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November 07, 2019 Thursday 11:57:29 AM IST

TRADE OF GOOD HOPE

Expert Counsel

A new trade bloc named RCEP (Regional Comprehensive Economic Partnership) has been in the news of late on account of voices of protest from farmer groups in Kerala against India being part of this group. This bloc comprises 16 nations including China, India, Japan, South Korea, Australia, New Zealand, Singapore, Indonesia, Thailand, Philippines, Laos, Vietnam, Brunei, Malaysia, Cambodia and Myanmar and seeks to promote free trade amongst these countries. Once formed, RCEP would cater to a market of more than 3.4 billion people, have a combined Gross Domestic Product of $ 21.3 trillion and account for 40% of global trade, making it the most powerful amongst such groupings in the whole world.

 Free trade is defined as an environment that promotes free movement of goods and services between nations without any trade or tariff barriers. This also envisages full and complete access to markets of countries involved with information about factors influencing them, without any distortions that give any groups/ interest any unfair advantage over others. Free trade is usually achieved either through a free trade agreement or formation of trade blocs or under the broad framework of a multilateral organisation.

 Western origin

Free trade in goods was postulated during the nineteenth century following Industrial revolution in the western world which completely transformed the concept of manufacture. Industrial revolution saw large factories capable of mass production being set up, which could conceive and make available goods at a very low price. However, such industrial units needed huge quantities of raw materials for use in the process of manufacture as well as markets for selling the final products. Countries of Europe who benefitted from Industrial revolution started sourcing cheap raw material from the colonies they had under them in Asia and Africa, while dumping the final produce in the same countries at very low price. This led to collapse of domestic industry in these colonies forcing into penury the artisans and craftsmen who worked in indigenous enterprises producing goods there.


 This unfair system whereby the western world enriched themselves at the expense of their colonies continued till the end of Second World War. The emergence of India and China from the yoke of colonialism in the immediate aftermath of this war was followed by many other countries of Asia and Africa breaking free from the shackles imposed by their imperialist masters. These newly independent countries were understandably wary of the concept of free trade which had brought financial ruin on them. Hence all of them started by trying to protecting and promoting domestic industry by raising barriers against free movement of goods. This took the form of either levy of Customs duty on import of goods (tariff barriers) or prohibiting or restricting imports of specified class of products (non-tariff barriers).

 Birth of GATT

As could be imagined, this led to tensions between nations which wanted to create an environment facilitating free trade for their goods and those that wished to protect their domestic industries. The countries that wanted to conduct global trade without any barriers and restrictions came together and signed General Agreement on Tariff and Trade (GATT) in 1947 to advance their cause. However, the existence of Union of Soviet Socialist Republics (USSR) and the powerful block of Communist countries under its control acted as a restraining force on GATT and prevented them from gaining an upper hand.

 


The series of trade negotiations conducted under GATT are named as ‘rounds’. GATT had conducted seven rounds during the period from its inception till the mid 1980’s winning only a few trade concessions amongst member nations, whose numbers gradually increased. But the collapse of USSR and the fall of Communist governments in East Europe during the late 1980’s saw the western world regaining their pole position. In a unipolar world dominated by USA, who were the biggest champions of free trade, countries leading GATT came back strongly through the Uruguay Round, which lasted from 1986 to 1994 and wrested concessions and tariff reductions from less developed and developing countries. This round also decided to include agricultural produce and services within the ambit of free trade. Further, GATT decided to change its name to World Trade Organisation (WTO) from 1995 onwards.

 The last round of negotiations under the aegis of WTO is the Doha round which commenced in 2001 but has been inconclusive as yet. The achievement of ambitious targets in Uruguay round prompted the developed world to seek more benefits under the Doha round, which is one of the reasons for it not reaching a successful culmination. Despite the stalemate over Doha round, it must be admitted that negotiations in GATT and WTO have succeeded in bringing down tariff and non-tariff barriers considerably and thus promoted free and faster trade between member countries.

 Free trade pacts

The lack of consensus over Doha round prompted interested nations to discuss matters relating to trade and tariff bilaterally and arrive at mutually acceptable agreements. These are known as Free Trade Agreements (FTA’s) when they cover only goods within their scope. When such accords include within their ambit, in addition to goods, trade in services besides other aspects such as movement of persons and other specified areas of cooperation, they are referred to as Comprehensive Economic Cooperation Agreement (CECA) or Comprehensive Economic Partnership Agreement (CEPA). India has signed CECA with Singapore and CEPA with Japan.


 Another related development has been the formation of trade blocs by countries coming together for this purpose. The largest such bloc is European Union (EU), where free movement of goods, services and persons are permitted within the entire area of countries that are part of this unit. Other similar groupings are North America Free Trade Agreement (NAFTA), Association of South East Asian Nations (ASEAN) and South Asia Agreement for Regional Cooperation (SAARC).  It is not the case that tariffs are completely eliminated in all these trade blocs; in many cases, members who form part of the bloc are given preferential rates. The advantage with trade blocs is that they enlarge the market for finished goods while making sourcing of raw materials from other member countries easier and cheaper, besides bringing in increased efficiency and lower prices on account of increased competition.

 

Pros and cons

However, all these measures aimed at promoting free trade suffer from the disadvantage that they place the domestic industry and producers at par with competitors from foreign lands. For example, it would be seen that Thailand and Indonesia produce large quantities of betel nut and rubber at very low prices. Import of these items into India without any duty would cause their prices to fall and is objected to by betel nut and rubber farmers in India. On the other hand, many global auto majors and Pharma companies have set up their manufacturing facilities in India hoping to cater to a larger market. If India does not form part of RCEP, their products would not gain benefit of duty concessions when exported to countries in this trade bloc. Thus, there is bound to be pressure from the side of manufacturing industry to join RCEP while farming communitywould oppose this move. Governments of the day are required to carefully weigh the possible gains against losses before taking a decision on signing agreements for promoting free trade.


 Negotiation for any agreement to promote free trade, whether in WTO or as part of trade bloc or bilaterally with another country involves detailed and protracted discussions to safeguard the interests of domestic trade and industry while making available to them access to a larger market. This would involve some amount of give and take, with the negotiators trying their level best to record more gains than losses. Negotiators have to walk a tightrope while trying to meet the objectives of the government and industry without giving away any concessions that could have an adverse impact on any of the sectors of domestic economy. They should also be adept at showcasing the strengths of the nation they represent, while taking care not to expose the vulnerabilities. In the case of India, countries would be keen to gain access to the vast domestic market with 1.4 billion population, most of who are in the younger age group and this aspect should be skillfully leveraged during the negotiations to gain good results.

To conclude, joining trade blocs and signing FTA’s are intended to promote the trade and commerce of a nation to help it achieve higher levels of prosperity. In a world where 75% of international trade takes place through such blocs and FTAs, one cannot wish them away nor afford to stay away from them. Detailed research, well-oiled negotiation apparatus and a system to enlighten the public about utilising the benefits gained from such accords offer the prudent way forward than blind opposition.


Dr. K N Raghavan

The writer is Chairman and Executive Director Of Rubber Board. 
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#Regional treaties have become part of international trade. Good negotiation skills and an enlightened public provide the way forward.