International Economic Integration

Theoretical framework of Trade Agreements Forms of International Economic Agreements Indias participation in Trade Agreements

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Learning Objectives
To provide an overview of international economic integration To elucidate the theoretical framework of Preferential Trading Agreements To explicate various forms of international economic integration To discuss major international economic trade groups To briefly outline Indias participation in PTAs To evaluate regional trading agreements under the WTO framework
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Significance of PTAs
Economic integrations among countries significantly influence international business. The preferential treatment granted to member countries affects the competitiveness of goods in international markets. Elimination of import tariffs by the member countries of a trade group encourages sourcing of goods from cost-

efficient production locations.

However, discriminatory tariff

against non-members do result in trade diversion to member countries, even at the cost of production efficiency.

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Trade-Creation Impact
Formation of an FTA results in the expansion of consumption opportunities by making available lowcost goods.

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Trade-Diversion Impact
Formation of an FTA results in trade diversion to its members from non-members since the elimination of import tariffs among member countries makes sourcing of goods from member countries more attractive compared to nonmembers, even at the cost of production efficiency.

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Forms of International Economic Integration

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Preferential Trade Agreement (PTA)

Member countries in a PTA lower tariff barriers to imports of identified products from one another e. g. ECOWAS, GSTP, COMESA, etc.

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Free Trade Agreement (FTA)

Form of economic integration in which member countries seek to remove all tariffs and non-tariff barriers for cross-border trade of goods and services among themselves e.g. NAFTA, LFTA., etc.

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Customs Union (CU)

Countries not only eliminate tariff barriers among

themselves but also apply common external import tariffs for

non-members e. g. CARICOM, CACM, etc.

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Common Market (CM)

In addition to free trade among members and

uniform tariff policy for non-members in a common

market, it involves elimination of all restrictions on cross-border investments, movement of labour, technology transfer, management, sharing of capital resources, e.g. COMESA, MERCOSUR, etc.

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Economic Union (EU)

It enjoys much greater level of economic integration where free exchange of goods and services takes place. The member countries in an economic union also maintain a fiscal discipline, stability in exchange, and interest rates by way of unified monetary and fiscal policies.

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Political Union (PU)

As a culmination of economic integration, the member countries strive to harmonize their security and foreign policies. A common parliament is

created with representatives of member countries

who work in synchronization with an individual

countrys legislature.

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Major Regional Trade Agreements

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European Union (EU)

Aimed at promoting regional co-operation among countries

in Europe, in addition to trade and economy, the EU deals

with many other subjects, such as citizens rights; ensuring

freedom, security, and justice; job creation; regional

development; environmental protection; and promoting globalization

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North American Free Trade Area (NAFTA)

Formed on 1 January, 1994, the economic integration between the US, Canada and Mexico aims at elimination of trade barriers related to industrial goods and services, besides separate

agreement on agriculture, intellectual property

rights, labour adjustment, and environmental

protection.

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MERCOSUR (Mercado Comun del Sur)

MERCOSUR, created in March 1991, aims at allowing free movement of goods, capital, labour, and services with a common uniform external tariff among member countries in Latin America.

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Gulf Cooperation Council (GCC)

Aimed at promoting stability and economic cooperation among the Persian Gulf nations, the GCC was established on 25 May 1981. Its members include Bahrain, Kuwait, Oman, Qatar, Saudi Arabia, and the United Arab Emirates.

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Asia-Pacific Economic Cooperation (APEC)

Established in 1989, APEC aims to enhance economic growth and prosperity for the region and to strengthen the Asia-Pacific Community. APEC has no treaty obligations required of its participants. Decisions are reached by consensus and

commitments and undertaken on a voluntary basis.

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Association of South East Asian Nations (ASEAN)

The ASEAN was established on 8 August 1967 with major objectives: To accelerate economic growth, social progress, and cultural development in the region through joint endeavors To promote regional peace and stability through abiding respect for justice and the rule of law in the relationship among countries

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Indias Participation in PTAs

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SAARC Preferential Trading Agreement (SAPTA)

The SAPTA was signed on 11 April 1993 at the Seventh SAARC Summit held in Dhaka to provide a framework for the exchange of tariff concessions with a view to promoting trade and economic cooperation among the SAARC member countries.

