TRADE BLOCS

Regionalism, Intra - regional Trade

Regional Integration Agreement/ Arrangement (RIA)

            Sometimes may countries may join hands together in groups to promote free trade or to liberalise trade barriers.  This group of countries is called as trade blocs or Regional Integration Agreement (RIA). A total of 265 RIA’S had been notified to the GATT/WTO until May 2003.

            There are different degrees of levels of economic integration.  The important forms of integration are out lined below.

Free Trade area:  A free trade area is a grouping of countries to bring about free trade between them.  Each member is left free to determine his own commercial policy with non-member.

Customs Union:  It is more advanced level of economic integration than the free trade area.  It not only eliminates all restrictions on trade among members but also adopts a uniform commercial policy against the non-members.

Common market:  It is a step ahead of custom union.  The common market besides having both the characteristics of customs union, allows free movement of labour and capital within the common market.

Economic union:  A still more advanced level of integration is the economic union.  Apart from satisfying the conditions of the common market mentioned above, the economic union achieves a common national economic policy through a common central bank.

Example: The European Union (EU)

Economic integration:  The ultimate form is full economic integration characterised by the completion of the removal of all barriers of trade, unification of social as well as economic policies and all members bound by decisions of a supranational authority of executive, judicial and legislative branches.

EUROPEAN UNION (EU]

A  European Economic Community (EEC)

A  European Common Market (ECM)

A  European Union (EU)

A  European Community (EC)

A  Europe 1992/EC 1992

A  European Fortress

A  Fortress 92.

            The European union in one of the best examples for economic – integration schemes.  The EEC originally comprises of six nations namely Belgium, France, Federal Republic of Germany, Italy, Luxembourg and the Netherlands.  These countries come together on a common platform and are bound together by treaty of Rome in 1957 the European union came into being from January 1, 1958 onwards.

The following are the important points laid under Treaty of Rome 1958.

Treaty of Rome salient features

1. Eliminates tariffs, quotas and other barriers of trade.
2. Devise a common internal tariff on the imports from the rest of the world.
3. Allow free movement of factors of production within the community.
4. Adopt a common policy on agriculture transport and competition in industry.

            By January 1 1986 the strength of European Union increased by 15.  The new countries which joined hands with original sex countries were UK, Denmark, Ireland, Greece, Spain, Portugal, Austria, Finland and Sweden by 2004, the strength of EU has gone up to 25.

            The European union consists of a EC commission which forms the chief executive body of European union.  The supreme decision making body of European Union is called as EC council.

            The EC council formed the white paper programme titled ‘completing the internal market’ by 1992.  This white paper programme unified the economics of all member nations into a single market by removing all border barriers to trade.  They also formed and adopted European Monetary System in 1979.

           

The barriers targeted for removal is as follows.

1.              Border control

2.    Limitations on the movement of people and their right for establishment.

3.    Difference in taxation between countries in EU.

4.    Lack of common legal framework for business.

5.              Controls on movement of capital.

6.    Product regulations and standards.

            The EC is the largest market in the world.  Some observers regarded the EC 1992 as European Fortress/ Fortress 92 implying that exports from non-member countries to the EC would have to encounter a mounting barrier.

            It is however true that the real purpose of the single market is to boost the competitiveness of European industry against its rivals particularly the USA, Japan and South East Asian nations.

NORTH AMERICAN FREE TRADE, AGREEMENT (NAFTA)

            NAFTA is a very important free trade area made up of developed and developing countries.

            It is a free trade agreement formed between USA, Canada and Mexico.  This makes the entire North America as a giant free - trade area.

            This free trade agreement between USA, Canada and Mexico is very peculiar USA and Canada are developed nations where as Mexico is a developing nation.  The labour cost in Mexico is very cheap when compared to labour cost of USA and Canada.  Moreover, the working condition is also very poor in Mexico.  This gave USA and Canada fear of losing more jobs to Mexico due to less wages.  In order to prevent this loss of jobs from Canada to Mexico, labour standards and Environmental standards were introduced in NAFTA.  In fact NAFTA is the only free trade agreements which has a very high labour and environmental standards.

            The potential benefits and harmful effects of NAFTA among its members are many.  There was a substantial exodus of jobs from USA and Canada to low wage Mexico. Apart from this, USA very intelligently shifted most of their polluting industries to Mexico.

            The Mexicans were also equally benefited by NAFTA.  Foreign Investments in Mexico has risen substantially since the agreement.  Companies from outside NAFTA have been making large investment in Mexico.  Once these companies establish trade links with Mexico they can explore and utilise the huge NAFTA market through Mexico.

