RCEP Withdrawal: Understanding Free Trade Agreements, Custom Union & Plurilateral Agreements

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India’s brave and bold step in exiting the RCEP negotiation. India cited the following reason in the answer laid down in the parliament:-

“During the 3rd RCEP Leaders Summit which was held on 4 November, 2019 in Bangkok, India stated that the current structure of RCEP did not reflect the RCEP Guiding Principles or address the outstanding issues and concerns of India, in the light of which India did not join RCEP. While RCEP was intended to provide mutually beneficial outcomes for RCEP countries including India, the current structure did not adequately address ambition and concerns of India’s stakeholders

RCEP issue brought to the center the subject of Plurilateral, Regional Trade Agreement and Multilateral Agreements. These agreements can take the form of Free Trade Agreement, Custom Union etc.

Five different forms of PTAs are –

  1. PARTIAL SCOPE AGREEMENT (PSA): A PSA is only partial in scope, meaning it allows for trade between countries on a small number of goods.
  2. FREE TRADE AGREEMENT (FTA): preferential arrangement in which members reduce tariffs on trade among them, while each having own tariff rates for trade with nonmembers.
  3. CUSTOMS UNION (CU): A customs union (CU) is a free-trade agreement in which members apply a common external tariff (CET) schedule to imports from nonmembers.
  4. COMMON MARKET (CM): A common market is a customs union where movement of factors of production is relatively free amongst member countries.
  5. ECONOMIC UNION (EU): An economic union is a common market where member countries coordinate macro-economic and exchange rate policies.

Ever since Adam Smith published The Wealth of Nations in 1776, the vast majority of economists have accepted the proposition that free trade among nations improves overall economic welfare.

Free trade, usually defined as the absence of tariffs, quotas, or other governmental impediments to international trade, allows each country to specialize in the goods that it can produce cheaply and efficiently relative to other countries. Such specialization enables all countries to achieve higher real incomes. While virtually all economists think free trade is desirable, they differ on how best to make the transition from tariffs and quotas to free trade. The three basic approaches to trade reform are

  • Unilateral
  • Multilateral &
  • Bilateral

Some countries, such as Britain in the nineteenth century and Chile and South Korea in recent decades, have undertaken unilateral tariff reductions—reductions made independently and without reciprocal action by other countries. The advantages of unilateral free trade are:

  1. A country can reap the benefits of free trade immediately.
  2. Countries that lower trade barriers by themselves do not have to postpone reform while they try to persuade other nations to lower their trade barriers.
  • The gains from such trade liberalization are substantial: a major study by the World Bank shows that income grows more rapidly in countries open to international trade than in those more closed to trade.

However, multilateral and bilateral approaches—dismantling trade barriers in concert with other countries—have two advantages over unilateral approaches.

  1. The economic gains from international trade are reinforced and enhanced when many countries or regions agree to a mutual reduction in trade barriers. By broadening markets, concerted liberalization of trade increases competition and specialization among countries, thus giving a bigger boost to efficiency and consumer incomes. Britain reaped additional benefits from unilaterally lowering its tariffs in the nineteenth century because its success with free trade prompted other countries to lower their barriers as well.
  2. Multilateral reductions in trade barriers may reduce political opposition to free trade in each of the countries involved. That is because groups that otherwise would be opposed or indifferent to trade reform might join the campaign for free trade if they see opportunities for exporting to the other countries in the trade agreement. Consequently, free trade agreements between countries or regions are a useful strategy for liberalizing world trade.

The best possible outcome of trade negotiations is a multilateral agreement that includes all major trading countries. Then free trade is widened to allow many participants to achieve the greatest possible gains from trade. The General Agreement on Tariffs and Trade (GATT), which the United States helped found after World War II, is an excellent example of a multilateral trade arrangement.

GATT Article XXIV

Although GATT embodies the principle of nondiscrimination in international trade, Article 24 of GATT permits the formation of “customs unions” among GATT members. A customs union is a group of countries that eliminate all tariffs on trade among themselves but maintain a common external tariff on trade with countries outside the union (thus technically violating MFN). This exception was designed in part to accommodate the formation of the European Economic Community (EC) in 1958. GATT also permits free trade areas (FTAs), such as the European Free Trade Area, which is composed primarily of Scandinavian countries. Members of FTAs eliminate tariffs on trade with each other but retain autonomy in determining their tariffs with nonmembers. Regional trade agreements (RTAs) have become increasingly prevalent since the early 1990s.

 

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