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South Asian Free Trade Agreement (SAFTA)

SAFTA has come into force from 1 January 2006 aimed at economic cooperation and integration among member countries. It anticipates completion of the whole

process of instituting free trade among the member countries in ten years.

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Comprehensive Economic Cooperation Agreement (CECA) between India and Singapore

Signed on 29 June 2005, the CECA came into force on 1 August 2005. Besides trade in goods, it also

covers investment, services, mutual recognition

agreements, and customs co-operations.

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Framework Agreement on Comprehensive Economic Cooperation between the Association of South East Asian Nations (ASEAN) and India
The framework agreement between ASEAN and India was signed on 8 October 2003. It covers several aspects such as: gradual tariff reductions leading to formation of FTA
trade facilitation measures,

Trade and investment promotion measures

early harvest programmes tariff concessions.

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Bay of Bengal Initiative for Multi-sectoral Technical and Economic Co-operation (BIMSTEC)
BIMSTEC provides a unique link between South Asia and Southeast Asia aimed to develop into an FTA and focus on activities that facilitate trade, increase investment, and promote technical cooperation among member countries. Six areas were identified for cooperation include trade and investment, technology, transportation and communication, energy, tourism, and fisheries.

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Indo-Sri Lanka Free Trade Agreement (ISLFTA)

An FTA between India and Sri Lanka was signed on 28 December 1998. The agreement envisages phasing out of tariffs on all products except for a limited number of items in the Negative List and tariff rate quota items over a period of time.

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Asia-Pacific Trade Agreement (APTA) (Bangkok Agreement)

The Bangkok agreement was approved by the GATT council in March 1978 aimed to liberalize and expand trade progressively in the ESCAP region through mutually agreed

concessions by member countries. From 2 November 2005,

this agreement is renamed the Asia Pacific Trade Agreement (APTA).

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Global System of Trade Preferences (GSTP)

The GSTP establishes a framework for exchange of trade concessions among the member developing countries. It also lays down the rules, principles, and procedures for conduct of negotiations and implementation of the decisions made.

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Generalized System of Trade Preferences (GSP)

The GSP is a non-contractual instrument by which developed countries extend tariff concessions to developing countries unilaterally and on the basis of non-reciprocity.

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Framework Agreement for Establishing FTA between India and Thailand

Signed on 9 October 2003, the framework agreement covers FTA in goods, services and investment, and areas of economic cooperation. It also provides an Early Harvest

Scheme (EHS) under which common items have been agreed

for elimination of tariffs on a fast-track basis.

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Bilateral Preferential Trading Agreement with Afghanistan

The Preferential Trade Agreement between India and Afghanistan, signed on 6 March 2003, aims to provide for grant or concessions on a range of

products of export interest to Afghanistan, as a part

of Indias endeavour to strengthen bilateral trade and economic relations.

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IndiaMERCOSUR PTA
Signed on 19 March, 2005, the PTA aims to expand and strengthen existing trade relations between India and MERCOSUR by granting reciprocal fixed trade preferences with the ultimate objective of creating an FTA.

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India-Chile Framework Agreement on Economic Cooperation

Signed on 20 January 2005,

the agreement

envisages a PTA between the two countries.

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IndoGulf Cooperation Council (GCC) FTA

Signed on 25 August 2004, it also aims to include services as well as investment and general economic

cooperation alongwith goods.

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Limitations of Regional Economic Integrations

It can create an incentive for even further

discrimination, which eventually will hurt all

trading partners. PTAs cannot solve systemic issues, such as rules of origin, anti-dumping, agricultural, and fisheries subsidies. These issues simply cannot be handled

at the bilateral or regional level.

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 The proliferation of Regional Trade Agreements can

greatly complicate the trading environment, creating a web of incoherent rules. To many small and weak developing countries entering into a PTA with a powerful big country means less leverage and a weaker negotiating position as compared to that in the multilateral talks.

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Regional Trade Agreements Vis--vis Multilateral Trading System Under the WTO
RTAs are an important exception under Article XXIV of the GATT Agreement to the MFN rule of the WTO agreements, under which tariff and other technical barriers to trade can be reduced on preferential basis by countries under the regional agreement.

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