            After NAFTA, Industries in Mexico started experiencing tough competition from USA and Canadian Industries.  This became an indirect stimulant for Mexico to boost up the standard of their industries equivalent to the standard of industries as found in USA and Canada.

The Southern Common Market or MERCOSUR – (Mercado comundel Sur):

            The southern common market was formed in 1991.  It consists of Argentina, Brazil, Paraguay and Uruguay.  Mercosur is the third largest customs union.  The main aim of Mercosur is to transform the bloc into a common market.  A common currency very similar to that of Euro may be adopted later.  The Mercosur blocks links 210 million people who produced more than one trillion in goods and services in 1999.

The Association of South East Nations (ASEAN)

            The Association of South East Asian Nations was formed under Bangkok Declaration in 1967.  Five South Asian countries participated in this trade agreement Viz, Indonesia, Malaysia, Philippines, Singapore and Thailand.  Brunei joined the Association in 1984.  The ASEAN region in richly supplied with natural resources.  This region accounts for the lion’s share of the world’s natural rubber, Palm oil and tin.  It is also important producer of sugar, coffee, timber, petroleum, nickel, bauxite, tungsten and coal.  Hence the economic growth rate in very high in this region.

            The ASEAN formed AFTA in 1992.  AFTA stands for the ASEAN Free Trade Area.  It is a free trade zone formed between the six nations of ASEAN.

            In November 2002, China and ASEAN have signed a major deal which led to he formation of ASEAN-China free trade zone.  One of the important features of ASEAN-china free trade is to reduce tariff and non-tariff barriers between nations and to promote free trade.  This free trade zone serves around 1.7 billion people.

The South Asian Association for Regional Co-Operation (SAARAC)

            The SAARA was formed between seven countries namely India, Bangladesh, Pakistan, Nepal, Bhutan, Sri Lanka and Maldives.  These neighbours have come together in an act of faith.  The birth  of SAARC was a logical response to the problems facing the region.   The secretariat of the Association is in Kathmandu, Nepal.  All SAARC countries have certain common salient features.

A  Massive Poverty.

A  High population growth and density.

A  Heavy dependence on primary sector.

Goal of SAARC

            The fundamental goal of SAARC is to accelerate economic and social development through optimum utilisation of their material and humman resources.

            According to Article I of the charter of the SAARC, the objectives of the Association are as follows.

A  To promote the welfare of the people of the people of South Asia and to improve their quality of life.

A  To accelerate economic growth, social progress and cultural development in the region and to provide all individuals the opportunity to live in dignity and to realise their full potentials.

A  To contribute to mutual trust, understanding and appreciation of each other problems.

A  To strengthen co-operation with other developing countries.

A  5. To co-operate with international and regional organizations with similar aims and purposes.

            Article II of the charter (written or printed statement of rights, permissions to do something esp. from a government) lays down the following principles.

A  Co –operation between the members of SAARC in not a substitute for bilateral co-operation.

A  Co-operation with the framework of the Association shall be based on respect for the principles of sovereign equality, territorial integrity, political independence, non – interference in the internal affairs of other states and mutual benefit.

            With about 1200 million inhabitants, the SAARC accounts for over 1/5 ^th of the world population.  A major share of the world’s poor lives in these countries.  All these are low income economics.  India holds about two – thirds of the total population of the Association.  On the other extreme is Maldives with a land area of 298 sq. Km inhabited by about 2 lake people.

            While Srilanka is an Island country and Maldives is an archipelago.  Nepal and Bhatan are land locked countries.  The majority of SAARC countries still derives its livelihood from Agriculture.

SAARC Preferential Trading Agreement SAPTA

The Sixth SAARC summit held in Colombo in 1991 strongly encouraged the idea of SAARC Preferential Trading Agreement (SAPTA) and all the members of SAARC (India, Pakistan, Maldives) signed the agreement for SAPTA in seventh SAARC summit held in Dhaka.

            The basic principles of SAPTA are as follows:

1. Step by step negotiation and extension of preferential trade agreement in stages.
2. Special and favourable treatment of least developed countries (LDC)
3. Over all sharing of advantages.

The special treatment of LDC includes technical assistance, duty – free trade, removal of tariff and non – tariff barriers, special export facilities with the help of concession on shipping, training facilities and support to export management etc.

