Regional Trade Agreements In India – What, Why and How

Posted on April 20, 2011 in Business and Economy

By Ankita Verma:

What are they?

The aftermath of the October 2009 financial crisis saw as many as 25 regional trade agreements being notified to the World Trade Organisation. It presents a stark contrast to the various stagnating multilateral trade agreements.

Regional Trade Agreements are usually established between neighbouring countries to reduce trade barriers like custom duties on imports. Regional Trading Agreements (RTA) can be segregated to two classes- customs unions and free trade areas. In a custom union agreement, the countries have zero tariffs internally and a unified tariff against the rest of the world. Unlike them, a free trade area agreement, does not force the countries to have a unified tariff rate for the rest of the countires, outside the agreement i.e. The concerned countries of the agreement have no internal trade barrier, but against non-member countries, they set their own tariffs.

Why are they controversial?

Many believe that RTAs violate the MFN or the Most Favoured Nation, a fundamental principle of the World Trade Organisation. The Most Favoured Nation clause in the General Agreement on Tariffs and Trade (GATT) states that all countries should be treated equally, that is, if a nation decides to reduce tariffs for another nation, it must do so for all the other nations as well, it can’t give any particular nation any preferential treatment.

However, enough room has been given in WTO’s Preamble to allow the many bilateral and regional trade agreements.

How did they come into being?

The initial push towards this regionalism was due to the belief of developing countries, that they need to unite to make their voice heard against the developed countries. Regionalism was considered a necessary precursion to industrialisation. It was believed that ‘infant industries’ should first export within a small set of countries, before opening itself up for the rest of the world. But now, with more than 200 RTAs , the motives and the nuances of the agreements vary drastically. In fact, an additional political dimension has been added to such agreements.

There are concerns, that RTAs are counter-productive. They just give countries more horsepower for arm-twisting on multilateral forums. The recent failure of Doha talks stand testimony to it. BRIC nations stand opposed to USA and EU, and there seems to be no plausible solution in sight. RTAs , more often than not, support both trade liberalisation and trade discrimination.

Regardless of the negative publicity that such regionalism has garnered in recent times, it is an unavoidable reality, and nations just have to find a cohesive way to integrate it with multilateral aspects.