Experience of Expansion of Existing Trade Blocs

1
Experience of Expansion of Existing Trade Blocs

• Dr. (Mrs.) Vijaya Katti
• Professor Chairperson (GSD)
• Indian Institute of Foreign Trade
• New Delhi-110016
• Email vckatti_at_yahoo.com, vijayakatti_at_iift.ac.in

Session on 23/09/12
2
Objectives

• To explain the rationale behind the expansion of
  Trading Blocs
• To elaborate on the existing three Trading Blocs
  viz. ASEAN, NAFTA and EU
• To explain the process of expansion of these
  three Trading Blocs
• To examine the implications of the expansion
  these three Trading Blocs for India

3
Evolution of Asia-Pacific Regionalism

• Broadly 3 waves
• First wave (50s/60s/70s)
• 1950 Conference on Asian/African cooperation in
  Bandung, Indonesia, the precursor of the
  non-aligned movement.
• Import-substitution industrialization strategy
  becomes development model. South-South
  cooperation based on strategic selection of
  tariff liberalization among members to promote
  industrialization. Inward looking with high
  tariff walls to keep out imports competing with
  infant industries.
• First RTA signed in 1975 Bangkok Agreement
• Second wave (80s/90s)
• Unsustainability of import-substitution model,
  globalization accelerates and results in
  north/south interdependence. Outward-oriented,
  open regionalism i.e. faster liberalization
  among RTA friends while at the same time
  lowering barriers to third parties

4
Contd

• Second wave
• Establishment of APEC based on non-discriminatory
  principles in its strictest interpretation,
  conclusion of UR
• Rapid increase in membership to GATT/WTO.
• Regionalism and multilateralism enter golden age
  of mutually supportive liberalization
• Third wave (Late 1990s-present)
• financial crisis
• stalling of APEC process of liberalization
• stalwarts of MFN (Japan and Rok) turn regional,
  as well as China who completes most difficult
  part of internal transformation.
• New era of deep and wide economic partnership
  agreements, with FTA as core, but much wider
  economic cooperation as well
• Bilateralism is key feature

5
Where Does Asia-Pacific Stand? New Age
Regionalism

• Despite density of agreements, concluded
  agreements are generally lite, particularly
  those among developing countries
• liberalization shifted to future (10 years or
  more)
• significant exceptions in goods
• rules of origin restrictive
• services not covered
• investments covered, but focus more on investor
  protection than locking in investment
  liberalization
• dispute resolution mechanisms not well defined

6
Contd

• However, agreements involving developing and
  developed countries much more comprehensive.
• services, TRIPs, investments and other WTO
  features are prominent
• increasing public concern regarding asymmetric
  negotiating powers
• calls for greater democratization of trade policy
  formulation strengthened consultative mechanisms
  (bottom-up), increased role for parliamentarians
  as interface between societies and policy making
  executive branch
• Other forms of regional economic cooperation also
  continue
• Growth triangles/quadrangles, EPZs, SEZs
• Many forms intergovernmental/private sector
  driven
• Common themes riparian cooperation, transport
  corridors, energy selfsufficiency.

7
APTA A Bridge across Asia

• Signed in 1975 as an initiative of UNESCAP, the
  Bangkok Agreement, now APTA, is Asias oldest
  preferential trade agreement between developing
  countries.
• It aims to promote regional trade through an
  exchange of mutually-agreed concessions.
• Bangladesh, China, India, Republic of Korea, Lao
  PDR and Sri Lanka are member countries.

