1. Professor and Chairperson (MDPs)
RTAs and WTO
Dr. (Mrs.) Vijaya Katti
Professor and Chairperson (MDPs)
IIFT, New Delhi

2. Regional Trade Agreements (RTAs)
Conceptual Economic Issues
Recent Trends in RTAs
Implications for India
Relationship with Multilateral Trading System

3. Share of intra-regional exports in total exports: 2002 (%)
Recent Trends in RTAs
Growth in Number of RTAs
Intra-Regional Trade of Major RTAs
Types of RTAs
RTA
Share of intra-regional exports in total exports: 2002 (%)
EU (15)
61.6
NAFTA (3)
56.5
AFTA (10)
24.0
CEFTA (7)
12.2
MERCOSUR (4)
11.5
ANDEAN (5)
10.2

4. Implications for India
India’s Recent Regional Trading Engagements
Bilateral: India-Nepal, India-Bhutan, India-Sri Lanka, India-Thailand, India- ASEAN, India-MERCOSUR, India-Singapore, India-China
Sub Regional: BIMSTEC, BBIN, Bangkok Agreement
Regional: SAPTA, SAFTA
Economic Implications: Trade, Investment, Static & Dynamic Gains
Trade Gains: Goods and Services (Banking, Tourism, Infrastructure, Professional etc.)
Potentials for Investment flows : Industrial Restructuring
Technology Exchange
Human Resource Development

5. Relationship with Multilateral Trading System
Stepping Stone towards Multilateralism
GATT Article XXIV, Enabling Clause, GATS Article V
Three Criteria
Transparency
Deep Intra-regional Trade Liberalization
Neutrality vis-à-vis non-parties’ Trade

6. Cont… Other Issues: Problems
Services
Investment
IPRs
Competition Policy
Technical Standards
Government Procurement
Problems
Inconsistency
Interpretational
Institutional
Harmonious Relationship between RTAs and WTO Desired

7. BASIC GATT PRINCIPLES MFN (Most Favoured Nation Treatment)
TRADE TO BE REGULATED BY CUSTOMS DUTY ONLY
DUTIES TO BE BOUND
NATIONAL TREATMENT

8. WTO RULES Permitted under Article XXIV of GATT 1994.
Exception to MFN treatment within the Rules subject to fulfillment of conditions:
items on which there is substantial trade to be covered
the phase out of duties should be within a reasonable period of time
it should not have trade distorting effect

9. M.F.N. EXCEPTIONS
Exception to MFN is also available under the “Enabling Clause Decision” of wherein the WTO members may accord differential and more favourable treatment to developing countries, without according such treatment to other Contracting Parties.

10. The Global Context Regional Trading Arrangements
RTAs are viewed by most countries as building blocks towards eventual global free trade.
More than 200 RTAs have been notified to GATT/WTO.
150 of these are still in force.
250 RTAs are expected by 2005.

11. STAGES OF ECONOMIC DEVELOPMENT
MONETARY
UNION
COMMON
EXTERNAL
TARIFF (CET)
FTA
PTA
ECONOMIC
COOPERATION

12. Regional Trading Arrangements
RTAs can be used as a tool for –
Material management
Cheaper imports – domestic prices in control
Better quality products at competitive price
Better market access
Investments flow - JVs
Coverage of Services
Mutual recognition of standards & laboratories
Trade facilitation, Harmonisation of Customs procedures etc.

13. Objectives: Components: Rules of Origin local content / value addition
to prevent trade diversion
enhance intra-regional trade
Components:
local content / value addition
manufacturing process
transformation

14. Free Trade Areas
To eliminate completely quantitative trade restrictions and customs tariffs against each other’s goods
Member countries retain the sovereign power to decide the trade policies to be imposed on non-members

15. Similar to free trade area
Customs Union
Similar to free trade area
Adopt uniform import tariffs and common quota restrictions to non-members
Weakened the ability of member countries to determine national trade policies independently

16. Common Markets Similar to customs union
Plus free movement of factors of production
A significant reduction of national sovereignty
An example of a common market is the EEC which is composed of Belgium, Denmark, France, Germany, Ireland , Italy, Luxemburg, Neitherlands and the UK.

17. Economic Unions Similar to common markets
Harmonization of monetary, fiscal and social policies
A single common policy as an essential prerequisite for the effective functioning of the union
An example of an economic union is the Benelux which is the economic union formed by Belgium, the Netherlands and Luxembourg.
Infact Belgium, Netherlands and Luxemburg formed a customs union in as early as 1948 and they became an economic union in 1960.

18. The different forms of RTAs Represent different degrees of Economic integration.
They start from the lowest degree Of economic integration (i.e. a Preferential trading club ) and go Through progressively higher degrees until the most complete Form of economic integration (i.e.economic union).

19. The theory of Customs Union
Basically deals with two concepts
Trade Creation
Trade Diversion
These two concepts were first put forth by
Jacob Viner in early 1950’s .

