Experience of Expansion of Existing Trade Blocs

1. Experience of Expansion of Existing Trade Blocs Dr. (Mrs.) Vijaya Katti Professor & Chairperson (GSD) Indian Institute of Foreign Trade New Delhi-110016 Email: vckatti@yahoo.com, vijayakatti@iift.ac.in Session on 23/09/12

2. Objectives • To explain the rationale behind the expansion of Trading Blocs • To elaborate on the existing three Trading Blocs viz. ASEAN, NAFTA and EU • To explain the process of expansion of these three Trading Blocs • To examine the implications of the expansion these three Trading Blocs for India

3. Evolution of Asia-Pacific Regionalism • Broadly 3 waves • First wave (50s/60s/70s): • 1950 Conference on Asian/African cooperation in Bandung, Indonesia, the precursor of the non-aligned movement. • Import-substitution industrialization strategy becomes development model. South-South cooperation based on strategic selection of tariff liberalization among members to promote industrialization. Inward looking with high tariff walls to keep out imports competing with “infant industries”. • First RTA signed in 1975: Bangkok Agreement • Second wave (80s/90s): • Unsustainability of import-substitution model, globalization accelerates and results in north/south interdependence. Outward-oriented, “open regionalism” i.e. faster liberalization among RTA “friends” while at the same time lowering barriers to third parties

4. Contd… • Second wave: • Establishment of APEC based on non-discriminatory principles in its strictest interpretation, conclusion of UR • Rapid increase in membership to GATT/WTO. • Regionalism and multilateralism enter golden age of mutually supportive liberalization • Third wave (Late 1990s-present): • financial crisis • stalling of APEC process of liberalization • stalwarts of MFN (Japan and Rok) turn regional, as well as China who completes most difficult part of internal transformation. • New era of deep and wide economic partnership agreements, with FTA as core, but much wider economic cooperation as well • Bilateralism is key feature

5. Where Does Asia-Pacific Stand?: New Age Regionalism • Despite density of agreements, concluded agreements are generally ‘lite’, particularly those among developing countries • liberalization shifted to future (10 years or more) • significant exceptions in goods • rules of origin restrictive • services not covered • investments covered, but focus more on investor protection than locking in investment liberalization • dispute resolution mechanisms not well defined

6. Contd… However, agreements involving developing and developed countries much more comprehensive. • services, TRIPs, investments and other WTO+ features are prominent • increasing public concern regarding asymmetric negotiating powers • calls for greater democratization of trade policy formulation: strengthened consultative mechanisms (bottom-up), increased role for parliamentarians as interface between societies and policy making executive branch • Other forms of regional economic cooperation also continue • Growth triangles/quadrangles, EPZs, SEZs • Many forms: intergovernmental/private sector driven • Common themes: riparian cooperation, transport corridors, energy selfsufficiency.

7. APTA: A Bridge across Asia • Signed in 1975 as an initiative of UNESCAP, the Bangkok Agreement, now APTA, is Asia’s oldest preferential trade agreement between developing countries. • It aims to promote regional trade through an exchange of mutually-agreed concessions. • Bangladesh, China, India, Republic of Korea, Lao PDR and Sri Lanka are member countries.

8. Contd… • Region-wide membership potential • Only RTA in which two most populous and fastest growing economies are members (i.e. China and India) • Through China and India linkages with other RTAs in the region can be established (e.g. AFTA, BIMSTEC, SAFTA)

9. Expanding Membership Status: China’s accession in particular makes membership more attractive to countries in the region Efforts are being taken to expand membership. Mongolia and Pakistan have indicated intention to join, others have expressed interest Next target: Central Asia

10. Contd… • The primary aim of AFTA is to “increase ASEAN’s competitive edge as a production base geared for the world market”. • Its main feature is trade liberalisation through the elimination of intra-ASEAN tariffs and non-tariff barriers, which would then raise the efficiency and cost effectiveness of doing business and promote trade and investment in a fashion consistent with the General Agreement on Tariffs and Trade (GATT)

11. Contd… Extra-ASEAN PTAs ASEAN+1 • ASEAN seems poised t gain a prominent position in the emerging network of PTAs in Asia Pacific. • Since 2002, the group has become party to FTA negotiations with Australia-New Zealand, China, India, Japan, Korea and the EU. These initiatives, known as the ASEAN +1 mechanism, have adopted AFTA’s framework and have a comprehensive scope that encompasses not just trade but investment, services, IT, customs harmonising and antidumping. • Hence, the term ‘Comprehensive Economic Partnership (CEP) has been preferred to FTA.

