It is time to invite intellectual debates on the costs and benefits from arrangements such as Comprehensive Economic Partnership Agreement before it takes a final shape following the preparation of a draft agreement by the joint study group.
REGIONAL OR MULTILATERAL TRADE?
The gravity model predicts, among other things, that the volume of trade between two countries is negatively related to the economic distance. Proximity is an important factor. Countries close to each other trade more than distant countries and are more likely to form a trade bloc. It is often argued that since negotiating with a few partners is easier, entering into a Preferential Trade Agreement (PTA) is politically feasible than pursuing multilateral trade liberalization agreements with too many members under the WTO arrangement. It is widely acknowledged that the benefits are not only cost reduction but also effective enforcement.
A recent study, however, comes out with empirical evidence by drawing from a sample of five ASEAN countries (Malaysia, Indonesia, the Philippines, Singapore and Thailand). The effort was made to compute terms of trade for regional and multilateral trade liberalization over the period of 1967-2000 for each of these countries to find out if they were moving towards regional or international terms of trade. This led to establish the long-run relationship between the two terms of trade (whether it is more trade-creating or trade-diverting). The findings showed ASEAN-5 were moving towards multilateral trade liberalization and membership in regional trade blocks were contributing to the advancement of multilateral trade liberalization. In other words, this also means regional trade liberalization appears not to hinder the global integration process in the region.
INCREASING PRESSURE ON CEPA
Comprehensive Economic Partnership Agreement (CEPA) stands on four pillars: Trade liberalization, regulatory convergence, economic precedents for the international system and trade security. CEPA intends to include fields as diverse as trade in goods, trade in services, investment and economic cooperation. Japan being ASEAN’s second-largest trading partner has concluded CEPA. Although CEPA may contribute to inter-regional integration by complementing capital and technology of advanced economies to the labor-abundant competitors, it involves lots of difficulties too. To make CEPA mandatory, the pressure from larger economies has been rejected not only by smaller economies but also by China. Therefore, some argue, CEPA should not be presented as a cohesive multilateral organization but rather as an ad hoc grouping like the tsunami-relief coalition (Action Memorandum, United States Department of Innovation). Japan prefers to call its agreements ‘economic partnership agreements’.
INDO-SRI LANKA BILATERAL FTA
India-Sri Lanka Free Trade Agreement (ISLFTA) was signed in 1998 and became operational in March 2000. The bilateral trade between India and Sri Lanka crossed to US$ 2.9 billion mark in 2007 and has grown five times in the last seven years increasing from US$ 658 million in 2000 to US$ 3266 million in 2007.
India is the largest source of imports and third-largest export destination for Sri Lanka. There is a provision that specified goods manufactured in Sri Lanka can be imported on a duty-free basis. As there is no excise duty in Sri Lanka or import duty, the imported goods would be cheaper. The added advantage is the benefit for Indian manufacturers who set-up a unit in Sri Lanka and import the goods to India under the similar duty-free provision. The widened absolute trade deficit is balanced to an extent by flows of Indian investment to Sri Lanka. After the pact, India has become the fourth-highest investor in Sri Lanka. Exports to India had grown 10 times over within four years. The success from Indo/Sri Lanka FTA has led to going for CEPA.
However, CEPA’s future is sometimes linked to the negative impact from FTA between two countries especially on the products of some regions. For example, Benny Kuruvilla in August version of Focus on the Global South writes the export of pepper from Sri Lanka to India increased from 2154 tons in 2000 to 6167 tons in 2003. There was a historical decline in the price creating a crisis for small producers, which even led hundreds of them to commit suicide in the pepper belt of Wayanad district in Kerala. On the contrary, there was strong opposition in Sri Lanka from left party by assuming that Indian investors will have an upper hand in Sri Lanka especially with regards to the service sector. Bangladesh had also objected the liberalization of service sector under SAFTA. Therefore, the reason behind the stalemate of CEPA between India and Sri Lanka is the issue of service sector.
NEPAL-INDIA CEPA
The CEPA between India and Nepal is in the pipeline, which got stimulus during Maoist Prime Minister Pushpa Kamal Dahal’s India visit. The Indians believe, given the early preparation for entering into CEPA, Nepal can expect to reduce trade deficits with India. Through this agreement, many Indian scholars think, Nepal can balance the blow-hot blow-cold relationship. At Nepal’s end, majority of political parties though do not go for abrupt abrogation, show dissatisfaction on the possibility that Nepal may be the loser since there is asymmetry in factor productivity, technology and scale of economy.
It is time to invite intellectual debates on the costs and benefits from such arrangements before it takes a final shape following the preparation of a draft agreement by the joint study group. The lesson is: Such agreements carry weight if the partners act in a spirit of equality and mutual benefit.
bishwambher@yahoo.com
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