Economics Project.docx

AMITY LAW SCHOOL ECONOMICS PROJECT TOPIC:

REGIONAL ECONOMIC GROUPINGS

MADE BY: PRITHVI YADAV: A11911115068 MANAS:

A11911115069

ANUSHKA SINHA: A11911115067 B.A.L.L.B(H) 2015-2020 [5TH SEMESTER] SECTION-C pg. 1

ACKNOWLEDGEMENT I take this opportunity to express my profound gratitude and deep regards to my guide Mrs. LEENA SHARMA MAAM for her exemplary guidance, monitoring and constant encouragement throughout the course of this project. The blessing, help and guidance given by her time to time shall carry me a long way in the journey of life on which I am about to embark.

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INTRODUCTION Regional Economic Groups are the associations of countries situated in a particular region whereby they come to a common understanding regarding rules and regulations to be followed while exporting and importing goods among them. Such groups have liberal rules for member countries while a separate set of rules is laid for non-members. For example, the European Union (EU), the Association of South-east Asian Nations (ASEAN). These groups are popularly known as Trading Blocs.

Economic regionalization can be viewed as one of the major instruments of promoting international trade activities among countries through removal of barriers to mutual trade in goods and services by means of free trade areas, customs union and other preferential trade arrangements. Further, linkages may be stimulated through freer international exchanges of capital and labour. When two or more countries come together to form a regional trade grouping, that will have two types of effects. The first is the trade creating effect, which will increase the national income in the participating countries. The second will be the trade diversion effect, meaning a resulting change in the direction of trade activities in favor of the member countries and against non-members. This actually implies disadvantages and losses on the part of the non-member countries. For this reason, the formation of trading bloc is very important issue not only for the signatory countries but also for the non-member countries.

Economic Grouping of the countries of the same region or areas increases the size of market, aggregate demand for products and services, overall, productivity, employment and ultimately economic activity of the region. At the same time, people of the region get a variety of products at comparatively lower prices. The number of regional groups has grown rapidly in recent decades. More than one-third of world trade now takes place within such groups.

Within the framework of the globalisation efforts conducted under, first, the General Agreement on Tariffs and Trade (GATT) and second, the World Trade Organisation (WTO), the utmost importance was given to the principle of non-discrimination at the international and national levels. The first principle is known as the most-favoured nation (MFN) clause and

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requires that any trade concession extended to a country must be automatically and immediately applied to all other GATT/WTO members. The second principle requires all the members to treat imported goods in the same manner as domestic products. Additionally, custom duties must be the only tools to protect domestic goods. Although, these two very basic principles were agreed under the GATT/WTO, there are, indeed, some effective exceptions to these rules. One exemption from the most-favoured nation clause is the case of free trade areas and customs union. Only in these economic groupings is ‘discrimination’ made permissible against the non-member countries. Another exception to the principle of non-discrimination is the special status of the developing countries. Trade preferences extended to the developing are also excluded from the MFN Clause. In other words, preferential treatment extended to the developing countries will not be granted compulsorily to the other countries.

Although trade liberalisation efforts at the global level are accelerating even day by day, regional economic groupings or regional trade blocs are also gaining momentum as indispensable forms of increasing trade amongst the countries, developed or developing, to satisfy, their growth and development aspirants.

At the level of developed countries, the European Union (EU), the North American Free Trade Agreement (NAFTA) and the Asia Pacific Economic Co-operation (APEC) have created huge economic blocs. These three blocs are very important in terms of both their weights in the world trade and economy and their inherent tendencies towards further enlargement and deepening.

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TYPES OF REGIONAL ECONOMIC GROUPS Regional Economic Groups can be classified on the basis of the degree of integration among different economies: (a) Preferential Trade Area: A preferential trade area is the weakest form of economic grouping. The member countries reduce custom tariffs in some product categories. They apply a preferential treatment to some groups of goods from the member countries as compared to the rest of the world. Higher tariffs would remain in place for all remaining product categories. A Preferential Trade area can be established through a trade pact. It is the first stage of economic integration. The line between a Preferential Trade Area and a Free trade area (FTA) may be blurred, as almost any PTA has a main goal of becoming a FTA in accordance with the General Agreement on Tariffs and Trade.

