"Trade policy is at crossroads. So is trade diplomac"
Mr. Mike Moore, Ex-WTO Chief


Vinayak Sakhare
Saurabh Prusty
Sulabh Jain
Rajashekar Rao
School of Management
National Institute of Construction Management & Research

"Trade policy is at crossroads. So is trade diplomac."
-- Mr. Mike Moore, Ex-WTO Chief.

The Theory of Free and Multilateral Trade Regime

Trade is only an instrument of development. It is not an end. Moreover, "Universal association" and free trade is the ultimate aim of every nation, when all countries will have achieved the same level of development, which is the sole motto of WTO. While nations are in different stages of development, as a matter of fact infant industry protection should be used as an instrument of industrialization by those who are still in the early stage of development. Over time, development would ultimately lead to universal association, allowing free trade. Free trade is suitable to the advanced countries which have already established their industrial base. But for non-industrialized countries, industrialization would only be possible through free trade if all countries were at the same level of industrialization an assumption made by the proponents of universal free trade.

But practically, the Free and Multilateral Trade Regime concept didn't work well as of today. Bringing developing and developed countries to negotiate was very difficult. As each want to protect its own interest.

The main issue(s) associated with the bilateralism and multilateralism is mentioned below. At a theoretical level, there is division over the desirability of regional trade agreement (RTA)1 in a multilateral trade regime. Even after years of debate, there is still no consensus about this issue. However, bilateral trades or treaties, with its advantages and drawbacks, is a reality of the current global trade regime. And given the economic and political situation of the current world order, the wave of bilateralism is likely to intensify in near future.

Among developing countries like India, the growth in bilateral treaties took place mostly due to the dissatisfaction with the multilateral trading system. Also, due to a host of political and economic reasons, major developed countries like USA have pursued BLT1 aggressively in past in their region. It is believed that this has led to a bandwagon effect of regionalism as most countries wanted to be part of at least some major trade blocks.

However, India is also looking for BLTs among developing nations just to avoid the frustration with the multilateral trading system as there is lot of imbalances among developing and developed nations. The dejection of developing countries about the functioning of WTO is not unnatural because the implementation of the recent agreements, these countries have not gained any meaningful increase in market access in the key areas where they have comparative advantage (textiles and agriculture). Liberalization of services or trade has occurred only in sectors which are of primary interest to developed countries like IT, ITES, automobile and some manufactured goods. On the other hand, declining industrial tariff and removal of all quantitative restrictions have harmed the industrial sector of these developing countries. The overwhelming dominance of developed countries in the WTO decision making process has not helped the cause of developing countries either.

Given the failure of WTO, it is clear that for developing countries the choice is between a multilateral trading system which is extremely unbalanced and BLTs. BLTs help these countries to expand market access without compromising on national policies and interests. It is not surprising that many developing countries are now looking for BLTs to expand their market access. These BLTs are likely to be beneficial for developing countries, unlike India, because lower dependence on developed country markets will not only help these countries to resist the pressures of economic superpowers but also it will help them forge and foster stronger alliances at the multilateral trade negotiations. Given the fact that a clear North-South division has appeared in WTO, this is likely to have a strong impact on the multilateral trading system.

Theoretically speaking, more of BLTs among nations and trade blocks will lead to regionalism. And trade liberalization through regionalism does not offer the best solution. However, in the current state of distorted multilateralism, regionalism has turned out to be one of the more viable alternatives for developing countries to expand their market access. In this context, South-South BLTs are particularly useful as they allow developing countries to expand their markets without having to bow before developed countries. Therefore India should not stay behind otherwise it will be isolated by such developments.

One of the most striking development in the world trading system since the mid 1990s is a surge in Regional Trade Agreements (RTAs). From about 50 till 1990, the number of RTAs notified to the World Trade Organization (WTO) has crossed 250 in 2003 and estimates indicate that over 300 RTAs will be in effect by 2007. WTO encouraged the growth of RTAs because it believed that regional integration initiatives can complement the multilateral trade regime. The figure below shows the trend in growth in RTAs.

"BLTs should be understood as a part of the broader neo- liberal project to encourage the free flow of goods, services, capital, and ideas across national borders."