8

• Contd
• Region-wide membership potential
• Only RTA in which two most populous and fastest
  growing economies are members (i.e. China and
  India)
• Through China and India linkages with other RTAs
  in the region can be established (e.g. AFTA,
  BIMSTEC, SAFTA)

9
Expanding Membership
Status Chinas accession in particular makes
membership more attractive to countries in the
region Efforts are being taken to expand
membership. Mongolia and Pakistan have indicated
intention to join, others have expressed
interest Next target Central Asia
10
Contd

• The primary aim of AFTA is to increase ASEANs
  competitive edge as a production base geared for
  the world market.
• Its main feature is trade liberalisation through
  the elimination of intra-ASEAN tariffs and
  non-tariff barriers, which would then raise the
  efficiency and cost effectiveness of doing
  business and promote trade and investment in a
  fashion consistent with the General Agreement on
  Tariffs and Trade (GATT)

11
Contd

• Extra-ASEAN PTAs
• ASEAN1
• ASEAN seems poised t gain a prominent position in
  the emerging network of PTAs in Asia Pacific.
• Since 2002, the group has become party to FTA
  negotiations with Australia-New Zealand, China,
  India, Japan, Korea and the EU. These
  initiatives, known as the ASEAN 1 mechanism,
  have adopted AFTAs framework and have a
  comprehensive scope that encompasses not just
  trade but investment, services, IT, customs
  harmonising and antidumping.
• Hence, the term Comprehensive Economic
  Partnership (CEP) has been preferred to FTA.

12
ASEAN Framework Agreement for Services (AFAS)

• Following the General Agreement on Trade in
  Services (GATS), the ASEAN Framework Agreement
  for Services (AFAS) aims to create a free trade
  area in services n the sectors of air transport
  services, maritime transport services, business
  and professional services such as accounting,
  engineering, telecommunication and financial
  services. Signed in 1995, AFAS entails
  cooperation in improving efficiency and
  competitiveness of service providers, reducing
  restrictions to trade in services among members,
  and liberalizing trade in services beyond the
  scope in GATS.

13
ASEAN EXPANSION

• The expansion of membership in ASEAN since 1995
  can be studied from various angles.
• As the conflict management' aspect of this
  process will be at the centre of attention, this
  is studied from two main perspectives first,
  allowing new members into ASEAN is a way to
  manage conflicts between the original and new
  member states in the association more
  efficiently second, through the expansion,
  ASEAN' s conflict management approach will be
  spread to a larger part of the Southeast Asian
  region.

14
Contd

• ASEAN's approach to conflict management is thus
  at the centre of attention-it can be studied from
  different angles and all or simply some specific
  conflicts can be addressed.
• The improvement of relations during the period
  often known as the 'formative years', ie 1967 to
  1976, led to the signing of the Declaration of
  ASEAN Concord and the Treaty of Amity and
  Co-operation (TAC) (Bali Treaty) on 24 February
  1976,7 in connection with ASEAN'S first summit
  meeting, held in Bali.
• With regard to conflict management, ASEAN's
  approach has been geared towards preventing the
  emergence of new conflicts, while simultaneously
  pre- venting existing conflicts from disrupting
  inter-states relations

15
The Expansion Process

• The expansion of membership in ASEAN is the
  culmination of a process of gradual rapprochement
  between the ASEAN members and Cambodia, Laos,
  Burma and Vietnam, respectively.

16
Contd

• Prior to 1994, the Association of Southeast Asian
  Nations (ASEAN) only operated in Southeast Asia.
  After that, however, the ASEAN-led ASEAN Regional
  Forum (ARF) emerged and was followed by two more
  ASEAN-led organisations, ASEAN Plus Three (A3)
  in 1999 and the East Asia Summit (EAS) in 2005.
  This thesis will explain why, in just over a
  decade, ASEAN came to lead three organisations in
  East Asia, the Asia Pacific and beyond. To do
  this I will look at five organisations in East
  Asia and the Asia Pacific that have emerged since
  World War Two ASEAN, the ARF, A3, the EAS and
  the Asia Pacific Economic Cooperation (APEC)
  forum. This is not a complete list of all the
  regional organisations in East Asia and the Asia
  Pacific, but a list of the most relevant ones.

