An Overview of the South Asian Efforts for ECONOMIC INTEGRATION through REGIONAL COOPERATION

Introduction

According to the Secretariat of the World Trade Organisation (WTO), there are 88 individual regional trade agreements currently in force. Virtually all members of the WTO participate in at least one agreement to advance regional trade liberalisation in goods and services. World trade growth doubled from 4 per cent per annum between 1980 and 1993 to 8 per cent in 1994-1996, outpacing world output growth by a widening margin. Recent trends in intra-regional and extra-regional trade allow one to tentatively conclude that regional trade rather than global networking was the dominant feature in the world economy during the 1980s and early 1990s.

Involvement of individual states in different regional and sub-regional agreements helps 'construct bridges' between them and form an extensive network of intra-regional agreements and cooperative ties. The trend towards the intensification of cooperation on intra-regional levels has gained momentum in the last two decades all over the world involving economies at all levels of development. The regional agreements vary in coverage, scope and completeness - the ASEAN, the North American Free Trade Agreement (NAFTA), European Union (EU), Eurasian Economic Community (EurAsEC) and proposed for intercontinental (Comprehensive Economic Partnership for East Asia (CEPEA), Transatlantic Free Trade Area (TAFTA) economic blocks are some examples.

Rationale for Regional Cooperation

The formation of organisations as a regional arrangement is initiated by the agreement of the states involved to deepen economic interaction between themselves in certain fields of common interest. The need to develop further economic cooperation in order to make it efficient and profitable for all countries involved act as the main incentive for them to widen and enlarge cooperation in other non-economic fields. The development of such regional organisations is a time- and labour-consuming process of balancing economic interests of participating states. But every step forward in this direction increases the foundations for stable and peaceful relations between the participating states in the long-term perspective.

Economic Integration – a step ahead in the process of Regional Cooperation

Economic integration means trade unification between different states by partial or full abolishing of customs tariffs on trade within the borders of each state. The main goal of economic integration is stimulation (growth) of trade and thereby an increase of welfare. As no customs duties are paid within the integrated area, prices are lower for distributors and consumers. In theory, the best option is free trade, with free competition and no trade barriers whatsoever. Economic integration has been thought of as the "second best" option for global trade where barriers to full free trade exist. Increase of trade between member states of economic unions is meant to lead to the increase of the GDP of its members, and hence, to better welfare - a goal of any state around the world. The other objective for the states pursuing economic integration is to stay/become regionally and globally competitive, as the goods in the states outside economic blocks become more expensive (i.e., less competitive).

Stages of Economic Integration

1. Preferential trading area
2. Free trade area, Monetary union
3. Customs union, Common market
4. Economic union, Customs and monetary union
5. Economic and monetary union – Fiscal union
6. Complete economic integration

A Preferential Trade Area (also Preferential Trade Agreement, PTA) is a trading bloc which gives preferential access to certain products from the participating countries. This is done by reducing tariffs, but not by abolishing them completely. A PTA can be established through a trade pact. It is the first stage of economic integration. The line between a PTA and a Free trade area (FTA) may be blurred, as almost any PTA has a main goal of becoming a FTA in accordance with the General Agreement on Tariffs and Trade. These tariff preferences have created numerous departures from the normal trade relations principal, namely that World Trade Organization (WTO) members should apply the same tariff to imports from other WTO members.

Free trade area (FTA) is a type of trade bloc, a designated group of countries (at least two) that have agreed to partially or fully eliminate custom tariffs, quotas and preferences on most (if not all) goods and services traded between them. It can be considered the second stage of economic integration. Countries choose this kind of economic integration form if their economical structures are complementary. If they are competitive, they will choose customs union. A free trade area is the result of a free trade agreement (trade pact). According to the WTO, there are over 200 FTAs in force. Most FTAs are between two individual countries, but such agreements can be reached between a trade bloc and an individual nation such as the European Union-Chile free trade agreement. The aim of a free trade area is to reduce barriers to easy exchange so that trade can grow as a result of specialization, division of labour and most importantly via comparative advantage. Every customs union, trade common market and economic and monetary union also has a free trade area.

A “customs union” is a type of trade bloc which is composed of a free trade area with a common external tariff. The participant countries set up common external trade policy, but in some cases they use different import quotas. Common competition policy is also helpful to avoid competition deficiency. Purposes for establishing a customs union normally include increasing economic efficiency and establishing closer political and cultural ties between the member countries. It is the third stage of economic integration. Customs union is established through trade pact to introduce unified tariffs on the exterior borders of the union (CET – common external tariffs).