(b) Free Trade Area: This is the simplest form of economic integration which provides for internal free trade between member countries. Each member is allowed to determine its’ own commercial policy with respect to non-members. For example, Latin American Free Trade Association (LAFTA). In free trade areas, participants aim mainly to expand trade activities among themselves. For this purpose, they eliminate customs tariffs on the products they produce themselves. However, they maintain their own external tariff on imports from third parties. For this reason, free trade areas are criticised on the ground that import products from third countries may penetrate into the grouping through the customs of the member state with the lowest tariff and may then be re-exported to the other participants. In order to prevent such trade, free trade areas generally develop very elaborate rules of origin. (c) Customs Union: A customs union is a more advanced form of economic integration which not only provides for internal free trade between member countries but also adopts a uniform commercial policy against non-members. For example, European Economic Community (EEC). In a customs union, the participants not only agree to abolish or reduce pg. 5

tariffs between themselves, they also set a common external tariff policy against third parties. In this manner, the member countries, on the one hand, secure the free or privileged flow of tradable goods amongst themselves and on the other hand, they form a discriminatory trade bloc against the non-member countries. In this case, the main concern becomes the coordination of the trade policies amongst the member countries instead of developing elaborate rules of origin. (d) Common Market: A common market allows free movement of labour and capital within the common market in addition to having free movement of goods between the member countries. The member countries of common market also adopt a common commercial policy with respect to non-members. However, such a scheme necessitates the coordination of commercial and industrial policies. Citizens of a common market can work and invest in any member country without any restriction. (e) Economic Union: In the case of economic union, the member countries have the same economic policies, including monetary and fiscal policy, in addition to the features of common market. Additionally, they also agree to harmonise their national economic policies and act as single economic unit. For example, the European Union introduced a common currency Euro 2000 for its member countries. (f) Political Union: Political union is the ultimate type of economic integration whereby member countries achieve not only monetary and fiscal integration but also political integration. For example, EU is moving towards a political union similar to the one created by 52 states of America.

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Positive Implications of Regional Economic Groups when countries form a regional economic grouping, two types of effect may arise: trade diversion and trade creation. Trade diversion is the resulting shift in the direction of trade in favour of the member countries and against third parties. On the other hand, trade creation will induce economic activity in the region and give an impetus to income creation.

Formation of a regional economic integration will, first, enlarge the volume of demand for commodities produced in the region. As a result, when any investment decision is to be taken, entrepreneurs will consider the whole region and invest in large scale production units. This fact will have two effects. First, it may increase efficiency and competitiveness through economies of scale in production of goods already being produced in the region. Secondly, it may also make possible the production of new commodities within the region. These two results are the direct effects of economic groupings. These will bring about more income creation within the region. Due to the expansion of market, trade and income creation will result in increased exports, increased trade exchanges, more investment, more output, higher rate of employment, new business opportunities, new goods produced in the region. Foreign trade structure and production possibilities will change. Expanded exports will improve the balance of payments, and in turn, may decrease the debt burden on the economies. A greater market may induce foreign capital from third parties. Structural changes will improve the quality and quantity of the products in the region. Specialisation and better division of labour would increase production, productivity and economic growth. Larger markets for commodities and factors of production will give an impetus to technological changes. The overall benefits will be reflected on the increased output, income and welfare of the people.

