Experience of Expansion of Existing Trade Blocs Dr. (Mrs.) Vijaya Katti Professor & Chairperson (GSD) Indian Institute of Foreign Trade New Delhi-110016.

Experience of Expansion of Experience of Expansion of Existing Trade BlocsExisting Trade Blocs

Dr. (Mrs.) Vijaya Katti Dr. (Mrs.) Vijaya Katti Professor & Chairperson (GSD)Professor & Chairperson (GSD)

Indian Institute of Foreign TradeIndian Institute of Foreign Trade

New Delhi-110016New Delhi-110016

Email: Email: [email protected], [email protected], [email protected]

Session on 23/09/12

ObjectivesObjectives To explain the rationale behind the expansion of To explain the rationale behind the expansion of

Trading BlocsTrading Blocs To elaborate on the existing three Trading Blocs To elaborate on the existing three Trading Blocs

viz. ASEAN, NAFTA and EUviz. ASEAN, NAFTA and EU To explain the process of expansion of these To explain the process of expansion of these

three Trading Blocsthree Trading Blocs To examine the implications of the expansion To examine the implications of the expansion

these three Trading Blocs for Indiathese three Trading Blocs for India

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

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

Contd…

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 goodsrules of origin restrictive services not coveredinvestments covered, but focus more on investor protection than locking in investment liberalizationdispute resolution mechanisms not well defined

Contd…

However, agreements involving developing and developed countries much more comprehensive. However, agreements involving developing and developed countries much more comprehensive.

services, TRIPs, investments and other WTO+ features are prominent services, TRIPs, investments and other WTO+ features are prominent

increasing public concern regarding asymmetric negotiating powersincreasing public concern regarding asymmetric negotiating powers

calls for greater democratization of trade policy formulation: strengthened consultative calls for greater democratization of trade policy formulation: strengthened consultative mechanisms (bottom-up), increased role for parliamentarians as interface between mechanisms (bottom-up), increased role for parliamentarians as interface between societies and policy making executive branch 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.

Signed in 1975 as an initiative of UNESCAP, the Bangkok Agreement, now APTA, is Asia’s 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.

APTA: A Bridge across Asia

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)

Expanding Membership

Status: China’s 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

Contd…Contd…

The primary aim of AFTA is to “increase The primary aim of AFTA is to “increase ASEAN’s competitive edge as a production base ASEAN’s competitive edge as a production base geared for the world market”.geared for the world market”.

Its main feature is trade liberalisation through Its main feature is trade liberalisation through the elimination of intra-ASEAN tariffs and non-the elimination of intra-ASEAN tariffs and non-tariff barriers, which would then raise the tariff barriers, which would then raise the efficiency and cost effectiveness of doing efficiency and cost effectiveness of doing business and promote trade and investment in a business and promote trade and investment in a fashion consistent with the General Agreement fashion consistent with the General Agreement on Tariffs and Trade (GATTon Tariffs and Trade (GATT))

Contd…Contd…

Extra-ASEAN PTAsExtra-ASEAN PTAs

ASEAN+1ASEAN+1

ASEAN seems poised t gain a prominent position in the ASEAN seems poised t gain a prominent position in the emerging network of PTAs in Asia Pacific.emerging network of PTAs in Asia Pacific.

Since 2002, the group has become party to FTA negotiations Since 2002, the group has become party to FTA negotiations with Australia-New Zealand, China, India, Japan, Korea and with Australia-New Zealand, China, India, Japan, Korea and the EU. These initiatives, known as the ASEAN +1 the EU. These initiatives, known as the ASEAN +1 mechanism, have adopted AFTA’s framework and have a mechanism, have adopted AFTA’s framework and have a comprehensive scope that encompasses not just trade but comprehensive scope that encompasses not just trade but investment, services, IT, customs harmonising and investment, services, IT, customs harmonising and antidumping.antidumping.

Hence, the term ‘Comprehensive Economic Partnership Hence, the term ‘Comprehensive Economic Partnership (CEP) has been preferred to FTA. (CEP) has been preferred to FTA.

ASEAN Framework Agreement for ASEAN Framework Agreement for Services (AFAS)Services (AFAS)

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

ASEAN EXPANSIONASEAN 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.

Contd…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

The Expansion ProcessThe 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.

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 (A+3) 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, A+3, 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.

Contd.. There are three reasons for this expansion. The first is ASEAN’s 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 APEC’s formation as well as APEC’s performance in the 1997 Asian Financial Crisis (AFC) drove the creation of ASEAN-led organisations.

The third and final reason for ASEAN’s 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, A+3 and EAS were all formed to deal with threats to sovereignty, which made ASEAN particularly well suited to leading these regional organisations.

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 Indonesia’s 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.

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

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.

Contd…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, increasedincreased 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

Contd…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 FactorThe 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.

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

Contd…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.

