Module-6Trade policy and

economic integration

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SAARC Structure• South Asian Association for regional

Cooperation.

• Came into existence on Dec. 08, 1985.

• Seven members- Bangladesh, Bhutan, India, Maldives, Nepal, Pakistan and Srilalnka.

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Main objectives of Saarc• To promote the welfare of people of

South Asia and to improve their quality of life.

• To promote and strengthen collective self reliance among the countries of south Asia.

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SAPTA SAFTA and Trade liberalisation• SAARC preferential trading arrangement

was signed in 1993.

• SAFTA was signed during the twelfth summit in Islamabad in 2004.

• It came into existence on January 1, 2006.

• Trade liberalization program scheduled for completion in ten years by 2016.

• Member nations are suppose to bring down their custom duties by 0-5 % by January 2009. 4

Problems and Prospects

• SAARC economies are basically rural in nature.

• Differences among member states.

• Inefficient communication network.

• It can provide way for customs union

• Services sector not covered in current trade agreements

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Country Share of SAARC Regional GDP 2005, (US$ 995.82 billion)

Bhutan0%

Pakistan11%

Maldives0%

Nepal1%

India79%

Sri Lanka2%

Afghanistan1%

Bangladesh6%

Concluding RemarksGreater integration among SAARC

countries critical for integration with greater Asia (connectivity aspect)

SAARC nations have been looking outwards –evident from bilateral FTAs – for greater flow of trade, commerce and investment across Asia.

Opportunity for India to demonstrate commitment to regional cooperation as incoming chair of SAARC

What is NAFTA?

• Effective as of January 1, 1994

• A trade agreement between CANADA, MEXICO, and the UNITED STATES which provides for the elimination of tariffs on North American goods shipped among the three countries.

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• MEXICO: Lower inflation and foreign debt; create more well-paying jobs for Mexicans, thus producing less incentive for Mexicans to work illegally in the U.S.; Mexico would become a richer market for American exporters.

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• UNITED STATES: Would solidify an expanding trade relationship, which would spur job creation at home and help to continue the revolutionary shift throughout Latin America away from state controlled markets toward freer markets.

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Top U.S.

1. Aircraft 2. Electronic Computing Equipment 3. Motor Vehicle Parts 4. Motor Vehicles 5. Semiconductors 6. Aircraft/Space/Missile Parts 7. Chemicals 8. Plastics 9. Airplane Engines/Parts 10. Refined Petroleum Products

1. Motor Vehicles 2. Oil/Natural Gas 3. Motor Vehicle Parts 4. Semiconductors 5. Electronic Parts

and

NAFTA Pros

+ Goods/Services at lower cost

+ Most underdeveloped countries gain the most (i.e. standards of trade increased)

+ Tariffs reduced

+ Jobs created

+ Mexico’s economy is growing again

NAFTA Cons

–Benefits Mexico more than the U.S.

–U.S. deficit with trading partners

–Loss of low-wage American jobs to Mexico

–Environmental problems

–Traffic congestion and delays along the borders

Impact on:Immigration

• In the 1990s, U.S. population grew 13.2%, with 60% growth of Mexican immigrants.

• Among Latinos nationwide, 26% are between the ages of 25-40.

• Remittances from Mexicans working in the U.S.: $6.65 billion (for 2001 through 3rd quarter)

• Increase in Mexican migrants led to increase in Border Patrol staff

Impact on:Environment

NAFTA Environmental Agreements:

North American Agreement on Environmental Cooperation (NAAEC) -

commission to enforce environmental law.

Border Environment Cooperation Commission and the North American

Development Bank - commission to address pollution problems along the U.S.-Mexican

border

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EUROPEAN UNION• Established in 1957 as the European Economic

Community (EEC), it became the European Community (EC) in 1995.

• It originally had 15 member states. Present 27 members

• In 1992, the Maastricht Treaty created the European Common Market– monetary union, establishment of common foreign and

security policy, common citizenship, and cooperation on justice and social affairs.

• The new name for the EC, after Maastricht, is the European Union.

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Organization of the EU• The executive body of the EU is the

European Commission, headquartered in Brussels

• The Council of Ministers has the final power to decided EU actions

• The future expansion of the EU will cause changes in the decision making processes

Euro Nations• Circulated on January 1, 2002.

• Austria, Belgium, Cyprus, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, Malta, Netherlands, Portugal, Slovakia, Slovenia Spain.

• The euro is managed and administered by the Frankfurt-based European Central Bank (ECB)

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EUROPEAN UNION

The case for free trade

• Research shows that more outward oriented countries (in terms of exports + imports) tend to grow faster.

The origin of GATT

• The great depression of the 1930s and WW resulted in protectionist policies.

• US had raised import duty to all time high of 53% prompting retaliation from other countries.

• International trade contracted sharply during this period.

• Need was recognized to free world trade. • GATT was born against this back ground

GATT/ WTO

• GATT was born in 1947 ; founded by 23 countries of which India was a member

• Objective of GATT was to promote free trade among members through multilateral trade negotiations.

Principles of GATT• Non-discrimination:. MFN principle- each member

shall be treated as well as the most favoured nation.