12. ASEAN Framework Agreement for Services (AFAS) • Following the General Agreement on Trade in Services (GATS), the ASEAN Framework Agreement for Services (AFAS) aims to create a free trade area in services n the sectors of air transport services, maritime transport services, business and professional services such as accounting, engineering, telecommunication and financial services. Signed in 1995, AFAS entails cooperation in improving efficiency and competitiveness of service providers, reducing restrictions to trade in services among members, and liberalizing trade in services beyond the scope in GATS.

13. ASEAN EXPANSION • The expansion of membership in ASEAN since 1995 can be studied from various angles. • As the conflict management' aspect of this process will be at the centre of attention, this is studied from two main perspectives: first, allowing new members into ASEAN is a way to manage conflicts between the original and new member states in the association more efficiently; second, through the expansion, ASEAN' s conflict management approach will be spread to a larger part of the Southeast Asian region.

14. Contd… • ASEAN's approach to conflict management is thus at the centre of attention-it can be studied from different angles and all or simply some specific conflicts can be addressed. • The improvement of relations during the period often known as the 'formative years', ie 1967 to 1976, led to the signing of the Declaration of ASEAN Concord and the Treaty of Amity and Co-operation (TAC) (Bali Treaty) on 24 February 1976,7 in connection with ASEAN'S first summit meeting, held in Bali. • With regard to conflict management, ASEAN's approach has been geared towards preventing the emergence of new conflicts, while simultaneously pre- venting existing conflicts from disrupting inter-states relations

15. The Expansion Process • The expansion of membership in ASEAN is the culmination of a process of gradual rapprochement between the ASEAN members and Cambodia, Laos, Burma and Vietnam, respectively.

16. Contd… • Prior to 1994, the Association of Southeast Asian Nations (ASEAN) only operated in Southeast Asia. After that, however, the ASEAN-led ASEAN Regional Forum (ARF) emerged and was followed by two more ASEAN-led organisations, ASEAN Plus Three (A+3) in 1999 and the East Asia Summit (EAS) in 2005. This thesis will explain why, in just over a decade, ASEAN came to lead three organisations in East Asia, the Asia Pacific and beyond. To do this I will look at five organisations in East Asia and the Asia Pacific that have emerged since World War Two: ASEAN, the ARF, A+3, the EAS and the Asia Pacific Economic Cooperation (APEC) forum. This is not a complete list of all the regional organisations in East Asia and the Asia Pacific, but a list of the most relevant ones.

17. Contd.. • There are three reasons for this expansion. • The first is ASEAN’s experience; the fact that there are no other regional organisations in East Asia with the same amount of experience. • The second is APEC; the circumstances of APEC’s formation as well as APEC’s performance in the 1997 Asian Financial Crisis (AFC) drove the creation of ASEAN-led organisations. • The third and final reason for ASEAN’s expansion is more complex. Apart from APEC, regionalism in East Asia has been driven by threats to sovereignty. • ASEAN itself was driven by threats to sovereignty and since its formation has structured itself to tackle such threats. • The ARF, A+3 and EAS were all formed to deal with threats to sovereignty, which made ASEAN particularly well suited to leading these regional organisations.

18. Contd.. • ASEAN consisted in the beginning only of countries with non-democratic governments, and that is still predominantly the case today. • While the Europeans work together in an often confrontational, but predominantly constructive way, ASEAN members work according to a code of conduct they call the Asian way. • Until now differences in size, and especially the vastness of Indonesia were of no real significance in the way ASEAN was run. • Everybody in the region is very aware of Indonesia’s sense of national identity. Most of the smaller ASEAN states are worried about a possible Indonesian hegemony. • ASEAN must now be prepared to take a further decisive step beyond the “ASEAN+” concept and allow full member status to new, economically strong democracies from the region.

19. Expanding ASEAN membership as constructive engagement and conflict management • The process of rapprochement and gradual expansion of ASEAN has brought to an end the animosity and mutual suspicion that had characterised ASEAN'S relations with the Indochinese countries from 1975

20. Factors in the expansion of ASEAN • As seen from the perspective of the ASEAN six, the economic rationale for expanding membership in the association can be identified as follows: creating a larger market for intra-ASEAN trade through an expanded ASEAN Free Trade Agreement (AFrA) encompassing the whole of Southeast Asia; facilitating investment in Vietnam, Laos, Burma and Cambodia; and more generally facilitating and creating conducive conditions for overall economic co-operation with the Southeast Asian region.

