubtedly



enhance the Bargaining strength. Hence regional trade groupings can successfully protect thetrade interests of their member countries at multilateral trade forums like WTO.

Potential negative effects of regional trade agreements: Still, while regionalism had much tocontribute, it was not an easy substitute for multilateralism. In some instances, regional tradingarrangements could even impede or divert, rather than promote, trade. However in order for

regional economic integration to be a useful tool in economic development, it must not be usedas an excuse for protectionism. Regionalism and multilateralism are complementary notions thatreinforce each other as long as regionalism is open.

FTAs/RTAs can complement the multilateral trading system, help to build and strengthen it. Butby their very nature FTAs/RTAs are discriminatory: they are a departure from the MFN principle,a cornerstone of the multilateral trading system. Their effects on global trade liberalization andeconomic growth are not clear given that the regional economic impact of FTAs/RTAs is ex anteinherently ambiguous. Though FTAs/RTAs are designed to the advantage of signatorycountries, expected benefits may be undercut if distortions in resource allocation, as well astrade and investment diversion, potentially present in any RTA process, are not minimized, if noteliminated altogether. For example, India today finds itself in a mess in the case of the Indo-Sri

Lanka FTA. Since the rules of origin were not given the due importance in the FTA, India hasnot only lost revenue but it has also been victim of rampant dumping, causing several domesticunits to turn sick.

The increase in FTAs/RTAs, coupled with the preference shown for concluding bilateral free-trade agreements, has produced the phenomenon of overlapping membership. Because eachFTA/RTA will tend to develop its own mini-trade regime, the coexistence in a single country of differing trade rules applying to different FTA/RTA partners has become a frequent feature. Thiscan hamper trade flows merely by the costs involved for traders in meeting multiple sets of traderules.

The proliferation of FTAs/RTAs, especially as their scope broadens to include policy areas notregulated multilaterally, increases the risks of inconsistencies in the rules and proceduresamong FTAs/RTAs themselves, and between FTAs/RTAs and the multilateral framework. Thisis likely to give rise to regulatory confusion, distortion of regional markets, and severeimplementation problems, especially where there are overlapping FTAs/RTAs.

The most powerful economic arguments against regional and bilateral trade agreements arethat they can cause trade diversion and trade distortions and ultimately undermine themultilateral system because of their discriminatory nature. In some cases, preferential rules of origin have proven to stifle technological developments, networks and joint manufacturing, andto unduly restrict third-country sourcing, leading to trade diversion. Moreover, they can createobstacles to trade facilitation by increasing administrative complexity at customs. One specificexample is the proliferation of different preferential rules of origin ± a prominent source of tradecosts and complexity in today¶s global marketplace in which companies depend on the rapiddelivery of products and components from multiple overseas sources. Such effects are costly tobusiness and detrimental to the regional trading areas. Harmonization and simplification of preferential rules of origin and the cumulation of origin could alleviate some of these obstaclesto trade facilitation.

Another problem with turning down freer trade for fear of trade diversion is that it is very difficult,before the fact, to determine whether thwarted wealth creation caused by trade diversion will



offset new wealth creation that results from more open markets. That is because it is notpossible to predict which enterprises will best serve the needs of consumers at any given time.Indeed, the whole point of having competition in a market is to separate successful fromunsuccessful producers.

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

liberty as the price for freer trade. In such a case, a potential member must make a pragmatic judgment about whether the benefits in the short and medium term outweigh the drawbacks andwhether the prospects in the future are for freedom from regulations or a heavier regulatoryburden.

In any case an FTAs¶/RTAs net economic impact will certainly depend on its own architectureand the choice of its major internal parameters (in particular, the depth of trade liberalization andsectoral coverage). Concurrent MFN trade liberalization by FTA/RTA parties, either unilaterallyor in the context of multilateral trade negotiations, can play an important role in defusingpotential distortions, both at the regional and at the global level. Hence the most of negativeeffects of an FTA can either be offset by proper policy formulation or their benefits far outweightheir negative effects.

In fact, there is no contradiction between greater regional integration and fully taking part inglobal trade liberalization. Contractual trade relations between neighboring countries,strengthened political ties and exchanges between civil society could all bolster the multilateralprocess and reinforce political stability. In reality regional trade arrangements hold out better prospects for dealing with difficult trade problems that are peculiar to a region than does theGATT/WTO mechanism. But the danger that deepening trade will simply deepen failedregulatory policies is also greater.

Bilateral or regional trade agreements that simply remove tariffs and traditional trade barriersare generally acceptable even if they divert some trade. This is because first, such agreementsincrease economic freedom. Second, they actually hold less danger of being a vehicle for theexport of failed regulatory policies. Third, it is difficult to determine before the fact whatarrangements will be more trade diverting in the long term than the status quo.

By Hemant Batra, Lead Partner, Kaden Boriss Legal LLP, India; Vice President, SAARCLAW;

Chairperson, IICLAM, Singapore; Advisory Board Member, OIC, USA

regionalism as against globalization part 3 by hemant k batra

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