A "monetary union" introduces a shared currency. A "common market" adds to a FTA the free movement of services, capital and labour. An "economic union" combines customs union with a common market. A "fiscal union" introduces fiscal and budgetary coordination policies. In order to be successful the more advanced integration steps are typically accompanied by unification of economic policies (tax, social welfare benefits, etc.), reductions in the rest of the trade barriers, introduction of supranational bodies, and gradual moves towards the final stage, a "political union".

In the backdrop of the world trend towards regionalization, this paper makes an overview of the efforts of the South Asian countries to for economic integration through the formation of the following regional and sub-regional associations:

(1) The Association of Southeast Asian Nations, commonly abbreviated ASEAN, is a geo-political and economic organization of 10 countries located in Southeast Asia, which was formed on 8 August 1967 by Indonesia, Malaysia, the Philippines, Singapore and Thailand when their foreign ministers signed the ASEAN Declaration, more commonly known as the Bangkok Declaration. Since then, membership has expanded to include Brunei, Burma (Myanmar), Cambodia, Laos, and Vietnam. Its aims include the acceleration of economic growth, social progress, cultural development among its members, the protection of the peace and stability of the region, and to provide opportunities for member countries to discuss differences peacefully.

ASEAN spans over an area of 4.46 million kms with a population of approximately 580 million people, 8.7% of the world population. In 2009, its combined nominal GDP had grown to more than USD $1.5 trillion. If ASEAN was a single country, it would rank as the 9th largest economy in the world in terms of nominal GDP. The motivations for the birth of ASEAN were so that its members’ governing elite could concentrate on nation building, the common fear of communism, reduced faith in or mistrust of external powers in the 1960s, as well as a desire for economic development; not to mention Indonesia’s ambition to become a regional hegemony through regional cooperation and the hope on the part of Malaysia and Singapore to constrain Indonesia and bring it into a more cooperative framework. On 15 December 1995, the Southeast Asian Nuclear-Weapon-Free Zone Treaty was signed with the intention of turning Southeast Asia into a Nuclear-Weapon-Free Zone. The treaty became fully effective on 21 June 2001, after the Philippines ratified it, effectively banning all nuclear weapons in the region.

India became a sectoral dialogue partner of ASEAN in 1992. Mutual interest led ASEAN to invite India to become its full dialogue partner during the fifth ASEAN Summit in Bangkok in 1995. India also became a member of the ASEAN Regional Forum (ARF) in 1996. India and ASEAN have been holding summit-level meetings on an annual basis since 2002. In August 2009, India signed a Free Trade Agreement (FTA) with the ASEAN members in Thailand. In January 2010, Singapore, Malaysia and Thailand accepted the FTA on goods. The other seven ASEAN contries are expected to operationalise the FTA by August 2010.

(2) The South Asian Association for Regional Cooperation (SAARC) is an economic and political organization of eight countries in Southern Asia. It was established on December 8, 1985 by Bangladesh, Bhutan, Maldives, Nepal, Pakistan, India and Sri Lanka. In April 2007, Afghanistan became its eighth member at the 14^th SAARC summit. India’s Sheel Kant Sharma is the present Secretary General of SAARC since March 2008.

SAARC’s objectives:

Ø To promote the welfare of the people of South Asia and to improve their quality of life;

Ø 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 realize their full potential;

Ø To promote and strengthen collective self-reliance among the countries of South Asia;

Ø To contribute to mutual trust, understanding and appreciation of one another’s problems;

Ø To promote active collaboration and mutual assistance in the economic, social, cultural, technical and scientific fields;

Ø To strengthen cooperation with other developing countries;

Ø To strengthen cooperation among themselves in international forums on matters of common interest; and

Ø To cooperate with international and regional organizations with similar aims and purposes.

In 1983 the Foreign Ministers of the concerned countries launched the Integrated Programme of Action (IPA) in nine agreed areas, namely, Agriculture; Rural Development; Telecommunications; Meteorology; Health and Population Activities; Transport; Postal Services; Science and Technology; and Sports, arts and Culture. SAARC has laid more stress on the “core issues” above rather than on political issues like the Kashmir dispute and the Sri Lankan civil war. SAARC has also refrained from interfering in the internal matters of its member states.