            Today, SAARC countries share in world Trade is not even 1% and their trade among themselves falls below 3% of their total foreign trade.

International Economic Organisations

            During world war – II, eminent economists and civil servants in the allied nations were seriously planning to evolve a purposeful international economic system in the post – war period.

American president Roosevelt, in fact, assigned a high priority to planning for peace and harmony among nations.  As a step towards achieving peace, the United Nations Monetary and Financial conference was held at Bretton woods, USA in July 1944.  44 Nations participated in this conference and proposed the establishment of:

1. The International Monetary Fund (IMF).  This fund was created with an aim to help member countries to finance short term balance of payments deficits.
2. An International Trade Organisation (ITO) was formed with an aim to promote trade across nations.
3. The International Bank for Reconstruction and Development (IBRD) now popularly known as world bank(WB) to assist post – war reconstruction and development of the member countries.  of all these, the proposal to establish the ITO did not materialize.  The IMF and IBRD, however, took birth.

Hence to promote world trade, as a stop – gap for the formation of ITO, GATT was formed.  In 1948.

                                                                               

GATT

The General Agreement on Tariff and Trade

            The general Agreement on Tariff and Trade (GATT) was a multilateral treaty that laid down many rules for conducting International Trade.  It came into force in January 1948.  One of the primary aim of GATT was to promote international trade by reducing trade barriers between nations.

Objectives and principles:

            The preamble (introduction to a formal document) of GATT has the following point stated as its objectives.

1.    To rise standard of living.

2. Utilising the resources of the world.
3. To promote International Trade.

            GATT consists of certain conventions (conference of members of a society, political party etc devoted to a particular purpose) and general principles governing international trade among various countries that adhere to the agreement.  The rules of GATT are as follows.

1.    Any proposed change in the tariff, or other type of commercial policy of a member country should not be undertaken without consultation of other parties to the agreement.

2.    The countries that adhere to GATT should work towards the reduction of tariffs and other barriers to international trade.

For the realisation of its objectives, GATT adopted the following principles.

1.    Non-discrimination: GATT strictly adopted the principle of non-discrimination among its members.  To ensure non-discrimination, members of GATT agreed to apply the principles of most favoured Nation (MFN).  By this principle even-non members of GATT were also treated as members of GATT.

2.    Prohibition of quantitative restrictions.

3.    Consultation:  GATT provided a common platform for consultation where members with disagreements on trading issues can come together and solve their problems by continuous negotiation.  So far, eight rounds of trade negotiations took place under GATT.  Each round took several years to complete.

            Therefore GATT offers a common platform to settle International trade disputes by various negotiation/rounds.  The first round of GATT mainly deal with tariff reduction but later negotiations included other areas such as anti-dumping and non-tariff measures. Of all the negotiations of GATT the last round – the 1986-94 Uruguay Round is very Important.

Uruguay Round:  Uruguay Round 8^th round Multilateral Trade negotiations (NITN’S) was launched at punta del este in September 1986.  The Urugua Round officially concluded at the Ministerial conference held in Marrakech, Morocco from 12-15 April 1994.

            The Uruguay round was actually planned to be held only for four years.  But due to the complexities of the issues, it got dragged on, Arther Donkel, the then Director General of GATT, presented a Draft Act which he considered as the final result of the Uruguay round.  This Draft was modified and the Final Act was signed ministers of 125 Governments on April 15, 1994.  This ended the Uruguay Round. 

            The Uruguay Round took up three basic subjects for discussion.

1. Reduction of Specific trade barriers and improving market access.
2. Problems of liberalization of trade in services, Trade Related aspects of Intellectual Property Rights (TRIPS) and Trade Related Investment Methods (TRIMs)
3. Strengthening GATT disciplines

            The Uruguay Round is considered to be important because of the following reasons.

Formation of WTO:

Following the UR agreement, GATT was converted from provisional agreement into a formal International Organization called world Trade organization (WTO) with effect from January 1, 1995.  It has around 150 members from different countries and is responsible for promoting 97% International Trade.  The WTO Secretariat is based in Geneva, Switzerland.

2.  Abolition of Multi – Fibre Agreement (MFA):

GATT could achieve only considerable trade liberalization.  There are areas which GATT did not cover which formed its exceptions.  The exceptions are Agricultural trade and textile trade.  Trade in Textile was restricted by Multifibre Agreement (MFA).  Under the MFA imports of textile items to a number of developed countries were restricted by Quotas.  One of the landmark achievements of the Uruguay Round was the decision to liberalise agricultural and textile trades.  The removal of MFA was completed by the end of 2004.

