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How Well is India doing in the field of Regionalism and Multilateralism in International Trade

Regional trade liberalization has swept the world trading system like wildfire while the multilateral GATT talks (“General Agreement to Talk and Talk” as per the regionalists claim) proceeded at a glacial pace. This contrast raises one of the most pertinent questions “Why are today’s countries eager to open market regionally, but very much reluctant to do so multilaterally?” The answer is that regional trade integration or agreements — or more accurately, preferential trade agreements (PTAs) - has come to the fore as an alternative to multilateralism since multilateral trade negotiations have become much more cumbersome to deal essentially with today’s complex trade issues than they represented earlier in the Vinerian model, while the regional trade agreements (RTAs) on the other hand can complement existing multilateral efforts to foster greater economic integration among countries, and should, therefore, be encouraged. According to Jagdish Bhagwati (1993), the single most important reason why regionalism is making a comeback is the conversion of the US from devoted multilateralism to ardent regionalist. Further RTAs offer an opportunity to reconstitute the bargaining process at an agreeable level.

They involve smaller group of nations; they can (as in case of “EC92”) involve what Robert Lawrence has called deep integration, which essentially removes borders and thus the possibility of creating protectionism. In fact, the ability to support a cooperative solution at the multilateral level is declining, while at the regional level it remains fairly strong. In the above backdrop, the present paper deals essentially for finding an answer to the question: Should the rise of RTAs be welcomed? Or should regional trading blocks be condemned as institutions that undermine the multilateral system? Section – II gives a penpicture of the economic reasons for the rise of regionalism and multilateralism in international trade respectively. Section III & IV depict the role of India in the field of regionalism and multilateralism respectively. Section V is the concluding observations.

Reasons Behind the Origin and Growth of Multilateralism in International Trade:

The strains of foreign exchange shortages and BoP problems were catalysts in the formation of GATT. The GATT was established following the Second World War (WW-II) by a group of industrial countries which agreed that their trade and economic relations should be conducted with a view to raising standards of living, ensuring full employment and a large and steadily growing volume of real income and effective demand, … the full use of resources and expanding the production and exchange of goods. They also agreed this could best be achieved by substantially reducing tariff and trade barriers and eliminating discriminatory treatment in international commerce. These objectives of the GATT, and its successor institution, the WTO, provided the guidance and framework for the trade policies of most nations and the many various agreements and institutions that comprise the multilateral trade system of the 21st Century.

In the past, the stock market crash and the onset of the Great Depression stopped the liberal trend in trade in the 1920s. Consequently, economic policy became inward-oriented following the devastation of war disrupting production and shipping. For example, India chose an inward looking path of import-substituting industrialization and adopted protectionist policies. Article-XVIII of GATT allows developing countries to maintain quantitative barriers indefinitely on the grounds of a threat to the BoP. Taking advantage of this provision, India created a regime of strict import licensing across all products, complementing it by equally strict foreign exchange controls. With some modifications, this regime remained in place until the systematic liberalization that began in 1991. India freed capital goods and intermediate inputs from licensing in1992.

Besides, over time, growing economic inter-dependence pushed economies closer together. Trade expanded more rapidly than domestic investment and with rising foreign investment, played an increasing role in economic development. These factors, combined with periodic economic downturns, trade and payments crisis, and specific commercial disputes, continued to bring governments back to the negotiating table. Successive rounds of negotiations, involving increasing numbers of countries and issues, shaped the development of multilateral trading system. On 1 January, 1948, the GATT entered into force and became the central element of the multilateral trade system.

Over nearly 45 years of its independent existence, GATT conducted 8 rounds of negotiations among its members. The Uruguay round of negotiations establishing the WTO was the last GATT round of multilateral negotiations. These rounds resulted in progressive liberalization of word trade. The last three rounds – Kennedy (1962-7), Tokyo (1973-9), and Uruguay, in particular, went beyond tariff reductions.

