Vol. 5 Num 1134 Tue. August 07, 2007  

Free trade

One of the current major trends among the industrialised countries seems to be to bury their hatchets and create or join a free trade block, where goods and services can move freely from one country to another with no tariffs or duties.

The primary idea is to establish a solid market structure for domestic industries to be able to withstand global competition. A free trade area helps a business firm grow, as it increases the size of the market. As mass production often leads to efficiency and lower production costs, business firms with a bigger market become more competitive.

Moreover, competition from firms in other members of the free trade zone forces firms to try yet harder to be more efficient, and at the same time drives the weaker firms out. In this way, by becoming more efficient, the domestic firms could prepare themselves to avert the adverse effects of globalisation.

Europe would be a good example for the beneficial effects of economic realignments. Europe is essentially an amalgamation of states with different languages, cultures, and nationalities. Many of the world's important events including the democratic movement and capitalism originated there. However, history is filled with tales of enmity and competition among European states, where many savage wars took place.

But it is hard to imagine those old enmities nowadays. Amazingly, economic interests are rapidly changing the situation in Europe and bringing the previously disgruntled countries together by eliminating all international barriers to an improved economic life. The European Union, which was officially launched in 1993 with only six member states, has since expanded to 27, comprising a majority of states in Europe.

In 2002, twelve member states also surrendered their national currencies and adopted the Euro as their common currency. Slovenia adopted the Euro this year, and more countries are likely to follow suit next year.

All these moves are indeed intended to face one thing -- the market globalisation. The EU countries' GDP of over $13 trillion in 2006 rivals that of the United States, and will surely go up when additional states join the union.

In order to maintain its superiority and to counter the move by the Europeans, the United States created its North American Free Trade Agreement (Nafta) with Canada and Mexico in 1994. Even in the absence of a congenial overall relationship, the United States found good reasons to form an economic alliance with Mexico.

As a free trade block, Nafta's GDP exceeds $15 trillion, which is also poised to go up if and when Chile and other Central American countries are granted their memberships as expected. But unlike the European Union, Nafta is limited in scope. For example, the United States would allow free movement of goods and services from Mexico, but disallows free movement of its people. In other words, this is a special kind of marriage limited to economic integration with no social assimilation, and it is designed simply to help domestic industries withstand global competition.

Similarly, the emerging economies could follow the tactic of market integration for maintaining their economic stability and growth. Let's look at the situation of the South Asian Association of Regional Cooperation (Saarc), a regional organisation that has a potential to greatly benefit from an effective free trade block.

Saarc was initially launched in 1985 with four states, but has now expanded to eight, comprising all of the states in the Indian sub-continent and Afghanistan, which joined this year.

The organisation encompasses a region that houses almost one fourth of the world's population. The region could evolve into one of the largest economic blocks with a huge market base as it will vastly increase the size of the market available to any particular firm in a Saarc nation.

Through intra-Saarc competition, improved and efficient business firms will emerge, which will then be better able to compete globally. Additionally, the allowance of free movements of capital and labour among the member states will further enhance the competitiveness of business firms in Saarc nations.

But from its inception, Saarc has remained mostly ineffective and has achieved very little due to serious political squabbling among its member states. There are a number of acute problems that the organisation faces, and religion may be at the center of it all.

As a matter of fact, it was religion that caused the division of the sub-continent to begin with. The main issues, which have plagued the region for years, are: Kashmir in the northwest, water distribution in the east, and internal power sharing in the north (Nepal) and south (Sri Lanka).

The dispute over Kashmir has brought India and Pakistan to the battlefield on a number of occasions in the past, and it has even advanced the race for nuclear weapons between them. The costs of such a race are enormous since every dollar invested in advanced weapon systems means a dollar less is invested in education, healthcare, social welfare and development. The fallout of Kashmir persists as neither country is prepared to give in.

For Bangladesh in the east, a country of over 145 million people, the lifeline for the country is the water that flows through India. Because of India's unilateral diversion of that water in the upstream during the dry season, great havoc has been created in Bangladesh. Obviously, this is affecting badly needed cooperation between the two countries.

In the north and south, both Nepal and Sri Lanka have been bogged down for years by their infighting over internal power sharing, which is having a serious impact on their attitude to and cooperation with others. The current internal situation of Bangladesh and Pakistan is not helping things either. Even the newest member state Afghanistan has its own baggage of problems.

The various conflicts in the region have already extracted a heavy price. Earlier, close to fifty per cent of Saarc countries' economic resources went for the destruction of each other and this has continued even today, though perhaps at a lesser scale. For example, out of the annual budget of $190 billion in 2006, the Saarc countries spent about $28 billion, roughly 15%, for defense related purposes. This amount represents about 2.7% of their total GDP, a huge amount compared to their per capita income.

The region's overall per capita GDP is about $3,350 based on purchasing power parity. Even for India this amount is a mere $3,800. Nearly 50% of the people in the region live on less than $2 a day, and about 400 million or 27% of the population live on less than $1 a day. So, to overcome such a depressed condition, the best course of action for Saarc countries would be to end political squabbling and forge economic integration.

India has the largest and fastest growing economy in the region, and it also holds a big trump card for resolving the major issues that have afflicted the region. As a big brother, India has a great responsibility to steer Saarc countries in the direction of economic integration. By doing so, India will expedite its own growth and ensure its stability as well. If India needs a convincing argument for this, it should only examine the circumstances that led to the creation of the EU and Nafta.

By observing the overall mood at the 14th Saarc summit that was held in New Delhi in April of 2007, one might sense that a change in the perception about Saarc may be occurring. This position may have been influenced by the increases in economic growth that has happened in many member states and by the realisation that, in the current wave of globalisation, economic integration rather than political separation is the best way to achieve and sustain economic prosperity.

The position that India took at the summit pretty much set the tone, and it appears to be positive. The summit had begun with a big fanfare and with an impassioned plea for greater cooperation to improve trade relations, combat terrorism, and above all alleviate poverty.

There was even a call from one member state, namely Sri Lanka, to adopt a single currency for the Saarc countries. India's offer to allow duty free entry of goods from the least developed members and to ease visa requirements for students, teachers, medical patients and specialists in various fields is encouraging.

The summit adopted a 30-point declaration that included the establishment of Saarc Development Fund, South Asian University, Food Bank, and Arbitration Council. All these are welcome changes.

But the future of Saarc will be determined not by the adoption of such programs, but by the proper implementation of these programs and by the resolution of all major conflicts. India as a leading power in the region has an enormous obligation to lead by setting a good example for other member states.

The general expectation is that the Saarc countries will eventually come around to face reality and establish an effective free trade agreement. But the question is how soon will it happen. In this fast moving world, timing is very important. A big delay in reaching an agreement will not help.

Thus, the challenge is now squarely before the Saarc countries, and if they fail to seize the opportunity and meet the challenge of economic integration with courage, they will have no one to blame but themselves. Let's hope sound judgment will prevail, and soon.

The author teaches Economics at CW Post Campus of Long Island University, New York.
Market day in Kathmandu PHOTO: Amirul Rajiv