17
Contd..

• There are three reasons for this expansion.
• The first is ASEANs experience the fact that
  there are no other regional organisations in East
  Asia with the same amount of experience.
• The second is APEC the circumstances of APECs
  formation as well as APECs performance in the
  1997 Asian Financial Crisis (AFC) drove the
  creation of ASEAN-led organisations.
• The third and final reason for ASEANs expansion
  is more complex. Apart from APEC, regionalism in
  East Asia has been driven by threats to
  sovereignty.
• ASEAN itself was driven by threats to sovereignty
  and since its formation has structured itself to
  tackle such threats.
• The ARF, A3 and EAS were all formed to deal with
  threats to sovereignty, which made ASEAN
  particularly well suited to leading these
  regional organisations.

18
Contd..

• ASEAN consisted in the beginning only of
  countries with non-democratic governments, and
  that is still predominantly the case today.
• While the Europeans work together in an often
  confrontational, but predominantly constructive
  way, ASEAN members work according to a code of
  conduct they call the Asian way.
• Until now differences in size, and especially the
  vastness of Indonesia were of no real
  significance in the way ASEAN was run.
• Everybody in the region is very aware of
  Indonesias sense of national identity. Most of
  the smaller ASEAN states are worried about a
  possible Indonesian hegemony.
• ASEAN must now be prepared to take a further
  decisive step beyond the ASEAN concept and
  allow full member status to new, economically
  strong democracies from the region.

19
Expanding ASEAN membership as constructive
engagement and conflict management

• The process of rapprochement and gradual
  expansion of ASEAN has brought to an end the
  animosity and mutual suspicion that had
  characterised ASEAN'S relations with the
  Indochinese countries from 1975

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Factors in the expansion of ASEAN

• As seen from the perspective of the ASEAN six,
  the economic rationale for expanding membership
  in the association can be identified as follows
• creating a larger market for intra-ASEAN trade
  through an expanded ASEAN Free Trade Agreement
  (AFrA) encompassing the whole of Southeast Asia
  
• facilitating investment in Vietnam, Laos, Burma
  and Cambodia
• and more generally facilitating and creating
  conducive conditions for overall economic
  co-operation with the Southeast Asian region.

21
Contd

• As seen from the perspectives of Cambodia, Laos,
  Burma and Vietnam, the economic benefits of
  closer co-operation and eventually membership in
  ASEAN were expectations of increased investments
  by the ASEAN six, increased export opportunities
  to these countries and more assistance to
  development efforts from the ASEAN members.
• The pattern of economic interaction between the
  ASEAN six and the other four shows that there has
  been an increase in ASEAN six investments in the
  other countries in the 1990s, that ASEAN six
  investments are an important contribution to
  their overall foreign investments,39 and that
  Vietnam is the most important target of ASEAN six
  investments

22
Contd

• Political Factor
• As seen from the perspective of the ASEAN six,
  expansion of membership was a process aimed at
  the fulfilment of the overall goal set out in
  1967 to bring about or create an association
  encompassing all 10 countries in the Southeast
  Asian region, ie fulfilling the notion of 'One
  Southeast Asia'
• Security Factor
• The security factor should be seen as an
  ambition to create a more stable regional
  environment for the individual countries to
  concentrate on development efforts as well as
  enhancing the possibility of inter-state co-
  operation by creating better relations between
  the various countries.

23
Relative importance of the three factors

• The political factor seems to have been crucial
  in creating the necessary basic conditions for en
  expansion of membership in ASEAN in the first
  place, ie the fact that the ASEAN six had from
  the outset formulated the goal of 'One Southeast
  Asia' with all 10 Southeast Asian countries as
  members of the association.
• As noted earlier this was a necessary condition
  for expansion to take place at all.
• The political factor seems to have been crucial
  in creating the necessary basic conditions for en
  expansion of membership in

24
Contd

• ASEAN in the first place, ie the fact that the
  ASEAN six had from the outset formulated the goal
  of 'One Southeast Asia' with all 10 Southeast
  Asian countries as members of the association. As
  noted earlier this was a necessary condition for
  expansion to take place at all.
• The economic factor does not seem to be such a
  crucial factor in explaining the urge to expand
  ASEAN membership from within.