The trade policies and GATT negotiations of the 1950s and 1960s focused on rebuilding economies and promoting economic growth, stimulated tariff reductions and more open borders. The agreements were broadened to include more countries.

The economic policies of the 1980s reflected an accelerating trend toward global integration and policy convergence. Many countries, both Developed Counties and Developing Countries shifted or even revised their trade policies away from protectionism and market intervention, to open their economies to international trade and competition. . By the 1990s new pressures came and the focus of trade policy tilted toward managing as well as liberalizing trade.

This new phase in trade policy was marked by many regional trade agreements and the most comprehensive multilateral negotiation in the history of GATT, the Uruguay Round. Its trial Act launched the WTO on January 1, 1995. It includes agreement on Tariffs and Trade in goods (GATT), services (GATS) and trade-related aspect of Intellectual Property Rights (TRIPs). The agreements cover the traditional trade barriers, reduction in tariffs and removal of waivers, derogations and most non-tariff barriers to trade.

A beginning is made on liberalization of trade in agriculture and textiles. Relevant for developing countries, greater access for agricultural goods along with reduction of subsidies paid to farmers in industrial countries and an end to the quota system for controlling textile trade were included. The WTO became imbibed with much stronger dispute resolution mechanisms (to address complaints by member country government of the violation of their WTO- sanctioned rights by other members and a permanent trade policy review mechanism).

The trade policies of the modern era continue to evolve within the WTO framework. The WTO membership is expanding, with many of the new members drawn from Developing Countries and former state controlled countries which are becoming market economies. Governments are now working to improve the multilateral trade system. Virtually all of the trading nations of the world are engaged in a further-round of multilateral negotiations with a focus on international development.

The modern history of trade policies is a record of the efforts by nations to move from policies based on power and unilateral and nationalistic economic behaviour toward a multilateral system of consultations, rules, and agreed dispute settlement procedures. The emergence of the multilateral trade system represents recognition of the growing inter-dependence of nations and the fact that all countries are affected by events elsewhere, whether open conflicts, monetary or macroeconomic developments, environmental issues or social or political unrest.

India’s Achievement in Regional and Preferential Trading Agreements:

India gives primacy to engagements in multilateral negotiations at the World Trade Organization. However, given the long and protracted nature of multilateral negotiations at the WTO and recognizing the fact that the regional cooperation would continue to feature prominently for a long time in the world trade, India has engaged itself with its trading partners/blocks with the intention of expanding its export market and began concluding in principle agreements and moving in some cases even towards Comprehensive Economic Cooperation Agreements (CECAs) which covers Free Trade Agreement (FTA) in goods, services, investments and identified areas of economic cooperation, though in the past, India had adopted a very cautious and guarded approach to regionalism.

Framework agreements have already been entered into with a number of trading partners with specific road maps to be followed and specific time frames by which the negotiations are to be completed. Joint Study groups have also been set up for examining feasibility of CECA between India-Japan, India-Brazil-South Africa and India –Russia, India- European Commissions. The Reports are at various stages of completion.

From these developments what we can infer is the fact that Regional Trading Arrangements, from India’s point of view, should be “building blocks” toward the overall objective of trade liberalization and should complement the multilateral trading system.

Some of the recent developments related to bilateral and regional trade and cooperation are the following:

Framework Agreement on the BISMSTEC FTA (Bay of Bengal initiative for Multi-Sectoral Technical and Economic Cooperation) signed in February, 2004 at Phuket among Bangladesh, Bhutan, India, Myanmar, Nepal, Sri Lanka and Thailand with the objective of strengthen and enhance economic, trade and investment co-operation among the member countries and to progressively liberalize and promote trade in goods, services and investment co-operation.