21. Contd… • As seen from the perspectives of Cambodia, Laos, Burma and Vietnam, the economic benefits of closer co-operation and eventually membership in ASEAN were expectations of increased investments by the ASEAN six, increased export opportunities to these countries and more assistance to development efforts from the ASEAN members. • The pattern of economic interaction between the ASEAN six and the other four shows that there has been an increase in ASEAN six investments in the other countries in the 1990s, that ASEAN six investments are an important contribution to their overall foreign investments,39 and that Vietnam is the most important target of ASEAN six investments

22. Contd… Political Factor • As seen from the perspective of the ASEAN six, expansion of membership was a process aimed at the fulfilment of the overall goal set out in 1967 to bring about or create an association encompassing all 10 countries in the Southeast Asian region, ie fulfilling the notion of 'One Southeast Asia' Security Factor The security factor should be seen as an ambition to create a more stable regional environment for the individual countries to concentrate on development efforts as well as enhancing the possibility of inter-state co- operation by creating better relations between the various countries.

23. Relative importance of the three factors • The political factor seems to have been crucial in creating the necessary basic conditions for en expansion of membership in ASEAN in the first place, ie the fact that the ASEAN six had from the outset formulated the goal of 'One Southeast Asia' with all 10 Southeast Asian countries as members of the association. • As noted earlier this was a necessary condition for expansion to take place at all. • The political factor seems to have been crucial in creating the necessary basic conditions for en expansion of membership in

24. Contd… ASEAN in the first place, ie the fact that the ASEAN six had from the outset formulated the goal of 'One Southeast Asia' with all 10 Southeast Asian countries as members of the association. As noted earlier this was a necessary condition for expansion to take place at all. • The economic factor does not seem to be such a crucial factor in explaining the urge to expand ASEAN membership from within.

25. The North American Free Trade Agreement • Includes Canada, the United States, and Mexico • Went into effect on January 1, 1994. • Involves free trade in goods, services, and investment • Is a large bloc but includes countries of different sizes and wealth.

26. NAFTA RATIONALE • U.S. Canadian trade is the largest bilateral trade n the world. • The United States is Mexico’s and Canada’s largest trading partner. • NAFTA calls for the elimination of tariff and non-tariff barriers, the harmonization of trade rules, the liberalization of restrictions on service and foreign investment, the enforcement of intellectual property rights, and a dispute settlement process • NAFTA is a good example of trade diversion; some US trade with the investment in Asia have been diverted to Mexico • Rules of origin-goods and services must originate in North America to get access to lower tariffs.

27. REGIONAL CONTENT • The percentage of value that must be from North America for the product to be considered North American in terms of country of origin. • 50 percent for most products; 62.5 percent for autos.

28. Additional NAFTA Provisions • Workers’ rights • The environment • Dispute resolution mechanism

29. Contd… • It’s logical that most trade groups contain countries in the same area of the world. • Neighboring countries tend to ally for several reasons: • The distances that goods need to travel between such countries are short • Consumers’ tastes are likely to be similar, and distribution channels can be easily established in adjacent countries • Neighboring countries may have a common history and interests, and they may be more willing to coordinate their policies.

30. The NAFTA Trade Perspective • The U.S.-Canada FTA: January 1, 1989 • The NAFTA: January 1, 1994, a remarkable success • The U.S. economy grew by 48% • Canada: 49% • Mexico: 40% • NAFTA total trade increased over $510 billion: $297 billion in 1993 to $866 billion now • In 2006, NAFTA traded $2.4 billion a day with our NAFTA partners -- $1.6 million a minute

31. Economic (‘Prosperity’) Component Working Groups • Manufactured Goods (DOC) • Lower production costs for North American manufacturers by eliminating unnecessary regulatory barriers, ensuring compatibility of regulations and by eliminating redundant testing requirements • Provide consumers with cheaper, safer, and more diversified and innovative products • The Other Nine: • E-Commerce and ICT (DOC) • Energy (DOE) • Movement of Goods (USTR) • Transportation (DOT) • Food and Agriculture (USDA) • Business Facilitation (DOS) • Financial Services (Treas) • Environment (DOS) • Health (HHS)

32. North America (NAFTA) XXI Century Realities • NAFTA consolidation and expansion (NA currency) • Economic regional trade with the Americas • Competition focusing on the EU + EE countries • 2005 Security and Prosperity Partnership (SPP) of North America • NATIONAL SECURITY

33. European Union • Changed from the European Economic Community to the European community to the European Union • The largest and most successful regional trade group • Free trade of goods, services, capital, and people • Common external tariff • Common currency.