GATT/ WTO

• GATT was born in 1947 ; founded by 23 countries of which India was a member

• Objective of GATT was to promote free trade among members through multilateral trade negotiations.

Principles of GATT• Non-discrimination:. MFN principle- each member

shall be treated as well as the most favoured nation.

GATT/ WTO

• Non-discrimination (contd)

If any county gave preferential tariff to any other country, the same shall be extended to all the member countries.

• Reciprocity: A country receiving concession from another country was to offer ‘equivalent concession’ in return.

GATT/ WTOPrinciples of GATT• Transparency: Prohibition of quantitative

restrictions except under Balance of Payment difficulties. Use of tariffs rather than non-tariff barriers.

Evaluation of GATT• Membership rose form 23 (1947) to 128 (1995)• 8 rounds of talks – 8th round (Uruguay)

concluded in 1994 gave way to WTO• Considerable trade liberalization was achieved.

GATT/ WTOEvaluation of GATT• Avg. tariffs on manufactured products in

developed countries came down from 40% in 1947 to 3% in 1995.

• Since 1974 non tariff barriers rose following oil crises

• Textiles and Agriculture were kept out of GATT.

• Textiles trade was governed my MFA which allowed developed countries to impose quotas on textile imports

GATT/ WTO• Following the conclusion of Uruguay round of

agreement, GATT was converted into WTO.• WTO agreements can de divided into:

– Agreement on agriculture– Agreement on market access– Trade in services– Trade Related Intellectual Property Rights

(TRIPs)– Trade Related Investment Measures

(TRIMs)– Dispute settlement body

WTO agreements

• WTO is more powerful than GATT with dispute settlement mechanism that is faster and more efficient.

Liberalization of trade in Manufactures1. Expansion of tariff bindings: For

Developed countries (DCs) this will cover 99% of imports. Developing countries – 61% of industrial imports (up from 13%).

2. Expansion of duty free access. DCs- From 20 to 43% of imports.

WTO agreements

3. Reduction in tariff rates: DCs - From 6.2% to 3.7%. Developing countries – 15% to 11%.

4. India has bound tariffs at 40% on industrial raw materials, capital goods, 25% in other cases. 68% of the India’s tariff lines will be bound (compared to 5% earlier).

WTO agreement

Non –Tariff baririers:• Abolish VERs by 1999 and phase out MFA by 2005. Liberalization of Agril. Trade1. Tariffication of NTBs2. Tariff binding3. Tariff cuts

4. Prohibited subsidies (export subsidy). Actionable subsidies –those that have significant adverse impact on other countries.

WTO agreement

Liberalization of Agril. Trade

5. Industrial countries to reduce tariff by 36% over 6 yrs (from 1995) Developing countries to reduce tariff by 24% over 10 yrs.

WTO agreement

Agreement on textiles

• Phasing put of MFA.

• Phasing out implies quotas have to be eliminated.

• In 2005 the MFA ended. China has a cap of annual 7-8% increase in exports to US/EU till 2008 (because of late entry into WTO)

GATS

• Covers tourism, financial services, telecommunications, transport, audio visual, movement of workers.

• MFN applicable to such services

• National treatment –domestic and foreign companies at par.

TRIMs

• National treatment of foreign investments and removal of quantitative restrictions

• TRIMs does not allow following conditions on foreign investments:– Local content requirement– Trade balancing requirements– Domestic sales requirement

TRIMS impact

• Increases competition from foreign firms• Facilitates JVs and technology transfers• Indian firms can expand overseas• Threat to domestic firms that are not

competitive• Benefits through foreign investment• Puts pressure on domestic firms to

become more competitive

TRIPS• Prior to this agreement IPRs covered patents,

trade marks, industrial designs. Governed by Paris convention (1967).

• IPRs were fairly liberal under Paris convention.• Under WTO, stringent IPR protection measures

were imposed.• It now covers patents, copyrights, geographical

indicators, industrial designs, layout designs and layouts, ICs.

• Patents for 20 yrs and copyrights for 50yrs.

TRIPS & Patent Regime in India

• Indian Patents Act 1972 allowed only process patents in Pharmaceuticals, food and chemicals. That too for 7 yrs. Now product patents are applicable for these for 20 yrs.

• In case of other industrial products, patents for 14 yrs. Now under WTO protection is for 20 yrs.

TRIPS & Patent Regime in India

Implications• 97% of all drugs manufactured in India

are off-patents – price will not be affected• Most patented drugs have off-patent

alternatives• Compulsory licensing possible in case of

national emergencies

TRIPS & Patent Regime in India

• Allows govt. use of patents for its own use – public health care system.

• India can participate in outsourcing of clinical research.

• MNCs may establish R&D Facilities in India• Expected to encourage R&D and foreign

investments • Indian companies can patent invention and

acquire monopoly rights.

General Agreement on Trade in Services (GATS)

• Trade in services such as banking, insurance, travel, labour mobility was brought under negotiations.

