Trading more within Asia makes economic sense
- Prelims: Current events of international importance(IMF, FTA, SAARC, BIMSTEC, Bay of Bengal,Regional forums etc
- Mains GS Paper II: bilateral, regional and global grouping involving India or affecting India’s interests etc
- A warning by the International Monetary Fund (IMF) that global trade would slow down from 4(five point four)% in 2022 to 2.4(two point four)% in 2023.
INSIGHTS ON THE ISSUE
What is an FTA?
- FTA is a pact between two or more nations to reduce barriers to imports and exports among them.
- Under a free trade policy: Goods and services can be bought and sold across international borders with little or no government tariffs, quotas, subsidies, or prohibitions to inhibit their exchange.
- Protectionism: The concept of free trade is the opposite of trade protectionism or economic isolationism.
- FTAs can be categorized as:
- Preferential Trade Agreement (PTA)
- Comprehensive Economic Cooperation Agreement (CECA)
- Comprehensive Economic Partnership Agreement (CEPA)
What does FTA cover?
- Tariff reduction impacting the entire manufacturing and the agricultural sector
- Rules on services trade
- Digital issues such as data localisation
- Intellectual property rights that may have an impact on the accessibility of drugs
- Investment promotion, facilitation, and protection.
IMF book, “South Asia’s Path to Resilient Growth”:
- It argues that a strong base exists for South Asia trading more with dynamic East Asia
- The total merchandise trade between South Asia and East Asia (in dollar terms) grew at about 10% annually between 1990 and 2018 to $332 billion in 2018
- It could reach about $500 billion looking ahead.
- The handful of free trade agreements (FTAs) linking economies in South Asia with East Asia may rise to 30 by 2030.
- Since the 1990s, South Asia-East Asia trade has gathered pace
- Trade is linked to
- India’s trade re-aligning towards East Asia through its ‘Look East’ and ‘Act East’ policies
- South Asia adopting reforms
- China offshoring global supply chains to Asia.
What needs to be done?
- Regional trade integration across Asia can be encouraged by gradually reducing barriers to goods and services trade.
- South Asia’s trade opening should be calibrated with tax reforms as trade taxes account for much of government revenue in some economies.
- Adjusting financing to losing sectors to reallocate factors of production and re-training of workers to promote gains from trade and mitigate income inequality.
- Improve the performance of special economic zones (SEZs) and invest in services SEZs to facilitate industrial clustering and exports.
- Pursue comprehensive FTAs that eventually lead to the Regional Comprehensive Economic Partnership (RCEP) to provide for a regional rules-based trade to insure against rising protectionism.
- South Asian economies need to improve tariff preference use by better preparing business in navigating the complex rules of origin in FTAs
- Including issues relevant to global supply chains in future FTAs.
- Reinvented trade-focused Bay of Bengal Initiative for Multi-Sectoral Technical and Economic Cooperation (BIMSTEC) can facilitate stronger trade ties and support the interests of smaller members.
Some FTA’s in South Asia:
- Japan-India FTA
- Sri Lanka-Singapore FTA
- Pakistan-Indonesia FTA.
South Asia has over 600 SEZs in operation:
- Kochi (India)
- Gwadar (Pakistan)
- Mirsarai (Bangladesh)
- Hambantota (Sri Lanka).
- Regional trade in Asia is recovering after the COVID-19 pandemic and has opened opportunities for South Asia to participate in global value chains and services trade.
- Improving SEZ processes and outcomes in South Asia requires:
- ensuring macroeconomic and political stability
- adopting good practice regulatory policies towards investors
- providing reliable electricity
- 5G broadband cellular technology
- upgrading worker skills.
- India has also concluded FTAs with the United Arab Emirates and Australia in 2022: The confidence gained from these can help prepare for future RCEP membership by undertaking structural reforms.
- It will boost business competitiveness in supply chains and foster greater regulatory coherence with East Asia.
- If India joins RCEP, the rest of South Asia may be incentivised to join out of a fear of being left out and suffering from trade diversion effects.
- Reinventing BIMSTEC requires better resourcing its Secretariat, concluding the long-running BIMSTEC FTA, building trade capacity in smaller economies, and introducing dialogue partner status to encourage open regionalism in Asia.
- A narrower geographical coverage between South Asia and Southeast Asia may be a building block for eventual trade integration across Asia.
- To mitigate a backlash against regionalisation, the larger economies should facilitate gains from trade to the smaller economies.
- Having the political will to implement pro-trade policies can improve the lives of Asians.
- India is South Asia’s largest economy and its G-20 presidency can be a good platform to initiate these changes.
QUESTION FOR PRACTICE
Do you think that BIMSTEC is a parallel organization like the SAARC ? What are the similarities and dissimilarities between the two ? How are Indian foreign policy objectives realized by forming this new organization?(UPSC 2022) (200 WORDS, 10 MARKS)