3.  Liberalisation of Agricultural trade:

One of the salient features of UR was the inclusion of Agriculture in the MTN (Multi lateral Trade Negotiation).  The exclusion of agriculture from the previous round of GATT made agriculture a highly protected area in developed countries.  But, the UR made the formation of Agreement on Agriculture (AOA).  According to AOA, all countries should follow three principal commitments namely (i) Market access (ii) domestic support (iii) export subsides.

4.  GATS: (The General Agreement or Trade in Services)

            The General Agreement on Trade in Services which extends rules and disciplines to services is regarded as the landmark achievement of the UR.  Banks, Insurance firms, telecommunication companies, tour operators, hotels, transport companies looking to do business aboard can now adopt free and fair trade in service sector through the guidelines laid in GATS.

5.  TRIM: Trade Related Investment Measures refers to certain certain conditions or restrictions imposed by a government in respect of foreign investment in the country.  TRIMS were employed in developing countries.  By UR, the application of TRIM is almost abolished.

6.  TRIPS: (Trade Related Aspects of Intellectual Property Rights)

            The Intellectual property rights are divided into two main areas

A  Copy rights:  The rights of the authors of literacy and artistic work (such as books and other writings, musical composition, paintings, sculptors, computer programs and films) are protected by copy rights for a minimum period of 50 years after the death of the author.  The main purpose of protection of copyright is to encourage and reward creative work.

A  Industrial Property: Industrial property rights can be divided into two main areas. One area aims to protect the distinctive signs or trademarks.  Trademarks are used to distinguish the goods or services of one undertaking from those of other undertaking.  The protection of trademarks will enable the consumer to make the right choices between the goods services.  Another area is the protection of innovation, inventions, discoveries trade secrets by patents.

The objectives of protection of intellectual property is

A  To encourage and reward creative work

A  To protect innovation

A  To promote fair competition

A  To enable transfer of technology

7.  Anti Dumping Measures: 

A product is regarded as dumped when its export price is less than the normal price in the exporting country.  As the cost of the dumped goods is very less in the imported country, it is said to cause serious damage to the domestic industries.  In the Uruguay Round Agreement provides greater clarity and more detailed rules on anti – dumping.

WTO [World Trade Organisation]

            Following the UR Agreement, GATT was converted into WTO from January 1, 1995 onwards.  To become a member of the WTO, a country must completely accept the result of the Urguay Round.

Objectives of WTO:

            WTO’S objective is to achieve freer, fairer and predictable trade. The above said objectives of WTO is achieved by performing the following functions.

Functions of WTO:

A  Administering WTO trade agreements.

A  Providing a common platform for negotiations among its members concerning their multilateral trade relations

A  Settlement of trade  disputes between the member countries.

A  Providing technical and  training assistance to developing countries.

A  Monitoring national trade policies.

A  Co operating with other international Organisations like IMF and WB with a view to achieve greater coherence in global policy making.

WTO principles:

All WTO agreements are based on following principles.

A  To help trade flow as freely as possible.

A  To achieve liberalisation through negotiation.

A  To set up own impartial means of settling disputes.

The WTO has certain basic, functional principles.  They are as follows

1.    Non – discrimination : This is achieved by adopting MFN’S among nations (Most Favoured Nation)

2.    Freer trade, predictable policies, encouraging Competition.

Organisational Structure of WTO:

Decision in the WTO are made up by the entire membership.  This is typically by consensus [Joint agreement, collective opinion]

The WTO’S top level decision making body is the Ministerial Conference which meets at least once every two years.  Below this is General council.  It consists of ambassadors, officials sent from member capitals, heads of delegation in Geneva.  The General council meets several times a year in the Geneva headquarters.  The General council also meets as the Trade policy Review Body and dispute settlement body.

At the next level, the Goods council, Services council report to the General council.

Numerous specialised committees, working groups and working parties deal with individual agreements and other areas such as environment, member applications and regional trade agreements.

The WTO Agreements – A Birds eye View

Under the old system there were two GATTS

         i.        GATT the agreement:  It consists of agreements between the governments setting out rules for international trade.

        ii.        GATT the Organisation:  An international organisation created to facilitate discussions and administration related to the agreement.

GATT the organisation ceased to exist with the establishment of WTO.  GATT the agreement became the official rule – book of WTO to monitor trade in services and goods.  The complete set runs for 30,000 pages consisting of 30 agreements and separate commitments called schedules.  Keeping these agreements as basic foundation, WTO members operate a non – discriminatory trading system throughout the world.