India-ASEAN CECA signed on October 8, 2003: A Framework Agreement on Comprehensive Economic Cooperation between the Association of South East Asian Nations (ASEAN) and India, consistent with India’s ‘Look East Policy’, was signed by the Prime Minister of India and the Heads of Nations/Governments of ASEAN members during the Second ASEAN-India Summit on October 8, 2003 in Bali, Indonesia. The India-ASEAN trade in goods agreement signed on August 13, 2009 has come into effect on January 1, 2010. The agreement provides for elimination of basic custom duty on 80% on the tariff lines accounting for 75% of the trade in a gradual manner.

India-South Korea Comprehensive Economic and Cooperation Partnership Agreement (CEPA) signed on August 7, 2009, covering goods, services and investments for which negotiations for FTA in Goods, Services and Investment completed. This is India’s first FTA with an OECD country. Under CEPA, tariff will be reduced or eliminated on 93% of Korea’s tariff lines and 85% of India’s tariff lines.

India-Japan CEPA Negotiations in goods, services and investment. The 12th Meeting of the Joint Task Force was held during September 29 – October 1, 2009 in Tokyo.

India-EU Trade and Investment Agreement Negotiations covering trade in goods, services and investment, trade facilitation, dispute settlements, IPR, etc. The 8th Round was held during January 25 – 29, 2010 in New Delhi.

India-Gulf Cooperation Council (GCC) Framework signed on August 25, 2004, covering goods, services and investment.

Asia Pacific Trade Agreements including Bangladesh, Republic of Korea, Sri Lanka, China, Lao PDR and India.

Global System of Trade Preferences (GSTP) signed in April 1998 with 44 developing countries.

India-Chile Framework Agreement on Economic Cooperation signed between India and Chile on January 20, 2005 and the agreement envisages a PTA between two sides. The neighbouring negotiations have been concludes and the agreement was signed on March 8, 2006 and has been implemented in August, 2007.

India-UK Economic and Financial Dialogue held on August 2008 in London. Topics discussed were i) Global economy and trade, ii) Financial Services, iii) Public-Private Partnership, iv) Climate change, v) Low carbon low cost car technology and vi) Development and Poverty Reduction.

India-Australia Economic Policy Dialogue held in April 2008 in New Delhi. Topics covered were: i) Global and Regional Economic Outlook, ii) Financial Sector reform, iii) Goods and Services Tax and FDI.

India-European Free Trade Association (EFTA) Negotiations held in October 2008 in New Delhi, to explore wage and means to increase a broad-based bi-lateral trade and investment agreement. The 4th Round of negotiation took place in New Delhi in September, 2009.

Also the list includes other agreements like, Framework Agreeement with MERCOSUR, Framework agreement on Economic Cooperation with Chile, Costa Rica, Brunei, Ecuador, Thailand, Myanmar, MoU with Bangladesh on Haat establishment across the border, Five-Year Development Program for Economic and Trade Cooperation between the People's Republic of China and the Republic of India September 18, 2014.

Such regional arrangements can help developing countries like India into the World Economy by providing immediate gains in trade and investment, particularly for geographically contiguous regions. This may also underline the need for expediting internal reforms if the benefits are to be maximized.

In the case of most of the RTAs/FTAs which have been implemented, value of exports is seen generally higher than imports. Import and export growth rates have increased immediately after the RTAs/FTAs were implemented due to unshackling of restrictions though import growth was generally higher. Studies also show that import growth of preferential items were higher than export growth of preferential items. However, there are other benefits like greater opportunities for investment and services exports.

This is also an indication that India has to move more towards CECAs which are FTA plus arrangements. For this India should take clear cut policy for beneficial CECAs even with some developed countries instead of just FTAs/PTAs which should be well integrated with our economic and trade policy reforms. These along with policies like marketing of services, including services in negotiations in different regional and bilateral trading arrangements could help India to a great extent.

