India has finally concluded its six-year-long preferential trade agreement (PTA) talks with Asean and both sides are claiming this as a major achievement. But it’s a matter of perspective. While the economic impact of PTAs is debatable, political strategy rules the day.
The best route to free global trade is through non-discriminatory multilateral liberalization under the World Trade Organization (WTO). But with repeated stalling of the current Doha Round, most economies today are party to regional or bilateral PTAs. India, which already has PTAs with Sri Lanka and Thailand and a broader pact with Singapore, has no wish to be left out of the intensifying trade and economic integration around Asean — which promises a strategic pan-Asian market that aims to strengthen the region’s role in global geopolitics. It is also looking at PTAs with the EU, GCC and perhaps in time with the US.
PTAs, however, lead to trade diversion, and their rules of origin create a mess. In Asean’s case, India wanted tougher norms than agreed on to ensure that products from other countries such as China are not routed to India. The Sri Lanka PTA had Indian spice and pepper producers complaining about Vietnamese items sneaking in. In a world of globalized production chains, it is too tough to identify the country of origin for ensuring it is eligible for preferential treatment. Both firms and governments land up in a mess of red tape, with overlaps, even contradictions that mean regulatory complexity and administrative nightmares. The transaction costs of doing business rise and corruption is encouraged. Economist Jagdish Bhagwati called this the “spaghetti bowl effect”.
Asean ministers admit that and say they will assess how to untangle the tangle in the future. They support the hypothesis that PTAs spur unilateral liberalization and work as building blocks for an eventual multilateral resolution.Hardly. Despite nearly 200 such pacts across the globe, the Doha Round collapsed. As Bhagwati says, for PTAs to spur multilateral success, WTO members should cut tariffs unilaterally, at par with their concessions in these pacts. That may seem utopian, but note commerce minister Kamal Nath’s comment that he could conclude the Asean PTA only because India had intensified unilateral liberalization and its already low tariffs helped it to concede enough.
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