Academic journal article Contemporary Economic Policy

Economic Integration and Trade Protection: Policy Issues for South Asian Countries

Academic journal article Contemporary Economic Policy

Economic Integration and Trade Protection: Policy Issues for South Asian Countries

Article excerpt

I. INTRODUCTION

Countries in South Asia stand out as an exception in a world where regional trade agreements are increasingly cornering and consolidating resources and markets. The emergence of the concept of the regional trading bloc has traversed a long way after Jacob Viner popularized the original idea in the 1950s. Since then, a large number of economic cooperation, free trade zones, currency unions, and so forth have been formed, and epitomized by the formation of the European Union (EU). The growing number of various other arrangements that exist in the Middle East, within the countries of sub-Saharan Africa, in the Asia-Pacific region, between countries of South America, and so forth has already created a stable variant of the multilateral trade regime, where blocs instead of individual countries negotiate the conditions of international trade. However, despite a multitude of attempts, the level of implementation of a defined structure across the South Asian countries has been both slow and incomplete with the feeble initiatives of SAPTA (South Asian Preferential Trading Arrangement) and BIMSTEC (Bay of Bengal Initiative for Multi-Sectoral Economic Cooperation) (1) and more recently by the formation of SAFTA (South Asian Free Trade Area). SAFTA was envisaged primarily as the first step toward the transition to a free trade area leading subsequently toward a Customs Union, Common Market, and Economic Union. Indeed, individual countries belonging to any such group get the benefits of trade creation within the bloc as well as import protection from other countries effective through group-based trade negotiations. It should be interesting to study and explore if benefits from membership of a bloc outweigh the losses due to recent withdrawal of other country-specific protection previously available, such as the abolition of the well-known multifiber arrangement (MFA) which allowed protected export market to small developing countries, such as Sri Lanka and Bangladesh, belonging to this region. It leaves us with an ample time period to estimate if the withdrawal and the simultaneous free-trade association formed by countries like India have outweighed each other in terms of the net benefits from parallel trade policies.

Our study takes a closer look at the existing dynamics of cross-border trade in South Asia, exploring the potential for such trade through the lens of one key sector in which nearly all countries in the region have strong comparative advantage vis-a-vis other parts of the globe, namely, textiles and clothing (henceforth T&C). Despite the global competitiveness of this sector as enjoyed and influenced by most of the South Asian Association for Regional Cooperation (SAARC) members, there was very little regional interlinkage within South Asia's T&C industry. Currently, less than 4% of SAARC's global T&C exports are traded within the region. Thus a significant, but so far unrealized, potential exists to strengthen intraregional linkages within South Asia's T&C sector and make it a powerful global hub of production and exports in this sector. This project has the noble potential to investigate the importance of such intraregional trade in the context of complete elimination of the bilateral MFA (2) quota system in 2005, which used to monitor the international trade in T&C since 1974, and its integration within the General Agreement on Tariffs and Trade (GATT) framework through the Agreement on Textiles and Clothing (ATC). As it has been shown in earlier studies that existence of MFA quotas actually gave protection to the smaller and less-developed countries in South-East Asia (see Kar 2012; Kar and Kar 2011), only the bigger textile giants such as India and China are expected to and eventually found to have been reaping the benefits from the withdrawal of this system. Now, we try to explore, with the help of an augmented version of the gravity model, whether the formation of regional trading arrangements (RTAs) like SAFTA serves to promote the magnitude of trade or not and if so, then whether the intra-bloc trade (3) is substantially accelerated vis-a-vis the effect of extra-bloc trade creation. …

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