Significance of RTA for developing countries / RTA
Significance of Regional Trade Arrangements for Developing Countries Increased emphasis on regionalism is a prominent feature of international economies since the mid-1980s. There are more than 200 active Regional Trade Agreements in force and the majority of these arguments are north-south RTAS or RTAs between developed and developing countries.
RTAS represent an important exception to WTO’s principle of non discrimination through the Most-Favored Nation (MFN) rule. According to the MFN rules, WTO members must extend the same market access conditions to all WTO members. However, as an exception to MFN, WTO allows countries with a RTA to trade among themselves using preferential tariffs and easier market access conditions than what is applicable to other WTO member countries.
Such RTAs are, however, permitted under WTO only when they have a clause to move towards global Free Trade Area without discrimination, in a time bound manner. The advantage to the RTA members thus comes from the preference margins, i.e. the gap between MFN rates and preferential tariff rates. As a result, WTO member countries that are not a part of the RTA lose out in these markets. Also, trading within the regional trading blocs does not come under the purview of WTO.
RTA and Developing Countries: The basic principles embodied in the GATT/WTO, viz. open markets, non-discrimination and global competition are unexceptionable. These are designed to foster a non-discriminatory, competitive and unified world market. Developing countries have, however, attempted to integrate their national economies with the world economy at a varying pace.
In the process of integration, developing countries have encountered several adverse consequences. For instance, easy market access, liberalized merger and acquisition laws, permitting majority to full foreign ownership and liberalized foreign exchange regulations, financial liberalization, etc. that comes in the course of integration process have facilitated large scale entry of global economic players in developing countries.
This has led to many local entrepreneurs surrendering their ventures to the global giants or assuming a position of joint partnership, if at all, in the restructured collaborative ventures. In the face of such threat to their survival, particularly for the small-scale sector, local entrepreneurs in developing countries have started demanding a level playing field and protection.
Another adverse consequence of globalization is that the emerging order would provide significant growth opportunities to only a few of the developing countries while for others it could result is several risky exposures. Some studies have brought out that many of the developing countries would be worse off as a result of WTO agreements.
This is expected to widen inter-country disparities. As visualized by the Centre periphery doctrine of Samir Amin and Andre Gunder Frank: developing countries, except a few, would be placed in a disadvantageous position (on periphery) while the system would work well for a few mighty developed countries and fast growing developing countries.
Options for Developing Countries
There are two options for the developing countries:
1. To join one or the other prominent bloc so as to remain within the mainstream of RTAs, or To strengthen economic ties among developing countries themselves on bilateral basis so as to provide a cushion to export growth.
The problem with regard to the first option is that membership of regional trading blocs is not easily available. There are usually too many restrictive qualifying criteria. For instance, India was denied membership of ASEAN for not being a Southeast Asian nation. These problems have motivated developing countries to come together and form a bloc of their own. In fact, developing countries from Asia, Africa and Latin America have made several attempts at bloc formation.