20. Trade Creation The formation of a customs Union Causes some
products which were formally produced domestically
to be imported from other partner countries-the tariffs
on such imports are eliminated. Since there is pro-
duction shift from a high cost domestic producer
to a lower cost producer in a partner country-it is trade Creation.

21. Trade Diversion
Customs Union also causes some Products which were formerly imported from the rest of the world to
Imported from the partner country-Thanks to the newly formed geogra
phical tariff discrimination. Here the
Shift in production is from a lower
Cost producer in the rest of the world
To a higher cost producer in a partner
Country-trade diversion.

22. The fundamental notion behind these
Concepts is that trade transfers goods
From a high cost region to a low
Cost region. Thus trade increases
Welfare by reducing costs or alterna
tively by increasing world income.
It is in this sense trade creation is
Conceived to be beneficial and trade
Creation detrimental.

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

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

25. Costs of RTAs For member countries: 1. Increase in competition
2. Loss of national sovereignty
3. Increase in unemployment in some sectors
4. Loss of tax revenues due to the relocation of companies to low-cost areas

26. Cont… For non-member countries: 1. Trade diversion
2. Deterioration in the terms-of-trade due
to a fall in export demand
3. The risk of being isolated if trade war occurs

27. The View of WTO
In the conclusion of a 1995 study by the WTO Secretariat
“... To a much greater extent than is often acknowledged, regional and multilateral integration initiatives are complements rather than alternatives in the pursuit of more open trade.”

28. GATT Article XXIV
The agreement must eliminate substantially all barriers and discrimination to trade between the parties
The agreement must cover substantially all trade between the parties .
The terms of access for non-members must not be worse than before the agreement went into effect

29. Committee on Regional Trade Agreements (CRTA)
Established in 1996
To centralize the effort of working parties in one body
To examine in detail future regional trade agreements notified to the WTO
To provide a common platform to discuss ways of dealing with the issue of regionalism in the WTO

30. Open Regionalism The criteria 1. Trade barriers against nonmembers
should not be raised
2. Nonmember countries are eligible to
join the group on the basis of clear and
reasonable criteria for accession

31. Regionalism that is consistent with globalism
Cont…
Regionalism that is consistent with globalism
The way for regionalism to conform to the multilateral trading system
Still difficult to achieve
1. Discriminatory benefit offered is the
source of incentive to join the RTA
2. Open accession is not welcomed by all
members due to different reasons

32. Conclusion Too early to draw a conclusion?
A clear trend towards regionalism
Inherent difficulties in building the multilateral trading system
Depends on the future development of major RTAs
Few major regional trading blocs may replace the multilateral trading system
Wait and see

33. The Regional Context
South Asian countries are exchanging tariff preferences under SAPTA.
India, Sri Lanka and Bangladesh are members of the Bangkok Agreement.
South Asian countries are also exchanging preferences under GSTP (Global System of Trade Preferences).
India, Sri Lanka and Bangladesh are also members of other economic groupings like BIMST-EC, IOR-ARC.

34. South Asian Regional Co operation
SAARC was set up as a forum for regional cooperation by adoption of its Charter in its first Summit in Dhaka in December 1985.
SAPTA was signed in 1993 and entered into force in December 1995.
SAPTA covers areas of tariff, para tariff, non tariff and direct trade measures.

35. SAPTA It provides special and favourable treatment to the LDCs.
The First Round was largely symbolic.
In the Second Round a combination of Sectoral and product by product approach was adopted.
In all India gave tariff concessions on 997 tariff lines during the two Rounds.

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

37. Free Trade in South Asia
The Male Summit in May 1997 called for achievement of the South Asian Free Trade Area (SAFTA) by 2001 AD.
This was modified to signing of the SAFTA Agreement by 2001 AD in the Colombo Summit in July 1998.
At the 11th SAARC Summit, the Heads of Nations agreed to revise the date for putting the SAFTA Treaty in place by end of 2002.

38. Cont…
The first meeting of Committee of Experts was held in Kathmandu in July, 1999 wherein the Terms of Reference for the drafting of the SAFTA treaty were finalised.
While the SAFTA Treaty is to be put in place by 2001, no time frame has yet been established for achieving SAFTA.
Thus achievement of a Free Trade Area remains an open ended objective.

39. BANGKOK AGREEMENT (BA)
The Bangkok Agreement was signed in July 1975 for contributing to expansion in trade through exchange of tariff concessions among developing country members of the ESCAP region.
The Agreement is currently operational between Bangladesh, India, Republic of Korea and Sri Lanka.
China’s accession to the Bangkok Agreement was finalised in the meeting of the Standing Committee of the Bangkok Agreement in April 2000.
The Third Round of BA has begun.
With the entry of China the B.A. will gain momentum as now two major countries with huge population are the members, with a market size of more than 2.2 billion .

