Free trade in South Asia needs
synergy By Durgadas Roy
If the
success of regional economic integration in other parts
of the world is any guide, a free trade arrangement
among the South Asian countries - namely India,
Pakistan, Bangladesh, Sri Lanka, Nepal, Bhutan and the
Maldives - will be a big step towards their greater
economic welfare.
India already has signed a
free trade agreement (FTA) with Thailand, is set to sign
one with the Association of Southeast Asian Nations
(ASEAN), and expects to sign another specifically with
Singapore early next year. All these agreements could be
the first step towards closer economic integration among
the nations in this part of the world.
On the
Asian continent, while several Regional Trade Agreements
(RTAs) involving ASEAN and Mercosur (Argentina, Brazil,
Paraguay and Uruguay) have come into being, the South
Asian Preferential Trade Agreement, the South Asian Free
Trade Area, and the ASEAN Free Trade Area, if seriously
implemented, should complement each other, thus making
regional economic integration viable. To this end, the
trade policies of these countries must further the cause
of regional cooperation towards developing their
external sector.
While advanced countries have
successfully formed their own larger RTAs, such as the
North American Free Trade Agreement and the European
Union's accord - there is every possibility that South
Asian countries will become marginalized unless they can
present their arguments with one voice and a collective
responsibility. Once they realize that free trade among
themselves is a sine qua non for their economic
uplift, there should be no foot-dragging in translating
this concept into reality.
What made RTAs so
popular? According to a recent World Bank policy
research report, this is a period of qualitative and
quantitative changes in regional integration, and these
changes call for closer cooperation among the nations of
a particular area, like South Asia. The strongest
argument for removing trade barriers, says the report,
is the recognition that effective integration
necessitates more than reducing tariffs and quotas. Many
other trade barriers have the effect of segmenting
markets and obstructing the free flow of goods,
services, investments and development schemes that call
for joint efforts. Therefore, wide ranging policy
measures are essential for removing all kinds of tariff
and non-tariff barriers.
Moreover, a direct move
from closed to open regionalism has the advantage of
being more outward-oriented and more committed to
liberalizing, rather than controlling world trade and
commerce. From the point of view of globalization, this
advantage for Asian countries in general and South Asian
countries in particular cannot be exaggerated. No wonder
the World Bank Experts Group has given special emphasis
to this point while examining the economic problems of
South Asia.
In a liberal trading regime, South
Asia will not only reap the benefits of an increased
volume of trade, larger investment flows and a rise in
the level of production, but also new technologies that
were hitherto unknown to the workforce, much of it
illiterate.
Trade facilitation has been defined
both narrowly and broadly. The World Trade Organization
(WTO), the United Nations Conference on Trade and
Development (UNCTAD), and the Organization of Economic
Cooperation on Trade and Development have restricted
their definitions to a relatively free movement of
goods, and more specifically to customs procedures and
technical regulations that could impair or delay trade.
The World Bank, however, takes a broader approach to its
trade facilitation work program, which primarily covers
reforms in customs, regulatory frameworks and standards.
The World Bank, the South Commission and UNCTAD all have
emphasized that given their stark variations in growth
indicators, the countries of South Asia "could somewhat
level pegging if they could plan their economic
development under a free trade mechanism of growth".
One example underscores the nature of this
variation: India is over 10,000 times larger, 3,000
times more populous and has a gross domestic product
over 800 times greater than the Maldives, the smallest
country in South Asia. It is also most striking that in
South Asia it is India which is changing the dynamics of
interaction among the countries of the region. This is
evident not only in terms of New Delhi's physical size
but also its geographical location, which has made it
"central" to the region. While there is great diversity
in the region, home to over a fifth of the world's
population and has more or less similar economic
development, South Asia has a disproportionate number of
people living below the poverty line.
According
to Raymond Bonner, author of South Asia: Issues and
Challenges, since poverty is the common factor in
South Asia, a common market with complete withdrawal of
all trade barriers is the key to the region's economic
development.
It should be pointed out here that
a free trade area in South Asia would provide numerous
microeconomic benefits such as transparency and the
allocation efficiency of trade in goods, services and
investments. Regional trade agreements are normally
criticized for promoting trade diversion rather than
trade creation. Such debates are rather sterile in the
specific context of South Asia. The rest of Asia,
particularly East Asia and Southeast Asia, is comprised
of keenly competitive economies and Indian enterprises'
exposure to their competitive aggression will have a
wholesome tonic effect on the country's manufacturing
sector.
But also there are some competitive
problems among Asian countries. The major problem is
that basically they supply the same kind of products to
the global market. Naturally, competition problems
impede trade arrangements. Just as India and Sri Lanka
cannot get over their rivalry in agro-products, such as
tea, rubber, coconuts, and so on, Indonesia, Malaysia
and Thailand have their own rivalry in the field of
garments, while Singapore and Malaysia compete in
electronics. Japan and South Korea share many common
articles as well. China is in a league of its own.
This rivalry is not unique to South Asia; the
RTAs of advanced countries also have this problem.
Therefore, the best way forward in this maze is to
synergize, for rivals to cooperate and adopt a joint
marketing strategy to enter into new unexplored markets.
Like the idea of forming tea cartels to enable India,
Kenya and Sri Lanka to join and work together for their
common good, ways must be found for a wider spectrum of
Asian countries to settle their differences and look for
common ground.
Durgadas Roy was a
professor of economics at the State University of New
York and is now director of the Indian Council for
Economic Research.
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