SAARC Preferential Trading Arrangement: The Agreement on SAARC Preferential Trading Agreement (SAPTA) was signed on 11 April 1993 and entered into force on 7 December 1995 with the desire of the SAARC members (India, Pakistan, Nepal, Sri Lanka, Bangladesh, Bhutan and the Maldives) to promote and sustain mutual trade and economic cooperation within the SAARC region through the exchange of concessions.

(3) In 1993, SAARC nations signed an agreement to gradually lower tariffs within the region in Dhaka. Eleven years later, on 6 January 2004, at the 12^th SAARC Summit at Islamabad, SAARC nations devised the South Asia Free Trade Agreement (SAFTA) which created a framework for the establishment of a free trade area covering 1.4. billion people in India, Pakistan, Nepal, Sri Lanka, Bangaldesh, Bhutan and the Maldives. The seven foreign ministers of the region signed a framework on SAFTA with zero customs duty on the trade of practically all products in the region by the end of 2016.

SAFTA came into being on 1 January 2006 and will be operational following ratification of agreement by the seven governments. SAFTA requires the South Asian developing countries, i.e. India, Pakistan and Sri Lanka, to reduce their duties to 20 per cent in the first phase of the two year period ending in 2007.In the final five year phase ending 2012, the 20 per cent duty will be reduced to zero in a series of annual cuts. The least developed nations in South Asia, i.e. Nepal, Bhutan, Bangladesh and Maldives have an additional three years to reduce tariffs to zero. India and Pakistan have signed but not ratified the treaty. Over the years the SAARC members have expressed their unwillingness on signing a free trade agreement. India has many trade pacts with Maldives, Nepal, Bhutan and Sri Lanka, but similar trade agreements with Pakistan and Bangladesh have been stalled due to political and economic concerns on both sides. In the Dhaka Summit (2009), the nations agreed to organize development funds under a single financial institution with a permanent secretariat that would cover all SAARC programmes ranging from social, to infrastructure, to economic ones.

(4) BCIM forum was floated in 1999 at a conference on regional cooperation which was held at Kunming, the capital of the Yunnan province of the Peoples’ Republic of China. This sub-region comprises a number of geographical units in contiguous eastern South Asia: North-east states of India, Southern provinces of China, Bangladesh and Myanmar. Broadly, it covers the four relevant countries, hence the acronym BCIM. Bangladesh, China, India and Myanmar (BCIM) is a sub-regional zone having varied topograpghy and inconvenient transport and communication system. But the entire zone possesses abundant natural, tourism and hydro-energy resources like the Brahmaputra, Ganges, Irrawati, Jinsha, Mekong and Nujiang rivers. Despite such resoucefulness, the entire zone is under developed.

If the BCIM countries are to grow faster by taking advantage of the globalization era, they must expand trade and investment among themselves. This can be achieved only through mutual cooperation by forming a trading bloc among themselves in which no trade and investment barriers should exist. The BCIM concept draws its inspiration from the concept of Growth Zones. The idea of growth zones involves cooperation between three or more countries for the development of a geographically contiguous region consisting of a part or the whole of each of the participating countries. Growth zones bring together resources of the neighbouring countries to foster economic development of the member countries. They provide a unique opportunity to blend cooperation in trade, investment, transport and communication in a comprehensive manner, in a planned way. In the developing world East and South-East Asia are regions where most of the growth zones have been established.

The idea of developing sub-regional cooperation originated, to a large extent, in the lack of progress stimulating investment and implementing development projects under the ambit of SAARC. Development of the Ganges–Meghna-Brahmaputra basin for efficient water management and extracting the potential benefits of hydroelectric power for the constituent countries were underlying factors that informed this idea. The targeted sectors identified were multimodal transportation and communication, energy, trade and investment facilitation and promotion, tourism, optimal utilization of natural resource endowments and environment.

North East India: Gains from South Asian Cooperation

North East India consisting of Arunachal Pradesh, Assam, Manipur, Meghalaya, Mizoram, Nagaland and Tripura share international borders with China (1175 km), Bhutan (800 km), Myanmar (1640 km) and Bangladesh (1596 km). On the other hand, the North-eastern Region is connected with the mainland India through the ‘chicken neck’ in West Bengal having an approximate width of only 22 km. due to this restriction, all the North Eastern States could not prosper despite being endowed with vast natural resources. Given this peculiar geo-political location, cross border trade links are likely to be more cost-effective for North East India. With these developments, the North East India with its geo-strategic locational advantage, could emerge as a business transit centre for BCIM, SAARC and ASEAN group of nations. Unless exportable surpluses are produced within it, North eastern Region will not be able to derive full benefits of all these developments simply by acting as a corridor of exports of other nations. North Eastern States have to identify a few well defined thrust areas having comparative advantage and specialize in those areas.

