Trade & economic linkages – SAARC

The Nation, Pakistan, June 03, 2015
By Dr Kamal Monnoo,

It will do our Ministry of Commerce, some good to first properly understand modern day trends in Trade and Economic Linkages’ before devising its trade strategies. After all, there was also significant trade and economic linkages between a colonized India and the Great Britain, but was it really good for India and in the interest of native Indians? Global trade has evolved over the last 8 years, especially post 2008 financial crisis, followed by the global recession, where the new norm is that while expansion of trade is a worthy global cause, it cannot be pursued blindly. Even when I look back at my book “A Study of WTO”, published back in 2007, I realize that it is now time for up-dating it.

The same applies when looking to liberalize trade and to enhance economic linkages in South Asia. Gone are the days when trade promotion endeavors could simply be viewed through the prism of promotion of globalization, as countries, developed and developing, these days getting more and more focused on protection of jobs and safeguarding of their core manufacturing sectors at home. There are numerous examples of these: Just a few weeks back, the Democrat Congressmen in the USA shot down the bid of their own President Obama for signing the proposed Trans Pacific Partnership, on a fast track, as they see it to be treaty that is likely to cost Americans jobs and erode wages. Today’s Japan is also being seen to facilitate national manufacturing in order to cut cost of doing business at home and to move back its off-shore production. President Ashraf Ghani of Afghanistan has also made it very clear to the visiting Pakistan business delegations in recent months that while he will welcome enhanced cum new economic linkages, where the resulting development from the same must take place at home.

So, in essence, disputes do not necessarily need to be political or geographical, rather they can simply be about protecting one’s own populace. And this is the backdrop to recent developments during WTO moots in Bali 2013 and Geneva 2014. In Bali, a landmark global agreement on commerce was signed, which incidentally made it the first and the only consensus accord struck by the WTO since its founding back in 1995. The pact included commitments to facilitate trade by simplifying customs procedures and limiting agriculture subsidies, and unleashing policies to aid least-developed countries. According to the estimates from a report compiled by the Washington based Peterson Institute for International Economics, the new customs measures could create an additional US $1 trillion in economic activity and up to 21 million fresh global jobs provided the agreement was followed in letter and spirit by the WTO member states. It also marked a paradigm shift on how trade was till then viewed by WTO, meaning a shift from “ensuring” free and fair trade and removal of all barriers, tariff and non-tariff, now to mere “facilitation”.

India’s demand for concessions on agriculture stockpiling led to the collapse of the Bali worldwide trade deal, i.e. when India unveiled its veto power at the eleventh hour. As we know, the Bali success, albeit a modest one, was reached after some hectic and nerve wrecking deliberations. Why modest, because the agreement merely covered “trade facilitation”, simplifying customs procedures, and not the broad liberalization that has been the ‘original’ aim of the main WTO initiative at Doha. Still, the breakthrough covered some useful stuff. The result was that this opened up the dangerous possibility of countries embarking on the route of ‘plurilateral agreements’, deals whereby group of countries, not necessarily belonging to the same region, get together to agree on liberalizing rules on one sort of good or service, with others free to join as and when it suits them. The emerging plurilateral examples being: upcoming deals between China & Brazil, also possibly between China and Russia and of course the TPP itself.

So a fair question to ask here would be that why even endeavor to liberalize trade in general and that within South Asia in particular? The answer to this stems from three main reasons. Firstly, despite all concerns the overall positives from trade far outweigh the negatives. Protectionism, according to a study by the famous Lawrence and Edwards, is a high-cost option in an interdependent environment and the socialist countries of the post-World War II era learnt this the hard way.

They basically argue on how increased, but prudent imports induce indigenous industries to be more competitive. Ultimately this enhanced competitiveness, leads to increase in exports of the country shunning protectionism. Secondly, in the 18th century, a French social critic and political philosopher, Montesquieu, thought that commerce improves manners and cures most destructive prejudices. The concept is now gaining currency that intra-regional as well as inter-regional trade will lead to peace among nations that have conflicts and have seen many wars. The dynamics of smooth intra-regional trade can not only play a pivotal role in strengthening economies, but also unleash a soft process, which over time can be the key to resolving long standing sticky disputes. Thirdly, the recent economic history is full of examples where countries have achieved higher growth through enhanced economic and trade linkages; in fact the world economy itself over the last decade has mostly grown on the back of enhanced global trade. And perhaps the most note able recent work in this respect comes from the Nobel Laureate economist, Paul Krugman. What Krugman really explained in his Nobel winning work was that in reality when trade barriers fall and trading increases, firms gain access to bigger markets, allowing them to expand production and reap economies of scale, but at the same time, openness also exposes them to competition from rival foreign firms, paring their margins. Some firms may go out of business, however, between the domestic survivors and the foreign entrants, consumers still have more to choose from.

Thus the gains from trade arise not from specialization, but from ‘scale economies’, fiercer competition and cornucopia of choice that globalization provides. This concept of scale economies for the first time gives economics a sense of space and provides empirical evidence in support of free trade. What in reality we learn from Mr. Krugman’s work is that regional focus, proximity and neighborhood cooperation instead yield new, yet, tangible kinds of benefits and strengths. Through his work the gross importance of regional cooperation for the first time comes to the global fore front, highlighted by 3 main points. Firstly, the regions that fail to offer space for joint production and common productivity development tend to lose out in the long run. Secondly, negative spillovers cannot be avoided. Meaning, a neighbor’s loss cannot be your gain and a regional partner’s problem cannot be bottled up within the geographical boundaries of that country. Thirdly, and the most important, is poverty alleviation, a geographical challenge that needs to be tackled at a regional level.

While there remains a long list of measures that need to undertaken in this regard, the ones of paramount importance are a need to ensure that trade in SAARC is fair and “equitable” for all members and not skewed in just one country’s (India’s) favor. For example, it may not be in Pakistan’s interest to blindly liberalize trade with India unless the endeavor also ensures visible economic gains for Pakistan. Non-tariff barriers need to be removed and trade facilitation measures, especially the main land-corridors of SAARC, as mapped out in recent studies of CUTS International and SDPI, need to be implemented in order to ensure a level playing field and to create an environment where intra-regional trade is preferred over trade with countries outside South Asia.

Game Theory needs to be shunned, where this is where one party goes for a spoiler in an endeavor, simply because the other party also gains from it, even though the gains arising to the spoiler may be much greater in nature. There must also be a change in approach, where this all-encompassing, broad-based, comprehensive, or grandiose trade agreements or efforts are just not working. What is being done at the Global/WTO level, here in South Asia also perhaps a time has come that we concentrate only on those specific areas that can provide a win-win for all regional stakeholders in selected sector(s). For example, it may be a good idea to seek a deal on cotton using custom facilitation and duty fairness and not one lumping together the entire farming sector.

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