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The North American Free Trade Agreement

• Includes Canada, the United States, and Mexico
• Went into effect on January 1, 1994.
• Involves free trade in goods, services, and
  investment
• Is a large bloc but includes countries of
  different sizes and wealth.

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NAFTA RATIONALE

• U.S. Canadian trade is the largest bilateral
  trade n the world.
• The United States is Mexicos and Canadas
  largest trading partner.
• NAFTA calls for the elimination of tariff and
  non-tariff barriers, the harmonization of trade
  rules, the liberalization of restrictions on
  service and foreign investment, the enforcement
  of intellectual property rights, and a dispute
  settlement process
• NAFTA is a good example of trade diversion some
  US trade with the investment in Asia have been
  diverted to Mexico
• Rules of origin-goods and services must originate
  in North America to get access to lower tariffs.

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REGIONAL CONTENT

• The percentage of value that must be from North
  America for the product to be considered North
  American in terms of country of origin.
• 50 percent for most products 62.5 percent for
  autos.

28
Additional NAFTA Provisions

• Workers rights
• The environment
• Dispute resolution mechanism

29
Contd

• Its logical that most trade groups contain
  countries in the same area of the world.
• Neighboring countries tend to ally for several
  reasons
• The distances that goods need to travel between
  such countries are short
• Consumers tastes are likely to be similar, and
  distribution channels can be easily established
  in adjacent countries
• Neighboring countries may have a common history
  and interests, and they may be more willing to
  coordinate their policies.

30
The NAFTA Trade Perspective

• The U.S.-Canada FTA January 1, 1989
• The NAFTA January 1, 1994, a remarkable success
• The U.S. economy grew by 48
• Canada 49
• Mexico 40
• NAFTA total trade increased over 510 billion
  297 billion in 1993 to 866 billion now
• In 2006, NAFTA traded 2.4 billion a day with our
  NAFTA partners -- 1.6 million a minute

31
Economic (Prosperity) Component Working Groups

• Manufactured Goods (DOC)
• Lower production costs for North American
  manufacturers by eliminating unnecessary
  regulatory barriers, ensuring compatibility of
  regulations and by eliminating redundant testing
  requirements
• Provide consumers with cheaper, safer, and more
  diversified and innovative products
• The Other Nine
• E-Commerce and ICT (DOC)
• Energy (DOE)
• Movement of Goods (USTR)
• Transportation (DOT)
• Food and Agriculture (USDA)
• Business Facilitation (DOS)
• Financial Services (Treas)
• Environment (DOS)
• Health (HHS)

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North America (NAFTA) XXI Century Realities

• NAFTA consolidation and expansion (NA currency)
• Economic regional trade with the Americas
• Competition focusing on the EU EE countries
• 2005 Security and Prosperity Partnership (SPP) of
  North America
• NATIONAL SECURITY

33
European Union

• Changed from the European Economic Community to
  the European community to the European Union
• The largest and most successful regional trade
  group
• Free trade of goods, services, capital, and
  people
• Common external tariff
• Common currency.

34
The European Union

• The largest and most comprehensive regional
  economic group is the European Union.
• It began as a free trade agreement with the
  global to become a customs union and to integrate
  in other ways.
• The formation of the European Parliament and the
  establishment of a common currency, the euro,
  make the EU the most ambitious of all the
  regional trade groups.
• Table 8.1 summarizes the key milestones for the
  EU, and Map 8.2 identifies the members of the EU
  and other key European groups.