Goods:  Since 1995, the Updated GATT has become the WTO’S agreement for trading in goods.  It has guidelines for product standards, subsides, action taken against dumping.

Services:  GATS [General Agreement on Trade in Services]

Banks, insurance firms, telecommunication companies, tour operators, hotels, transport companies looking to do business abroad can now enjoy the same principles of free and fair trade that once applied to trade in goods.  The guidelines for these appear in GATS.

Intellectual property:  The WTO’S intellectual property agreement amounts to rules for trade and investment in ideas and creativity.  The rules state how copyrights, patents, trademarks, geographical names used to identity products, industrial designs, undisclosed information such as trade secrets - intellectual property’ - should be protected when trade is involved

Dispute Settlement: The WTO agreement has got standard norms for dispute settlement.  Countries bring disputes to WTO.  Judgments on disputes are given by specially – appointed independent experts based on careful interpretations of the agreements.  The system encourages countries to settle their differences through consultation.  Failing in consultation, they can follow stage by stage procedure that includes the possibility of a ruling by panel of experts.  Even if this is not satisfactory, they can appeal the ruling on legal grounds.

Policy review:  The trade policy Review mechanisms purpose is to improve transparency, to create a greater understanding of the policies that countries are adopting and to assess their impact.  All WTO members must undergo periodic scrutiny, each review containing reports by the country concerned and the WTO secretariat.

Development and trade:

            Over three quarters of WTO members are developing or least developed countries.  Hence higher priority is given to these developing countries to develop their trade through negotiations and consultations.

T­echnical Assistance and Training:

            The WTO organizes around 100 technical Co-Operation missions in developing countries annually.  It holds on an average three trade policy courses each year in Geneva for Government officials.  Regional seminars are also regularly held in all the regions of the world.  Several training courses are also organized in Geneva for officials from countries in transition from central planning to market economics.

Dispute settlement under WTO

            One of the major function of WTO in to settle international trade disputes.  Settings disputes is the responsibility of the Dispute Settlement Body (The General Council).  The Dispute Settlement Body has the sole authority to establish ‘panels’ of experts to consider the case or to accept or reject the panels findings.  It also carefully monitors WTO rulings and recommendations, and has power to authorise retaliation when a country does not comply with the ruling.  The following are the different stages of dispute settlement under WTO. 

First stage: Consultation (up to 60 days dispute)

            The first stage in settlement is consultation.  The countries in dispute have to talk to each other to see if they can settle their differences by themselves.  It that fails, they can also ask the WTO director-general to mediate or try to help in any other way.

Second Stage:  The panel (45 days for a panel to be appointed, plus 6 months for the panel to conclude)

            If consultations fail, the complaining country can ask for a panel to be appointed.  The panel study the case carefully and forms a report.  This report is given to the parties to the dispute within Six months.  The following are the different stages of functioning of panel.

A  Before the first hearing:  First each side in dispute present their case to the panel in writing.

A  First hearing:  The complaining country, the responding country make their case at the panels first hearing.

A  Rebuttals (a charge, place of evidence etc):  The countries involved submit written rebuttals and present oral arguments at the panels second meeting.

Experts:  If one side raises scientific or other technical matters, the panel may consult experts or appoint an expert review group to prepare an advisory report.

First draft:  The panel then submits the descriptive section of its report to the two sides, giving them two weeks to comment.  This report does not include findings and conclusions.

Interim report:  The panel then submits a interim report to the two sides.  This report has got findings and conclusions. 

Review:  The interim report is reviewed for two weeks.

Final report:  The final report with all the findings and conclusions is circulated to all the WTO members.  These findings are based on WTO rules and regulations.  They give solution to the dispute.

Ruling:  The report then becomes a ruling.  Both sides can appeal the report. 

Appeals:  Either side can appeal a panel’s ruling.  Each appeal is heard by three members of a permanent seven member Apellate Body set by dispute settlement body.  The members forming the Apellate Body are usually individuals with out standing credentials in the field of law and international trade, not affiliated with any government.  The appeal can uphold, modify and reverse the panels legal findings and conclusions.

            The Dispute Settlement Body has the right to accept or reject appeals report within 30 days.  Rejection is possible only by consensus.

Punishment:  Punishment is usually given to the side which does not follow the recommendations given by the Dispute settlement Body.  Usually includes suspension of concessions, fine, etc.

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