Free trade and new regionalism

The United Nations Conference on Trade and Development (UNCTAD) report on Free Trade Agreements (FTAs) may be music to the ears of Indian industry and trade. The U.N. agency has cautioned developing countries against entering into FTAs with developed or industrialised countries, saying it could not only weaken the multilateral trading system, but also reduce the scope for national policies. But that note of caution seems limited to the North-South bilateral or regional trade agreements. The report for 2007 advocates: “Rather than subscribing to the ‘new regionalism,’ developing countries may examine other areas of cooperation with partners in the same geographical region and at a similar level of economic development, in a spirit of true regionalism. This could help strengthen their own strategies for national development and integration into the global economy.” It is in the case of an FTA between developed and developing countries that UNCTAD says the latter would lose out in competition and their domestic industry would get overwhelmingly exposed on account of foreign competition. But the fact remains that the number of FTAs rose from a mere 20 in 1990 to 86 in 2000 and to 159 in 2007, pointing to a clear wave in favour of regional or bilateral arrangements. This has been attributed to a growing frustration among developing countries over the stalemate in multilateral negotiations under the World Trade Organisation.
The UNCTAD report has identified East Asia and South Asia as the most dynamic regions of growth, powered by the sustained momentum of the Chinese and Indian economies. But strangely, these very countries are finding it difficult to forge FTAs. From the larger canvas of the Asia Pacific economic grouping called APEC, to the smaller, regional entities such as Asean in South East Asia and SAARC in South Asia, not much progress has been made on regional trade agreements. While the Asean has taken a full three decades to strike an FTA — that it is beset with problems is another matter — South Asia’s SAARC has not been able to clinch an agreement even after two decades of existence. Despite the problems and sensitivities inherent in an FTA, even the WTO has considered them to be building blocs of the global free trade area that should ultimately take shape. While waiting for the multilateral negotiations to succeed, developing countries should focus on regional arrangements with economies at the same level of development, building upon the advantages of proximity, similarity of interests, and economic complementarity.