35
The Euro

• Is a common currency in Europe
• Is administered by the European Central Bank.
• Was established on January 1, 1999.
• Resulted in new bank notes in 2002.
• Does not include the United Kingdom, Denmark,
  Sweden, or the 11 new entrants to the EU as of
  2007.
• The EU expanded from 15 to 25 countries in 2004
  with countries from mostly Central and Eastern
  Europe. In 2007 it admitted Romania and Bulgaria,
  bringing the number to 27.

36
Expansion of EU

• One of the EUs major challenges is that of
  expansion.
• The May 2004 expansion has been its largest and
  included Cyprus, the Czech Republic, Estonia,
  Hungary, Latvia, Lithuania, Malta, Poland, the
  Slovak Republic, and Slovenia.
• Bulgaria and Romaina were admitted at the
  beginning of 2007, and candidates for future
  membership currently include Turkey, the former
  Yugoslav Republic of Macedonia, and Croatia.
• However, Turkey has been put on hold while it
  continues to improves its human rights record.

37
EU Enlargement The Next Eight

• Eight countries are waiting in the wings to join
  the European Union. The eight countries are as
  follows-
• Albania
• Albania is not expected to join the EU until 2015
  at the earliest. It formally applied for
  membership on 28 April 2009.
• Bosnia-Hercegovina
• Bosnia-Hercegovina is not expected to join the EU
  until 2015 at the earliest.
• Croatia
• Applied for membership February 2003
• Confirmed as candidate country June 2004
• Negotiations started October 2005
• Croatia has completed its accession negotiations
  with the European Commission and a target date of
  1 July 2013 has been set for it to join the EU.

38
Contd

• Iceland
• Applied for full membership July 2009
• Negotiations started July 2010
• The EU has opened accession talks with Iceland.
• But Iceland's progress is threatened by a dispute
  over mackerel fishing.
• Macedonia
• Applied for full membership March 2004
• Confirmed as candidate December 2005
• The European Commission has recommended that the
  EU open membership talks with Macedonia.
• Montenegro
• Applied for full membership December 2008
• Confirmed as candidate December 2010
• Negotiations started June 2012
• Candidate status has boosted Montenegro's bid and
  the EU opened the country's accession talks on 29
  June 2012.

39
Contd

• Serbia
• Applied for full membership December 2009
• Confirmed as candidate March 2012
• Turkey
• Applied for full membership 1987
• Confirmed as candidate December 1999
• Negotiations started October 2005

40
Contd

• Turkey met the last condition for accession talks
  in July 2005, when it extended a customs union
  with the EU to all new member states, including
  Cyprus. So far only 13 of the 33 areas of
  negotiation - called "chapters" - have been
  opened.
• Croatia and Turkey started accession talks on 3
  October 2005. Turkey could complete them in 10-15
  years, but Croatia is set to join the EU in
  mid-2013.
• The other Balkan countries have been told they
  can join the EU one day, if they meet the
  criteria. These include democracy, the rule of
  law, a market economy and adherence to the EU's
  goals of political and economic union.
• Iceland is the latest country to seek EU
  membership.

41
Expansion of SAARC

• SARC (South Asian Regional Cooperation)
  established in 1982
• SAARC (South Asian Association for Regional
  Cooperation) established in 1985
• Members of SAARC India, Bangladesh, Maldives,
  Nepal, Srilanka, Bhutan and Pakistan.
• New member of SAARC is Afghanistan added in 2007.

42
Summary

• Behind the expansion of EU, NAFTA and ASEAN,
  various Geo Political and Economic factors can be
  underpinned.
• Each expansion has implications for Indias
  Foreign Trade in the sense that exports of India
  to the country which becomes part of expanded
  trading blocs get affected.
• India needs to undertake special efforts to
  enhance the level of exports to the expended
  trading blocs.

43

• THANK YOU.
• Dr. (Mrs.) Vijaya Katti
• Professor Chairperson (GSD)
• Indian Institute of Foreign Trade
• New Delhi-110016
• vckatti_at_yahoo.com, vijayakatti_at_iift.ac.in