India’s Achievement in Multilateral Trade Negotiations:

Developed countries were successful in introducing four new issues into the WTO agenda at Singapore: multilateral agreement on investment and competition policy as well as trade facilitation and transparency in government procurement and environment. India lobbied particularly hard against this demand and had opposed the inclusion of these issues which came to be known as Singapore Issues of 1996. In addition, many developed countries sought to add trade rules to support labour standards and address environmental issues. These became the bone of contention between the Developed countries and the Developing countries including India. Developing countries were less than enthusiastic about expanding the scope of the multilateral trade system. And they mistrusted the motives of those who argued for the adoption of tougher labour and environmental standards, which they feared would rob them of their competitiveness.

All these above issues did not disappear from the WTO agenda and subsequently converged at the 3rd WTO Ministerial Meeting at Seattle, in late 1999, for a new round of trade talks. But the tensions between the developed and developing countries slowed progress. The EU and the US at that time were away from the strategy of coordination, acting as silent spectators. The meeting broke up without agreement on this new round.

The new multilateral system was in danger. But eventually, all members agreed at the Doha Ministerial, in November 2001, to launch a new round of talks (The 4th WTO Ministerial Meeting). The round was labeled the Doha Development Agenda (DDA). Meanwhile, at Doha, the People’s Republic of China, after taking its membership in WTO in December, 2001, with her more than 5% share in World exports, entered as an actor into this drama. At this India’s and other developing country’s bargaining power and the negotiating skill in the meeting room had no doubt increased to safeguard the interest in the future rounds of the WTO.

At Cancun in September, 2003, the EU and the US somehow became vibrant and being the leaders of the developed countries, insisted on bringing the issues on the Committee Room although opinion was still as deeply divided as ever. A joint EU-US proposal, may even a revised declaration on liberalization on agricultural trade was rejected by the G-20, a newly formed group of larger developing countries including India.

The emergence of this group under the leadership of India, Brazil, China and South Africa put a landmark in multilateral negotiation, which indicated that the days of dictating term unilaterally by the rich countries seem to be bleak or breaking up coalition of the poorer members seem to be over. After a disappointing review of progress in Cancun Summit in September 2003 (The 5th WTO Ministerial Meeting), the DDA was back of track by the summer of 2004. But the three of the Singapore Issues have been dropped. Only trade facilitation issue remained on the agenda over the negotiating table, on which India did not have serious reservations.

This represented a major victory for G-20, and consequently, the expansion of the scope of the WTO appeared to be halted, at least for the moment. And the elimination of the three Singapore issues following Cancun Ministerial Meeting left the Doha Round focused principally on trade liberalization in agriculture, industry and services.

To conclude the Doha negotiations, the 6th 2005 WTO Ministerial began at Hong Kong in December. At this 6th Conference, the member countries agreed to eliminate the export subsidies in agriculture by 2013. The member countries also agreed to provide aid for trade to the least developed countries, including duty-free access to the developed country markets in 97% of the products. Once again, in this negotiation, India took a much harder line stand with her saying that liberalization in agriculture would in no way do good to India and the 650 million people in India living in agriculture would not survive. So agricultural liberalization on her part would be a major risk. But India was willing to undertake liberalization in industrial products and services. So the Hong Kong Round ended with inconclusive results and the future of the multilateral trading system became dependent now on how the WTO’s tighter rules would be relaxed for a more structural and inclusive trade system. To have a good result, this required a broad consensus both within major countries and across the membership. The consensus was proving difficult to obtain.

The Doha Round of trade negotiations at the WTO has been under way since 2001. The negotiation still covered several areas such as agriculture, market access for agricultural products, trade related IPR, rules covering anti-dumping and subsidies and trade facilitation. A Mini-Ministerial Meeting in the WTO was held from July 21-29, 2008 to discuss the modalities in agriculture and Non-Agricultural Market Access (NAMA). In agriculture, the issues discussed included reductions in over-all trade-distorting domestic support by developed countries, tariff cuts, designation of sensitive products, special safe-guard mechanism (SSM) for developing countries, etc. While in the end, discussions focused almost exclusively on the SSM which could not be resolved. This was not the only contentious issue. Several issues in agriculture and NAMA were not discussed at all and remained unresolved. Multilateral discussions on agriculture resumed at the WTO in October 2008. The Chairs of the WTO Negotiation Groups of the Agriculture and NAMA brought out fresh drafts of modalities for Agriculture and NAMA on December 6, 2008. This was the fourth Revised Draft Modalities Text. The Chair specially identified certain elements in this text as areas where large negotiating gaps remain to be bridged.