The main objective of regional economic groups is to promote trade between different countries located in the same region. Some people view world trade as consisting broadly of intraregional trade and inter-regional trade. The regionalism offers certain advantages and poses certain threats. Some of the advantages of such groups are:

(a) Increased Trade in the Region: Proponents of regional economic groups strongly advocate that such groups result in considerable increase in trade within the region due to pg. 7

the elimination of trade barriers and other restrictions. This promotes prosperity in the region and improves general standard of living. (b) Promotes Efficient Firms: Elimination of trade barriers within the region encourages the efficient firms to expand their business activities in the region. At the same time, healthy competition within the region helps the less efficient firms in acquiring competencies in order to challenge the efficient firms. (c) Improves Performance: Competition between firms from different countries in the region leads to improvement in the overall business performance in terms of productivity, quality, price, delivery and customer service. Consumers get better quality goods and services at the competitive price. (d) Reduction in Transaction Costs: Elimination of trade barriers reduces transaction costs involved in conversion of currencies. This also eliminates the risks involved in international transactions due to fluctuation in currency rates. This gives boost to tourism and other related sectors in the region. (e) Price Transparency: Free trade among countries in the region also promotes price transparency. Price transparency means more or less same price prevails in all the countries in the region. As a result, customers need not wreck their brains trying to calculate what price a commodity is in their currency. (f) Promotes Investment: Many firms become wary when investing in other countries due to uncertainty caused by the fluctuating currencies. Regional grouping prevents such uncertainty and promotes investment in the region due to universal currency and elimination of risks due to fluctuations in currency. (g) Reduces Dependence: Economic regional grouping reduces dependence of member countries on the other countries of the world. This is because most of the requirements of the member nations can be met within the group. This helps the member countries become self-reliant in the long run. (h) Promotes International Peace: Regional groups are more of political unions rather than just economic unions. This is because it is the political will of the countries that compels them to come together for their common benefits. This prevents friction between them and promotes international peace. (i) Optimum Use of Resources: Integration of nations would promote smooth flow of resources and technology among the member nations. This would lead to better utilisation of natural and human resources in the member countries and would improve general standard of living in the region. pg. 8

Negative Implications of Regional Economic Groups There are certain negative implications of the Regional Economic Groups: (a) Over-estimation of Trade Benefits: Some economists argue that the trade and cost advantages of regional economic groups have been grossly over estimated. They simply transfer business from inefficient and protected firms in underdeveloped member countries to the efficient firms in the developed countries in the region.

(b) Loss of Sovereignty: On the political side, it is argued that individual member countries of regional groups lose their political sovereignty. The national policies of the member nations would no longer be guided by popularly elected governments of the nations but would be forced upon them externally by the dominating members of the regional group. (c) Threat to Infant Industries: Removal of barriers provides easy opportunity to the efficient firms to penetrate in the markets of the underdeveloped members nations. This endangers the existence and survival of the new and less efficient firms. Hence, the less developed countries mostly become consumption centres and the advanced countries the production centres. (d) Overexploitation of Resources of Underdeveloped Member Nations: The resources of the less efficient countries are exploited by the firms from the advanced countries of the region for their own economic benefits. As a result, the less developed countries become poorer whereas the advanced countries of the region become richer. (e) Restricts International Trade: The most discouraging effect of the regional economic grouping is the restriction of international trade. Regional economic groups encourage trade among its member countries while the trade with non-members is discouraged through stringent rules and trade barriers. This affects the flow of international trade.

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EXAMPLES OF REGIONAL ECONOMIC GROUPS EUROPEAN UNION (EU) The EU traces its origins from the European Coal and Steel Community (ECSC) formed among six countries, the then West Germany, France, Italy, Belgium, Netherlands and Luxemburg, in 1951 and the Treaty of Rome formed in 1957 by the same states. Since then, the EU has grown in size through enlargements and in power through the addition of policy areas to its remit.

The European Union (EU) is an economic union of 27-member countries located primarily in Europe. From an original membership of six states, there have been six successive enlargements, the largest occurring on 1st May 2004, when ten states joined. The EU is currently composed of twenty republics, six kingdoms and one duchy. The EU was established by the Treaty of Maastricht on 1st November 1993 upon the foundations of the European Communities. With over 500 million citizens, the EU combined generates an estimated 28% share (US$ 16.45 trillion in 2009) of the Nominal gross World Product and about 21.3% (US$14.8 trillion in 2009) of the PPP gross World Product.