40. Generalised System Of Preferences
Unilateral and generalised tariff concessions given by the developed countries to the developing countries under the GSP Scheme.
Important to India are GSP given by USA, EU, Japan etc.
Rules of Origin to be fulfilled.
Graduation process defined for no concessions.

41. India and Nepal Treaty on Transit and Trade India Bhutan Trade treaty
The Bilateral Context
India and Nepal Treaty on Transit and Trade
India Bhutan Trade treaty
India Sri Lanka Free Trade Agreement

42. INDO-NEPAL TREATY
On 2nd March, 2002, the validity of India-Nepal Treaty of Trade and Protocol was extended for a period of 5 years w.e.f
Rules of Origin along with local content and substantial manufacturing clause introduced.
TRQ for Vanaspati, acrylic yarn, copper products and zinc oxide introduced.

43. INDO-BHUTAN TREATY
Agreement on Trade and Commerce between India and Bhutan signed on 28th February, 1995
Preferential market access allowed for products originating from respective countries
All exports and imports of Bhutan to and from countries other than India will be free from and not subject to customs duties and trade restrictions of the Government of India.

44. INDIA-SRI LANKA FTA
PM Vajpayee offered to consider bilateral FTAs with our South-Asian neighbours in his address in the Colombo SAARC Summit.
The FTA was signed by PM of India and President of Sri Lanka on 28th December 1998.
The Agreement envisages phasing out of tariff on all products except for a limited number of items in the Negative List, over a period of time. While India would complete the process of tariff elimination over a period of 3 years, Sri Lanka would achieve this over 8 years.

45. CONT…
The FTA has been implemented with the issuance of Customs Notification by Sri Lanka on 15th February 2000 and by India on 1st March 2000.
Procedural modalities on import of Quota of tea and textile items have been finalised.
The first meeting of the Working Group on Customs was held on September 2000 in Colombo.
The first meeting of the JMC was held on 6 – 7 June 2002 in New Delhi.

46. BIMST- EC
The Initiative was taken by Thailand in 1994 and with the admission of Myanmar in December 1997 it was named as “Bangladesh, India, Myanmar, Sri Lanka, Thailand Economic Cooperation” (BIMST-EC) to serve as a bridge linking ASEAN and SAARC.
6 areas of Trade and Investment, Technology, Transportation and Communication, Energy, Tourism and Fisheries were identified for cooperation
The Second Economic/ Trade Ministers meeting in April 2000 decided to constitute an Inter Governmental Group (IGG) to prepare a Concept Paper on possible approaches towards a PTA leading to an FTA.

47. Cont…
IGG’s recommendation was considered by the Ministers in their third meeting held in Yangon in 2001 and a Group of Experts was constituted to examine in detail the two approaches.
The GOE consists of the representatives of Government, Business and the Academia.
GOE has recommended to go for a ‘negative list approach’ for FTA in BIMST-EC.
A final decision will be taken in the next Trade and Economic Ministers Meeting, scheduled to be held in Sri Lanka.

48. INDIAN OCEAN RIM - ASSOCIATION FOR REGIONAL COOPERATION (IOR - ARC)
IOR - ARC was founded in 1995 with the first meeting on Working Group held in Mauritius.
The focus for economic cooperation is in the areas of Trade Facilitation, Promotion and Liberalization, Promotion of Foreign Investment, Promotion of Scientific and Technological exchanges, Promotion of Tourism, Promotion of Movement of Natural persons and Service providers, Development of Infrastructure and Human Resources

49. Consider enlargement of products Deepening of concessions
STEPS AHEAD ……
Consider enlargement of products
Deepening of concessions
Remove non tariff barriers
Include coverage of “Services, Investments etc.” under the Agreements
Regular interaction among the business and academia
Government to play more pro-active role

50. Future plans Concentrate on ‘Trade facilitation measures’.
Harmonisation of customs documents, procedures and regulations
Harmonisation of standards.
Promotion of Joint ventures, technology transfers
Consider devising means for having industrial linkages (backward-forward linkages) to promote intra-regional investments.

51. Study the areas of complementarities, looking for global market
Cont…
Study the areas of complementarities, looking for global market
Organise workshops, seminars etc at regular intervals
Study and recommend the areas of JV, and enhancing intra regional investments.
Dissemination of information

52. Bangladesh Egypt South Africa Oman Chile Singapore
NEW FTA PROPOSALS
We are also studying the feasibility of having PTAs/FTAs with the following countries:
Bangladesh Egypt South Africa
Oman Chile Singapore
Mauritius Venezuela Brazil
Thailand
Argentina Colombia USA
EU Morocco Syria

53. THANK YOU Dr. (Mrs.) Vijaya Katti Professor and Chairperson (MDPs)
Contact :
Dr. (Mrs.) Vijaya Katti
Professor and Chairperson (MDPs)
IIFT, New Delhi