RTAs and WTO

1
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
Recent Trends in RTAs

• Growth in Number of RTAs
• Intra-Regional Trade of Major RTAs
• Types of RTAs

4
Implications for India

• Indias 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
• 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 1979 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 ContextRegional 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
Rules of Origin

• Objectives
• 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
  others goods
• Member countries retain the sovereign power to
  decide the trade policies to be imposed on
  non-members

15
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 1950s .

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
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
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.
• Chinas 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
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. 6.3.2002.
• Rules of Origin along with local content and
  substantial manufacturing clause introduced.
• TRQ for Vanaspati, acrylic yarn, copper products
  and zinc oxide introduced.

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 14-15 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

• IGGs 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
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
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
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

• Contact
• Dr. (Mrs.) Vijaya Katti
• Professor and Chairperson (MDPs)
• IIFT, New Delhi
• E-mail vijayakatti_at_iift.ac.in vckatti_at_yahoo.com