Regional Trade Agreements

A Global Perspective
Shri T.C. VENKAT SUBRAMANIAN
Chairman & Managing Director Exim Bank of India Chennai, February 19, 2005
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Global Trade : Developed vs Developing

Increasing Importance of Developing Countries but only in Merchandise Trade
VALUE (US$ bn) 1993 2003 Global Merchandise Exports 3777.1 7502.9 Advanced Countries ( 29 ) 2876.8 5375.8 Developing Countries ( 174 ) 900.3 2127.1 VALUE (US$ bn) 1993 2003 940.6 1796.4 749.7 1451.7 190.9 344.7 SHARE (%) 1993 2003 100.0 100.0 76.2 71.6 23.8 28.4 SHARE (%) 1993 2003 100.0 100.0 79.7 80.8 20.3 19.2
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Global Services Exports Advanced Countries ( 29 ) Developing Countries ( 174 )

Source: ITS 2004, WTO

Global Trade : Major Countries

Top 10 Global Merchandise Exporters and Importers (2003)
2500

US$ billion

Total Exports : US$ 7503 bn (incl. re-exports) reTotal Imports : US$ 7778 bn (incl. Imports for re-export) re-

2000

EXPORTS
1500
1303 602

IMPORTS
383

1000

413

391

500

391 305

724

748 472 438 387

291 292

263 294

245 273

235 255

0
USA Germany Japan China France UK Italy N'lands Canada Belgium

Source: ITS 2004, WTO

World Trade Organisation (WTO)

superset of all RTAs
The WTO is member-driven, with decisions taken by consensus among all member governments Any state or customs territory having full autonomy in the conduct of its trade policies may join (accede to) the WTO. The following process is involved :
Commencement of the accessions process Working party and the fact-finding process Bilateral negotiations Report, Protocol of Accession and Entry into Force

As on December 2004, there were 148 WTO members 26 Countries negotiating membership (WTO observers) including Russia, Vietnam, Algeria, Saudi Arabia, Bhutan and Sudan
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Regional Trade Agreements

Liberalising trade on a reciprocal & preferential basis
RTA encompasses both reciprocal bilateral free trade or customs areas and multi-country (plurilateral) agreements Regional and bilateral trade agreements provide for one type of trade liberalization While programs such as the U.S. African Growth and Opportunity Act (AGOA) and the EUs Everything But Arms (EBA) also liberalize trade preferentially, the United States and EU extend these preferences unilaterally rather than reciprocally Countries often lower trade barriers in a nondiscriminatory fashion for all trade partners either multilaterally through GATT/WTO negotiating rounds or autonomously
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Regional Trade Agreements

Classification of liberalisation methods
METHOD OF IMPLEMENTATION
Scope of Beneficiaries
Preferential: Select Countries Nondiscriminatory (MFN): All Countries

Reciprocal
NAFTA, EU, COMESA and other RTAs

Unilateral
AGOA, EBA, Cotonou

GATT/WTO Multilateral Autonomous Agreements Liberalisation

RTAs & Types of Liberalisation

RTAs : Four Major Levels of Integration
RTAs divided into several basic categories according to the degree of economic integration they provide:
Free Trade Area: members eliminate barriers to trade in goods (and increasingly services) among members, but each member is free to maintain different MFN barriers on nonmembers Customs Union: moves beyond a free trade area by establishing a common external tariff on all trade between members and nonmembers Common Market: deepens a customs union by providing for the free flow of factors of production (labor and capital) in addition to the free flow of outputs Economic & Monetary Union: members share a common currency and macroeconomic policies
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Regional Trading Arrangements

RTAs: Increasing Proliferation
Sharp proliferation in Regional Trading Agreements (RTAs) in recent years
The number of these agreements has more than quadrupled since 1990, rising to around 230 by late 2004

Nearly all countries belong to at least one RTA

As of July 2003, only 3 WTO members, viz. Macau China, Mongolia and Chinese Taipei were not party to any RTA