Moreover the trends of FDI inflows shows no correlation with multilateral trade regime.  "FDI  has no relevance and the developed countries' arguments for it are not convincing. Firstly, they contend that foreign direct investments (FDI) are good for growth and development. However, FDI may crowd out domestic investments and leave the host country worse off. The developing countries need careful and selective to tune their policies in the requirement of their development policy goals, just like the developed did in their time of development." -Mr. Nagesh Kumar, Director-General, Research and Information Systems (RIS) for Developing and Non-Aligned Countries, speaks to Clifford Polycarp regarding the issue of governing Investments.

Recently, India has embarked upon an ambitious program of regional trade arrangements. It has signed free trade area (FTA) agreements with Sri Lanka and Thailand and is in the advance stages of negotiating a free trade area agreement with Singapore. India has also signed a framework agreement for a free trade area with the members of the Association of South East Asian Nations (ASEAN) and an agreement to create a South Asian Free Trade Area (SAFTA). Recently, it has also approached distant trading partners such as South Africa and Brazil to negotiate FTA arrangements.

A number of mutually reinforcing factors have contributed to this upsurge in the FTA activity on the part of India. First, the proliferation of regional trade arrangements around the world has made India feel that it is being left behind in this area. The framework agreement with the ASEAN members, SAFTA and the offers for FTA negotiations with Brazil and South Africa were all post-Cancun developments.

Political factors have been clearly dominant in the decision by India and other countries in the region to sign the SAFTA agreement. Regardless of the economic implications, the leaders saw a major payoff. The critical question we must address is whether this aggressive pursuit of FTAs is a good idea from the Indian perspective.


"Multilateralism, Regionalism, Bilateral and Cross regional Free Trade Arrangements: All Paved with Good Intentions for the world."

In the present senario India should go for BLTs with fellow developing countries. There are lot of imbalances between the developed and developing countries to trade in multilateral trade regime. In this the weaker or developing nations tend to lose. As a matter of fact the WTO negotiations on multilateral trade regime, especially in agri-related areas, is still a distant dream. Developing nations entering into BLTs with other developing nations will give level playing field to both the parties to trade.

The current developments in Asia and Asia-Pacific region are responses to regionalism happening elsewhere in the context of free trade especially in US-EURO, Mexico-EURO, etc. This is because of the fact that 'first best' theory of free trade under multilateralism and WTO have fallen short. A 'second best' theory of new regionalism2 has been acknowledged by the Doha ministerial declaration to complement and supplement WTO. India should work hard to be a part of this development otherwise it stands to lose and will be isolated.

Recently, Mr. Kamal Nath in his speech at WTO ministerial conference has shown inclination towards BLTs. A portion of his speech has been included below.

"But our problems and challenges are so manifold and our socio-economic contexts so diverse, that no single, 'harmonized' development strategy can be adopted. Each country must choose the path that best suits its own genius."

Trade commitments which throw hundreds of millions of people already on the edge of subsistence into a chasm of poverty and unemployment simply cannot be supported. The ambition of developed countries cannot and must not trample on the aspirations of four-fifths of humanity.

It is in agriculture that the structure of international trade is the most distorted and it is here that the development outcome of Doha would be the most critically judged. It is in agriculture again that many developing countries find a natural comparative advantage. But they are shut out from world markets by a complex edifice of protection, built on high tariff walls, domestic and export subsidies, and an intricate maze of non-tariff barriers. In many developing countries, including India, hundreds of millions of low-income and subsistence farmers eke out a precarious livelihood from agriculture. Unless the playing field is completely leveled, they cannot enter the arena of international competition. Our farmers are quite willing to deal with trade flows but not with an avalanche of subsidy flows from developed countries.

Market access is not governed by tariffs alone. Exporters from developing countries face an impenetrable labyrinth of non-tariff barriers. These include the abuse of both anti-dumping measures and technical standards, often dealing with peripheral matters and extraneous considerations. If we are to pursue the so-called 'real' market access in the NAMA negotiations, the boot is surely on the other foot."

-- Statement by Mr Kamal Nath, Minister of Commerce and Industry at Hong Kong Ministerial Conference of WTO, 2005.

In today's scenario India should go for BLTs first. So that it can balance differences and build capabilities at par with developed countries and then move towards a multilateral trade regime.

Vinayak Sakhare
Saurabh Prusty
Sulabh Jain
Rajashekar Rao
School of Management
National Institute of Construction Management & Research

Source : E-mail March 25, 2006




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