These are Sensitive Products (SEPs), tariff quota creation, non-SEPs with tariffs higher than 100%, tropical and diversification products, proposals for reduction in subsidies for cotton and tariff simplification. Even issues like India’s food security, livelihood security and rural development needs were taken care of. But there are number of elements yet to be resolved to the full satisfaction of India and its coalition partners in G-33. Meanwhile, India hosted a Ministerial Conference in New Delhi from September 3-4, 2009 for the WTO members and in that Conference, there was an unanimous affirmation of the need to expediously conclude the Doha Round, particularly for further development remaining at the heart of the Doha Round. The major issues in the 2009 7th WTO Ministerial Meeting, the first full Ministerial Meeting of the WTO, in the aftermath of the global economic Tsunami held in Geneva from November 30 – December 3, 2009 were related to Agriculture and NAMA discussions, which resumed on the basis of the draft modalities of agriculture and NAMA. As per the Draft Agriculture Modalities, developed countries would have to reduce their bound tariffs in equal annual installments over 5 years with an overall minimum average cut of 54%. Developing countries would have to reduce their bound tariffs with maximum overall average cut of 36% over a large implementation period of 10 years. Both developed and developing members would have the flexibility to designate an appropriate number of tariff lines on sensitive products, on which they would undertake lower tariff cuts.

In the agricultural negotiations that would serve of interest of developing countries, India has been working close with coalition partners in developing country groups such as the G-20 and the G-33 in order to achieve an outcome in the agricultural negotiations. India along with above alliance partners has emphasized that the Doha agricultural outcome must include at its core for the removal of distorting subsidies and protection by developed countries to level the playing field. Thus the formation of grouping had a dramatic effect on the dynamics of negotiations. Developed countries now noticed that India along with other larger developing country’s view point would have to be considered for negotiations.

Apart from this, India has also taken the stand that stable and remunerative price for domestic products are urgently called for increasing productivity and to this ends India is bereft of safe-guard mechanism available only to developed countries. India now needs an operational and effective Special Safeguard Mechanism (SSM) to check against global price dips and input surges which must be more flexible. The G-33 and India remained firm that a priori exclusion of any product, particularly SPs from the ambit of the SSM could not be justified or accepted.

n the case of NAMA negotiations, India chose tariff reductions through a non-linear Swiss formula that ensures less than full reciprocity in percentage reduction commitments from bound rates. Moreover, in the current negotiations on rules,
(a) India is seeking strong anti-dumping rules so as to prohibit the use of zeroing in dumping margin calculation including sunset review, etc.;
(b) India is opposed to enlargement of the scope of prohibited subsidies and countervailing measures for the developing countries and
(c) In the negotiations on new disciplines on fisheries subsidies, India is seeking effective special and differential treatment for developing countries, particularly in the light of employment and livelihood concerns of small artisans and fishing communities and for retaining sufficient policy space so as to enable it to develop its infrastructure.

This paper has attempted to shed light on why countries like India frequently engage in negotiating agreements on a multilateral and regional level. The paper also goes a step further to acknowledge that, while free trade would allocate world resources efficiently, at least in a competitive market setting, it is seldom a reasonable policy objective for a country. Moreover, in a world of imperfect competition, creating free trade is a virtual impossibility. In the face of this awkward conjuncture, it would be wise for India to seek her true interest whether it will gain from multilateral trading system or from regional negotiations or will accept both of them on her forward march.

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