Trade between RTA partners now makes up nearly 40% of total global trade Members of RTAs liberalize trade on a reciprocal and preferential basis RTAs can create trade and bring other benefits for members but results are not automatic and depend critically on design Contd
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Regional Trading Arrangements

Particularly in the Last Decade
Annual number Total in force

30 25 20 15
Notified to WTO Cumulative in force (right axis) Not Notified to WTO
229

300 250 200 150 100 50 0

1958 1969 1976 1984 1989 1994 1999 2004
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10 5 0
Source: Global Economic Prospects 2005, World Bank

Regional Trading Arrangements

Most countries belong to more than one RTA
East Asia Europe & LAC MENA South Sub North* TOTAL & Pacific Central Asia Sharan Asia Africa 32 36 39 21 8 48 25 209 4 2 4 24 2 3 26 2 7 12 1 4 22 6 12 26 6 12 6 2 4 33 8 17 35 8 19 10 1 3 20 5 12 20 5 13 0 0 8 4 9 8 4 9 2 1 1 47 4 9 48 4 9 10 4 24 10 8 15 11 11 29 44 2 24 164 5 17 174 5 29

Number of countries

North-South Bilateral*
Countries belonging to at least one RTA Average number of RTAs per country Maximum number of RTAs per country

All Others
Countries belonging to at least one RTA Average number of RTAs per country Maximum number of RTAs per country

Total
Countries belonging to at least one RTA Average number of RTAs per country Maximum number of RTAs per country

Note: Note: Bilateral agreements are defined as an RTA with two members. members. * North is OECD 24 plus Liechtenstein and South is all other countries
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Regional Trading Arrangements

South-South RTAs predominate in number but not in trade covered
Number of RTAs
250 35 30 200

Percent of World Trade Covered

SouthSouthSouth
150 193 100 108 50 36 1 6 1990 3 18 1996 4

25 20 15

SouthSouth

5 13

USA
10 5 0 2002 1990 3 0.3 7

USA

10

13

European Union

32

European Union

1996

2002
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Source: Global Economic Prospects 2005, World Bank

Regional Trading Arrangements

Intra-Regional Trade of Major RTAs, 1995, 2000 & 2003
INTRA-TRADE
Value Share in w orld exports (US$ bn) (%) RTA EU (15) NAFTA (3) ASEAN (10) CEFTA (8) MERCOSUR (4) ANDEAN (5) Total 2003 1795 651 105 29 13 5 2598 1995 26.6 7.9 1.6 0.3 0.3 0.1 36.7 2000 23.1 10.9 1.6 0.3 0.3 0.1 36.2

SHARE OF INTRA-TRADE IN
Exports (%) Im ports (%)

2003 1995 2000 2003 1995 2000 2003 24.6 64.0 62.4 61.9 65.2 60.3 61.7 8.9 46.0 55.7 56.1 37.7 39.6 36.8 1.4 25.5 24.0 23.3 18.8 23.5 23.3 0.4 16.2 13.0 13.6 12.3 10.2 11.3 0.2 20.5 21.0 11.9 18.1 19.8 19.0 0.1 12.2 35.6 8.9 9.4 12.9 13.8 14.7 -

Source: International Trade Statistics, 2004, WTO

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Regional Trading Arrangements

Why This Proliferation?
HIGH-INCOME COUNTRIES SUCH AS US & EU
To support foreign policy goals, including development Slow progress on multilateral agenda: competitive liberalization Access to services markets, protection of intellectual property, and rules for investment

DEVELOPING COUNTRIES
Secure access to markets, especially large markets More FDI Among neighbors, lowering trade cost at border Framework for regional cooperation
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Regional Trading Arrangements

Major RTAs in Select Regions
High Income Countries
Asia Pacific Economic Cooperation (APEC) European Union (EU) North American Free Trade Agreement (NAFTA)