The EU has developed a single market through a standardised system of laws which apply in all member states, ensuring the free movement of people, goods, services and capital. It maintains common policies on trade, agriculture, fisheries and regional development. Of these 27 member countries, 16 countries have adopted a common currency, the Euro, constituting the Eurozone.

As an international organisation, the EU operates through a hybrid system of supranationalism and intergovernmentalism. In certain areas, decisions are made through negotiation between member states, while in others, independent supranational institutions are responsible for the same. Some of the important institutions of the EU are:

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(a) The European Parliament (representing the people of Europe). (b) The Council of the European Union (representing national governments). (c) The European Commission (representing the common EU interest). (d) Council of Justice of the European Union. (e) European Central Bank.

The European Parliament is elected every five years by member states' citizens, to whom the citizenship of the European Union is guaranteed. 

Member Countries of European Union (EU)

The European Union is composed of 27 sovereign Member States: Austria, Belgium, Bulgaria, Cyprus, the Czech Republic, Denmark, Estonia, Finland, France, Germany, Greece, Hungary, Ireland, Italy, Latvia, Lithuania, Luxembourg, Malta, the Netherlands, Poland, Portugal, Romania, Slovak Republic, Slovenia, Spain, Sweden, [and the United Kingdom which has recently opted out of the EUROPEAN UNION in a very controversial movement which is being called BREXIT] 

Objectives of the European Union (EU)

The main objectives of the Union are now to promote peace, the Union's values and the wellbeing of its peoples. These general objectives are supplemented by a list of more detailed objectives: (a) To create an area of freedom, security and justice without internal frontiers; (b) To establish an internal market where competition is free and undistorted; (c) To strive for sustainable development, based on balanced economic growth and price stability; (d) To establish a highly competitive social market economy, aiming at full employment and social progress; (e) To achieve a high level of protection and improvement of the quality of the environment; (f) To promote social justice and protection, equality between women and men, solidarity between generations and protecte the rights of the child; (g) To promote economic, social and territorial cohesion and solidarity among the Member States.

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(h) To promote scientific and technological advancement; (i) To combat social exclusion and discrimination;

In addition, the Union respects cultural and linguistic diversity and ensures that Europe's cultural heritage is safeguarded and enhanced.

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India-European Union (EU) Relations:

India-EU relations go back to the early 1960s. India was among the first countries to establish diplomatic relations with the then European Economic Community (EEC). The 1994 cooperation agreement signed between EU and India took bilateral relations well beyond trade and economic cooperation. The 5th India-EU Summit at The Hague in 2004 endorsed the EU’s proposal to upgrade its relationship with India to a ‘Strategic Partnership’. The two sides also adopted a Joint Action Plan in 2005 which provides for: (a) Strengthening Dialogue and Consultation mechanisms; (b) Deepening political dialogue and cooperation; (c) Bringing together People and Cultures; (d) Enhancing Economic Policy Dialogue and Cooperation; and (e) Developing Trade and Investment. 

Bilateral Agreements:

India and the EU have signed bilateral agreements which includes cooperation in the field of Science & Technology in 2001 which was renewed in 2007; Joint Vision Statement for promoting cooperation in the field of information and communications technology in 2001; customs cooperation agreement in 2004; Memorandum of Understanding on Cooperation on Employment and Social Affairs in November 2006; Horizontal Civil Aviation Agreement in 2008; Joint Declaration in field of Education in 2008; Joint Declaration on Multilingualism in March 2009 and Agreement in the field of nuclear fusion energy research in November 2009.

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SOUTH ASIAN ASSOCIATION FOR REGIONAL COOPERATION (SAARC) The South Asian Association for Regional Cooperation (SAARC) is an economic and political organisation of eight countries in Southern Asia. In terms of population, its sphere of influence is the largest of any regional organisation - almost 1.5 billion people. It was established on 8th December, 1985 by Bangladesh, Bhutan, Maldives, Nepal, Pakistan, India and Sri Lanka. In April 2007, at the Association's 14th Summit, Afghanistan became its eighth member. 