34. The European Union • The largest and most comprehensive regional economic group is the European Union. • It began as a free trade agreement with the global to become a customs union and to integrate in other ways. • The formation of the European Parliament and the establishment of a common currency, the euro, make the EU the most ambitious of all the regional trade groups. • Table 8.1 summarizes the key milestones for the EU, and Map 8.2 identifies the members of the EU and other key European groups.

35. The Euro • Is a common currency in Europe • Is administered by the European Central Bank. • Was established on January 1, 1999. • Resulted in new bank notes in 2002. • Does not include the United Kingdom, Denmark, Sweden, or the 11 new entrants to the EU as of 2007. • The EU expanded from 15 to 25 countries in 2004 with countries from mostly Central and Eastern Europe. In 2007 it admitted Romania and Bulgaria, bringing the number to 27.

36. Expansion of EU • One of the EU’s major challenges is that of expansion. • The May 2004 expansion has been its largest and included Cyprus, the Czech Republic, Estonia, Hungary, Latvia, Lithuania, Malta, Poland, the Slovak Republic, and Slovenia. • Bulgaria and Romaina were admitted at the beginning of 2007, and candidates for future membership currently include Turkey, the former Yugoslav Republic of Macedonia, and Croatia. • However, Turkey has been put on hold while it continues to improves its human rights record.

37. EU Enlargement: The Next Eight • Eight countries are waiting in the wings to join the European Union. The eight countries are as follows:- Albania • Albania is not expected to join the EU until 2015 at the earliest. It formally applied for membership on 28 April 2009. Bosnia-Hercegovina • Bosnia-Hercegovina is not expected to join the EU until 2015 at the earliest. Croatia • Applied for membership: February 2003 • Confirmed as candidate country: June 2004 • Negotiations started: October 2005 • Croatia has completed its accession negotiations with the European Commission and a target date of 1 July 2013 has been set for it to join the EU.

38. Contd… Iceland • Applied for full membership: July 2009 • Negotiations started: July 2010 • The EU has opened accession talks with Iceland. • But Iceland's progress is threatened by a dispute over mackerel fishing. Macedonia • Applied for full membership: March 2004 • Confirmed as candidate: December 2005 • The European Commission has recommended that the EU open membership talks with Macedonia. Montenegro • Applied for full membership: December 2008 • Confirmed as candidate: December 2010 • Negotiations started: June 2012 • Candidate status has boosted Montenegro's bid and the EU opened the country's accession talks on 29 June 2012.

39. Contd… Serbia • Applied for full membership: December 2009 • Confirmed as candidate: March 2012 Turkey • Applied for full membership: 1987 • Confirmed as candidate: December 1999 • Negotiations started: October 2005

40. Contd… • Turkey met the last condition for accession talks in July 2005, when it extended a customs union with the EU to all new member states, including Cyprus. So far only 13 of the 33 areas of negotiation - called "chapters" - have been opened. • Croatia and Turkey started accession talks on 3 October 2005. Turkey could complete them in 10-15 years, but Croatia is set to join the EU in mid-2013. • The other Balkan countries have been told they can join the EU one day, if they meet the criteria. These include democracy, the rule of law, a market economy and adherence to the EU's goals of political and economic union. • Iceland is the latest country to seek EU membership.

41. Expansion of SAARC • SARC (South Asian Regional Cooperation) established in 1982 • SAARC (South Asian Association for Regional Cooperation) established in 1985 • Members of SAARC India, Bangladesh, Maldives, Nepal, Srilanka, Bhutan and Pakistan. • New member of SAARC is Afghanistan added in 2007.

42. Summary • Behind the expansion of EU, NAFTA and ASEAN, various Geo Political and Economic factors can be underpinned. • Each expansion has implications for India’s Foreign Trade in the sense that exports of India to the country which becomes part of expanded trading blocs get affected. • India needs to undertake special efforts to enhance the level of exports to the expended trading blocs.

43. THANK YOU……. Dr. (Mrs.) Vijaya Katti Professor & Chairperson (GSD) Indian Institute of Foreign Trade New Delhi-110016 vckatti@yahoo.com, vijayakatti@iift.ac.in