The North American Free Trade The North American Free Trade AgreementAgreement

Includes Canada, the United States, and Includes Canada, the United States, and MexicoMexico

Went into effect on January 1, 1994.Went into effect on January 1, 1994. Involves free trade in goods, services, and Involves free trade in goods, services, and

investmentinvestment Is a large bloc but includes countries of Is a large bloc but includes countries of

different sizes and wealth.different sizes and wealth.

NAFTA RATIONALENAFTA RATIONALE U.S. Canadian trade is the largest bilateral trade n the U.S. Canadian trade is the largest bilateral trade n the

world.world. The United States is Mexico’s and Canada’s largest The United States is Mexico’s and Canada’s largest

trading partner.trading partner. NAFTA calls for the elimination of tariff and non-tariff NAFTA calls for the elimination of tariff and non-tariff

barriers, the harmonization of trade rules, the barriers, the harmonization of trade rules, the liberalization of restrictions on service and foreign liberalization of restrictions on service and foreign investment, the enforcement of intellectual property investment, the enforcement of intellectual property rights, and a dispute settlement processrights, and a dispute settlement process

NAFTA is a good example of trade diversion; some US NAFTA is a good example of trade diversion; some US trade with the investment in Asia have been diverted to trade with the investment in Asia have been diverted to MexicoMexico

Rules of origin-goods and services must originate in Rules of origin-goods and services must originate in North America to get access to lower tariffs.North America to get access to lower tariffs.

REGIONAL CONTENTREGIONAL CONTENT

The percentage of value that must be from The percentage of value that must be from North America for the product to be North America for the product to be considered North American in terms of considered North American in terms of country of origin.country of origin.

50 percent for most products; 62.5 percent 50 percent for most products; 62.5 percent for autos.for autos.

Additional NAFTA ProvisionsAdditional NAFTA Provisions

Workers’ rightsWorkers’ rights The environmentThe environment Dispute resolution mechanismDispute resolution mechanism

Contd…Contd… It’s logical that most trade groups contain countries in the It’s logical that most trade groups contain countries in the

same area of the world.same area of the world. Neighboring countries tend to ally for several reasons:Neighboring countries tend to ally for several reasons: The distances that goods need to travel between such The distances that goods need to travel between such

countries are shortcountries are short Consumers’ tastes are likely to be similar, and Consumers’ tastes are likely to be similar, and

distribution channels can be easily established in distribution channels can be easily established in adjacent countriesadjacent countries

Neighboring countries may have a common history and Neighboring countries may have a common history and interests, and they may be more willing to coordinate interests, and they may be more willing to coordinate their policies.their policies.

The NAFTA Trade The NAFTA Trade PerspectivePerspective

The U.S.-Canada FTA: January 1, 1989The U.S.-Canada FTA: January 1, 1989

The NAFTA: January 1, 1994, a remarkable successThe NAFTA: January 1, 1994, a remarkable success The U.S. economy grew by 48%The U.S. economy grew by 48% Canada: 49%Canada: 49% Mexico: 40%Mexico: 40%

NAFTA total trade increased over $510 billion: NAFTA total trade increased over $510 billion: $297 billion in 1993 to $866 billion now$297 billion in 1993 to $866 billion now

In 2006, NAFTA traded In 2006, NAFTA traded $2.4 billion a day$2.4 billion a day with our with our NAFTA partners -- $NAFTA partners -- $1.6 million a minute1.6 million a minute

Economic (‘Prosperity’) Component Economic (‘Prosperity’) Component Working GroupsWorking Groups

Manufactured Goods (DOC)Manufactured Goods (DOC) Lower production costs for North American manufacturers by Lower production costs for North American manufacturers by

eliminating unnecessary regulatory barriers, ensuring eliminating unnecessary regulatory barriers, ensuring compatibility of regulations and by eliminating redundant compatibility of regulations and by eliminating redundant testing requirements testing requirements

Provide consumers with cheaper, safer, and more Provide consumers with cheaper, safer, and more diversified and innovative productsdiversified and innovative products

The Other Nine:The Other Nine: E-Commerce and ICT (DOC)E-Commerce and ICT (DOC) Energy (DOE)Energy (DOE) Movement of Goods (USTR)Movement of Goods (USTR) Transportation (DOT)Transportation (DOT) Food and Agriculture (USDA)Food and Agriculture (USDA) Business Facilitation (DOS)Business Facilitation (DOS) Financial Services (Treas)Financial Services (Treas) Environment (DOS)Environment (DOS) Health (HHS)Health (HHS)

North America (NAFTA) XXI North America (NAFTA) XXI Century RealitiesCentury Realities

a.a. NAFTA consolidation and NAFTA consolidation and expansion (NA currency)expansion (NA currency)

b.b. Economic regional trade Economic regional trade with the Americaswith the Americas

c.c. Competition focusing on the Competition focusing on the EU + EE countriesEU + EE countries

d.d. 2005 Security and 2005 Security and Prosperity Partnership Prosperity Partnership (SPP) of North America(SPP) of North America

e.e. NATIONAL SECURITYNATIONAL SECURITY

European UnionEuropean Union

Changed from the European Economic Changed from the European Economic Community to the European community to Community to the European community to the European Unionthe European Union

The largest and most successful regional The largest and most successful regional trade grouptrade group

Free trade of goods, services, capital, and Free trade of goods, services, capital, and peoplepeople

Common external tariffCommon external tariff Common currency.Common currency.