Dispute settlement Body

• Under GATT it was taking long to settle disputes

• Under WTO it is mandatory to settle disputes in 18 months

• Dispute settlement will be final and binding on all parties

TRIPs: Turmeric patent case

• In 1995, to two NRIs, Suman K. Das and Hari Har P. Cohly, Univ. of Mississippi Medical Centre, Jackson, USA obtained patent for use of turmeric in wound healing.

• CSIR challenged the patent on the ground that it lacked novelty. CSIR could locate 32 references which showed that this finding was well known in India prior to filing of this patent.

TRIPs: Turmeric patent case

• In the United States, prior existing knowledge to deny a patent is accepted in terms of publication in any journal, but not of knowledge known and available in oral or folk traditions.

• The formal request for re-examination of the patent was filled by CSIR at USPTO on 28 October 1996.

• Unites State Patent and Trademark Office (USPTO) revoked the patent.

TRIPs: The Basmati patent case

• In Sept 1997, an American company RiceTec Inc, was granted a patent by the US patent office to call the aromatic rice grown outside India 'Basmati'.

• RiceTec Inc, had been trying to enter the international Basmati market with brands like 'Kasmati' and 'Texmati' described as Basmati-type rice with minimal success.

TRIPs: The Basmati patent case• However, with the Basmati patent rights,

RiceTec was could not only call its aromatic rice Basmati within the US, but also label it Basmati for its exports

• RiceTec argued that Basmati is a generic name and not a geographical indicator

• Economic Times, "Patenting Basmati in the US is like snatching away our history and culture”

TRIPs: The Basmati Case study

• India contended that Basmati rice is traditionally grown in India and Pakistan and granting patent to it violated the Geographical Indications act under the TRIPS

• Under Geographical indicators for example, the term “champagne” can only be used to describe wine that has been produced in the Champagne region of France, and “Scotch” whisky can only be applied to the spirit produced in the Scottish highlands.

TRIPs: The Basmati Case study

• US trademark office has issued patents to only three strains of hybrid basmati grain developed by the texas-based Ricetec corporation while rejecting a more generic and sweeping claim by the company.

• RiceTec has been allowed to call its rice equal or superior to Basmati.

TRIPs: The Neem patent case• The neem patent was granted by the

European Patent Office to the United States Department of Agriculture and the chemical multinational, W.R. Grace, in 1995.

• the Indian scientists argued that the people of India have known the medicinal properties of neem for thousands of years and hence no other company can patent its properties.

TRIPs: The Neem patent case• The Indian team argued that neem oil has been

traditionally used as fungicide by farmers• The European Patents Office accepted the

arguments offered by Indian scientists and rejected the order of the US patents office to award the patent to W R Grace, a US-based company in 2000

Module- 6International Economic

Institutions

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International Monetary Fund• Established on Dec. 27, 1945 and started

functioning on March 1, 1947.

• 186 member nations

• Membership of IMF is pre-requisite for membership of WB.

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Objectives• To promote international monetary cooperation

among member nations.

• To facilitate the expansion and balanced growth of international trade.

• To promote exchange stability among members.

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Objectives• To assist in establishing a multilateral

system of payments.

• To eliminate foreign exchange restrictions among nations.

• To assist member nations to correct their BoP disequilibrium.

• To solve the problem of International liquidity.

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ResourcesResources of IMF came from two sources-

i) Subscription from members

ii)Borrowings

Each member is assigned a quota which is based on criterion of country’s economic power. Countries are suppose to contribute towards fund resources 25% in the form of SDR’s or Forex and rest in its own currency. Quota defines a member’s voting power in IMF.

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Resources• IMF is authorized to supplement its

ordinary resources by borrowing.

• IMF may seek the amount it needs in any currency and from any source, that is, from official entities or from private sources.

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Functions

• IMF provides financial assistance to member nations for BoP difficulties.

• IMF provides technical assistance to member nations in following areas-

i) Designing and implementing fiscal and monetary policies.

ii)Drafting and reviewing economic and financial legislations.

iii)Institution and capacity building.56

WORLD BANK• IBRD was established in 1945.

• An outcome of Bretton Woods conference

• 186 member nations.

• Board of governors consists of one governor from each member

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Objectives

• To assist in reconstruction and development of territories of members by facilitating the investment of capital for productive purposes.

• To restore the economies of members destroyed or disrupted by war.

• To encourage the development of productive facilities in UDC’s.

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Objectives• To promote private foreign investment by

means of guarantees of participation.

• Finance for productive purposes out of its own capital funds raised by it and other resources.

• To promote the long range balanced growth of international trade.

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UNCTAD• Established in 1964 as a permanent organ

of UN general assembly. It was designed as a forum in which trade related development issues could be discussed and analyzed to lead to negotiations of international understanding on issues that were in dispute.

• 193 member nations.

• Headquarters at Geneva.

• Supachai Panitchpakdi- present secretary general of UNCTAD. 60

Functions of UNCTAD• To promote international trade.

• To formulate principles of and policies on international trade and related problems.

• To negotiate multinational trade agreements.

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• UNCTAD played a key role in the emergence of the generalized system of preferences (GSP), a maritime shipping code, and special international programs to help the least developed countries.

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