Conclusion

The economic benefits of regional cooperation and integration would definitely outweigh the costs in the form of importation of vices, imaginary or real. To achieve such regional cooperation through trade and investment, the physical linkages among the integrating partners in the form of Trans National roadways, railways, waterways and airways (wherever possible) are essential. A huge amount of capital expenditure would be necessary to build such infrastructural facilities. This is possible only through financial cooperation among all the partners and international financial institutions.

(Acknowledgement: Various Websites)

WTO and Indian Agriculture

The Uruguay Round of negotiations led to the birth of the WTO in January 1995. Under the Uruguay Round, all member nations of GATT participating in negotiations committed themselves to a widespread reduction in tariffs, removal of quantitative restrictions and opening up their economies to international competition in most fields of economic activity. Thus the new international economic order that is taking shape under the aegis of WTO is likely to pull down drastically the levels of domestic protection in all areas of economic activity. As far as agriculture is concerned, the Agreement on Agriculture (AoA) provides framework for the long-term reform of agricultural trade and domestic policies over the years to come, with the objective of introducing increased market orientation in agricultural trade. AoA deals specifically with: (1) providing market access, (2) regulating domestic support, and (3) containing export subsidies.

Market Access. AoA required that the prevailing trade-distorting non-tariff barriers in agriculture were to be abolished and converted into tariffs so as to provide the same level of protection and subsequently the tariffs were to be progressively reduced by a simple average of 36 per cent by the developed countries over 6 years (year ending 2000) and by 24 per cent by the developing countries over 10 years (year ending 2004).

Domestic Support. AoA divides domestic support into two groups – (1) trade distorting and (2) non-trade distorting or minimal trade distorting. All trade distorting domestic support is placed in ‘Amber Box’. This has to be quantified in accordance with the Aggregate Measure Support (AMS) and removed. Non-trade distorting domestic support measures have been divided into (1) Green Box, (2) Blue Box and (3) Special and Differential (S & D) Box. The Green Box measures include assistance given through environmental assistance programmes, services such as research training and extension, marketing information, certain types of rural infrastructure etc. The support under Green Box is excluded from any reduction commitments and is not subject to any upper limit. Subsidies under Blue Box include direct payments given to farmers in the form of deficiency payment (i.e., the difference in the government’s minimum support price and market price is paid directly to the farmers, as in USA), direct payments to farmers under production limiting programmes, as in European Union etc. Support under Blue Box is also exempted from any reduction commitments, but it has an upper limit. The S & D Box includes measures taken by developing countries, otherwise subject to reductions, such as investment subsidies and various agricultural input subsidies generally available to low income and resource poor producers in a developing country.

Export Subsidies. The developed countries were required to reduce the volume of subsidized exports by 21 per cent over 6 years and the budgetary outlays for export subsidies by 36 per cent with respect to the base period 1986-90. Developing countries were required to reduce the volume by 10 per cent and budgetary outlays by 24 per cent over 10 years.

Other Agreements Related to Agriculture

There are some other WTO agreements that have a clear bearing on agriculture: (1) Agreement on Sanitary and Phyto-Sanitary (SPS) measures, which sets international standards for protection of human, animal or plant life or health. (2) Agreement on Technical Barriers to Trade (TBT) aims to encourage use of international standards and calls for national testing and certifying bodies to avoid discrimination against imports. and (3) Agreement on Trade Related Intellectual Property Rights (TRIPs) covers seven types of intellectual property for protection, namely, patents, copyrights, trademarks, industrial designs, geographical indications, design layouts of integrated circuits and undisclosed information. As far as agriculture is concerned, article 27.3 (b) of the agreement requires members to provide for protection of plant varieties either by patent or by an effective sui generis system or by any combination thereof.

India had expected that with the dismantling of domestic support in developed countries and widespread reduction in export subsidies by these countries, as part of their commitments under WTO, market access for Indian agricultural products in developed countries would expand. But the developed countries have played their cards cleverly and have taken effective steps to block agricultural exports from developing countries including India behind various loopholes in AoA and allies agreements. On the other hand, India has provided increased market access to other countries by effectively dismantling quantitative restrictions during the last few years. To protect Indian agriculture and farmers from foreign competition, it is imperative for the government to lay down priorities for action.