LAC Region
Andean Group Central American Common Market (CACM) Caribbean Community and Common Market (CARICOM) Latin American Integration Association (LAIA) Southern Cone Common Market (MERCOSUR)
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Regional Trading Arrangements

Major RTAs in Select Regions (contd)
Africa
Common Market for Eastern & Southern Africa (COMESA) Economic Community of West African States (ECOWAS) Southern African Development Community (SADC) West African Economic and Monetary Union (WAEMU)

Asia
Association of South-East Asian Nations Free Trade Area (AFTA) Gulf Cooperation Council (GCC) South Asian Free Trade Area (SAFTA)
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Regional Trading Arrangements

Many RTAs can complicate administrative procedures
Spaghetti Bowl of RTAs in the Americas and Asia-Pacific Growing number of overlapping agreements Emergence of spaghetti bowl due to proliferation of bilateral agreements The associated myriad of rules strains institutions charged with administering trade agreements.
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Regional Trading Arrangements

Effects on trade
RTAs can have positive or negative effects on trade depending on their design and implementation Gains from a preferential trade agreement cannot be taken for granted Even in agreements with positive impacts on average incomes, not all members are assured of increases The policy question then is not whether RTAs are categorically good or bad, but what determines their success Agreements that have been designed to complement a general program of economic reform have been most effective in raising trade
When RTAs have tended to be fruitless, it is often because of the lack of a coherent program of reform
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Regional Trading Arrangements

Making Regionalism Complementary to Multilateralism
RTAs can be a complement to multilateral reform, but they are not a substitute From a development perspective, the WTO remains the best-available forum to discipline the use of trade-distorting policies
RTAs can complement the WTO efforts by cooperating on behind-the-border policies, especially on regulation-intensive issues such as services, trade facilitation, and the investment climate

Large developed countries may gain more from signing individual bilateral agreements than they would from a multilateral accord
They can use preferential access to extract concessions in non-trade areas from developing country partners that would be resisted in the WTO negotiating framework
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Regional Trading Arrangements

Bilateral Agreements vs. Global Trade Reform (change in real income in 2015 compared to 2001)
Regions Global Bilateral Global with Quad US$ billion 154.4 133.6 16.6 -19.0 92.2 -2.6 108.8 -21.5 263.2 112.0 Bilateral with Quad

High-income countries Low-income countries Middle-income countries All developing countries World Total
Source: Source: World Bank Simulations

Percent 0.6 0.9 1.2 1.2 0.8

0.5 -1.0 0.0 -0.2 0.3

Most development friendly outcome is associated with global reform

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Regional Trading Arrangements

Regional Trade Agreements : Indias Initiatives
Framework Agreement on Comprehensive Economic Cooperation with ASEAN Bay of Bengal Initiative for Multi-Sectoral Technical and Economic Cooperation (BIMSTEC) FTA India Singapore Comprehensive Economic Cooperation Agreement Framework Agreement for establishing Free Trade between India and Thailand India Sri Lanka Bilateral Free Trade Area Agreement on South Asian Free Trade Area (SAFTA) India Mercosur PTA India Southern African Customs Union (SACU) Framework Agreement India Gulf Cooperation Council (GCC) Framework Agreement
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Regional Trading Arrangements

RTAs : Indias Initiatives (contd)
The government has decided to convert all preferential/free trade agreements into Comprehensive Economic Cooperation Agreements (CECA).
PTAs/FTAs usually involve structured reduction in tariffs between two countries. CECAs would cover preferential relaxation of FDI rules vis--vis the partner country, tax holidays on investment and income, easing of visa restrictions, trade in services.

The proposed FTAs/PTAs with Thailand, Mercosur & ASEAN to be made CECAs
This has already been done with Sri Lanka. PTA with the SACU would be merged with a new CECA with South Africa

The agreements with Singapore and GCC is also envisaged to be a CECA Other proposed alliances with Russia, China and Israel would also be CECAs, rather than mere FTAs
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