Objectives of SAARC

(a) To improve the quality of life and welfare of the people of the SAARC member countries. (b) To enhance mutual assistance among member countries in the economic, social, cultural, scientific and technical fields. (c) To provide an opportunity to the people of the region to live with dignity and to exploit their potentialities. (d) To provide a conducive climate for creating and enhancing mutual trust, understanding and appreciation of one another’s problems. (e) To promote and strengthen collective self-reliance among the countries of South Asia; (f) To strengthen cooperation among themselves in international forums on the matters of common interest; and (g) To co-operate with international and regional organisations with similar aims and purposes. (h) To develop the region economically, socially and culturally.

The SAARC countries are committed to a step-by-step trade liberalisation in such a manner that all countries in the region share the benefits of trade expansion equitably.

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Major Development in SAARC:

The Declaration on South Asian Regional Cooperation was adopted by the Foreign Ministers in 1983 in New Delhi. During the meeting, the Ministers also launched the Integrated Programme of Action (IPA) in nine agreed areas, namely, Agriculture; Rural Development; Telecommunications; Meteorology; Health and Population Activities; Transport; Postal Services; Science and Technology; and Sports, Arts and Culture. The South Asian Association for Regional Cooperation (SAARC) was established when its Charter was formally adopted on 8 December 1985 by the Heads of State or Government of Bangladesh, Bhutan, Maldives, Nepal, Pakistan, India and Sri Lanka.

In July, 1992, a decision was reached to draft an agreement for the South Asian Preferential Trading Agreement (SAPTA). The draft agreement was submitted to the SAARC Standing Committee in 1992 and signed by foreign ministers in Dhaka on 11th April, 1993. It entered into force on 7th December, 1995. The SAPTA aims to remove para-tariff and non-tariff barriers to trade exchanges in the region, to deepen the tariff cuts and to expand the list of products to be included in intra SAARC preferential trade. Negotiations still continue to finalise schedules of concessions and to expand them further. SAPTA is considered to be a step to create a South Asian Free Trade Area (SAFTA), which is still at the discussion stage. Afghanistan was added to the regional grouping at the behest of India on 13th November 2005, and became a member on 3rd April 2007. With the addition of Afghanistan, the total number of member states was raised to eight. In April 2006, the United States of America and South Korea made formal requests to be granted observer status. The European Union has also indicated interest in being given observer status, and made a formal request for the same to the SAARC Council of Ministers meeting in July 2006. On 2nd August 2006 the foreign ministers of the SAARC countries agreed in principle to grant observer status to the US, South Korea and the European Union. On 4 March 2007, Iran requested observer status.

Poverty alleviation is also one of the major issues addressed within the framework of SAARC. In 1991, the Sixth SAARC Summit held in Colombo decided to establish an Independent South Asian Commission on Poverty Alleviation (ISACPA).

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Future Membership:

(a) The People’s Republic of China has shown its interest in joining SAARC. While Pakistan and Bangladesh support China's candidature, India is more reluctant about the prospect of Chinese membership, while Bhutan does not even have diplomatic relations with China. However, during the 2005 Dhaka summit, India agreed on granting observer status to the People’s Republic of China along with Japan. During the 14th summit, Nepal along with Pakistan and Bangladesh, announced their support for the membership of China.

(b) Indonesia intends to become an observer as well and is supported by Sri Lanka.

(c) Iran, a state with borders to two SAARC members, has traditionally enjoyed strong cultural, economic and political relationships with Afghanistan, Pakistan, India and Bangladesh and has expressed its desire to become a member of the South Asian organization. On 3rd March 2007, Iran asked to join the SAARC as an observer.

(d) Russia intends to become an observer as well, and is supported by India.

(e) Myanmar has expressed an interest in joining as a full member. India is currently backing Myanmar. Myanmar’s military regime officially applied for full SAARC membership in May 2008. However, the application is still being considered and the government is currently restricted to observer status.

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