The European UnionThe European Union The largest and most comprehensive regional The largest and most comprehensive regional

economic group is the European Union.economic group is the European Union. It began as a free trade agreement with the It began as a free trade agreement with the

global to become a customs union and to global to become a customs union and to integrate in other ways.integrate in other ways.

The formation of the European Parliament and The formation of the European Parliament and the establishment of a common currency, the the establishment of a common currency, the euro, make the EU the most ambitious of all the euro, make the EU the most ambitious of all the regional trade groups.regional trade groups.

Table 8.1 summarizes the key milestones for the Table 8.1 summarizes the key milestones for the EU, and Map 8.2 identifies the members of the EU, and Map 8.2 identifies the members of the EU and other key European groups.EU and other key European groups.

The EuroThe Euro Is a common currency in EuropeIs a common currency in Europe Is administered by the European Central Bank.Is administered by the European Central Bank. Was established on January 1, 1999.Was established on January 1, 1999. Resulted in new bank notes in 2002.Resulted in new bank notes in 2002. Does not include the United Kingdom, Denmark, Does not include the United Kingdom, Denmark,

Sweden, or the 11 new entrants to the EU as of Sweden, or the 11 new entrants to the EU as of 2007.2007.

The EU expanded from 15 to 25 countries in The EU expanded from 15 to 25 countries in 2004 with countries from mostly Central and 2004 with countries from mostly Central and Eastern Europe. In 2007 it admitted Romania Eastern Europe. In 2007 it admitted Romania and Bulgaria, bringing the number to 27.and Bulgaria, bringing the number to 27.

Expansion of EUExpansion of EU One of the EU’s major challenges is that of One of the EU’s major challenges is that of

expansion.expansion. The May 2004 expansion has been its largest The May 2004 expansion has been its largest

and included Cyprus, the Czech Republic, and included Cyprus, the Czech Republic, Estonia, Hungary, Latvia, Lithuania, Malta, Estonia, Hungary, Latvia, Lithuania, Malta, Poland, the Slovak Republic, and Slovenia.Poland, the Slovak Republic, and Slovenia.

Bulgaria and Romaina were admitted at the Bulgaria and Romaina were admitted at the beginning of 2007, and candidates for future beginning of 2007, and candidates for future membership currently include Turkey, the former membership currently include Turkey, the former Yugoslav Republic of Macedonia, and Croatia.Yugoslav Republic of Macedonia, and Croatia.

However, Turkey has been put on hold while it However, Turkey has been put on hold while it continues to improves its human rights record. continues to improves its human rights record.

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.

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.

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

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.

Expansion of SAARCExpansion of SAARC

SARC (South Asian Regional Cooperation) SARC (South Asian Regional Cooperation) established in 1982established in 1982

SAARC (South Asian Association for SAARC (South Asian Association for Regional Cooperation) established in 1985Regional Cooperation) established in 1985

Members of SAARC India, Bangladesh, Members of SAARC India, Bangladesh, Maldives, Nepal, Srilanka, Bhutan and Maldives, Nepal, Srilanka, Bhutan and Pakistan.Pakistan.

New member of SAARC is Afghanistan New member of SAARC is Afghanistan added in 2007.added in 2007.

SummarySummary

Behind the expansion of EU, NAFTA and Behind the expansion of EU, NAFTA and ASEAN, various Geo Political and Economic ASEAN, various Geo Political and Economic factors can be underpinned.factors can be underpinned.

Each expansion has implications for India’s Each expansion has implications for India’s Foreign Trade in the sense that exports of India Foreign Trade in the sense that exports of India to the country which becomes part of expanded to the country which becomes part of expanded trading blocs get affected.trading blocs get affected.

India needs to undertake special efforts to India needs to undertake special efforts to enhance the level of exports to the expended enhance the level of exports to the expended trading blocs.trading blocs.

THANK YOU…….THANK YOU…….

Dr. (Mrs.) Vijaya Katti Dr. (Mrs.) Vijaya Katti Professor & Chairperson (GSD)Professor & Chairperson (GSD)

Indian Institute of Foreign TradeIndian Institute of Foreign Trade

New Delhi-110016New Delhi-110016

[email protected], [email protected], [email protected]