M. Com.

Part I
ECONOMICS OF GLOBAL TRADE AND FINANCE
Semester I
)
MODULE - 1
COMMERCIAL POLICY
1. MEANING OF COMMERCIAL POLICY:
Commercial or trade policy followed by a country can broadly be divided into protectionist and liberal.
Classical economists were strong proponents of free trade which in reality meant liberal trade. They argued
their case on the basis of the positive effects of international trade. The positive aspects include larger
production, employment, income, savings, investment, thus leading to enhanced world economic welfare.
The above achievements are due to the specialisation in production on the basis of comparative.
All types of protection are aimed at improving the position of a domestic producer relative to his foreign
competitor. This can be done in following ways:
1.
2.
3.

By increasing the home price of the foreign product.

By decreasing the costs of domestic producers.
By restricting the access of foreign producers to the home market.

Tariff and Non-tariff barriers are some of the standard ways of implementing protectionist policies.
Tariff barriers are the taxes imposed on goods and services entering a country from abroad and are the
most common form of protection to domestic producers. Tariffs also generate significant revenues for the
government. Non-tariff barriers are trade barriers that restrict the import by using methods other than tax.
2. TARIFFS
The duties or taxes levied on goods imported or exported are called as tariffs. Generally, tariffs are a
schedule of custom duties levied upon the imports. In a broader sense, however, tariffs include all customs
duties: import duties, export duties and transit duties. Amongst these, as a restrictive measure, import duties
are the most common.

Classification of tariffs:
There are different ways of classifying tariffs or customs duties. Using the levy criterion, tariffs may be
classified into; i) specific duties, ii) ad valorem duties, iii) combined specific and ad valorem duties, and iv)
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sliding scale duties.

1. Specific duties are flat levies per physical unit (metro, kilo, ton, etc) of the commodity imported.
2. Ad valorem duties are, on the other hand, levied as fixed percentage of the value of the imported
commodity.
3. Combined specific and ad valorem duties, when imposed, specify that one or the other, usually
whichever involves lower charge, is payable at the customs.
4. Sliding scale duties are those which tend to vary with the price of the commodity imported. These may
be either specific or ad valorem. Specific sliding scale duties are, however, common in practise.
Another important classification of tariffs is based on the purpose they serve. Using the objective
criterion, tariffs are distinguished as: i) Revenue Duties, and ii) Protective Duties.
5. Revenue tariffs are those whose primary purpose is to provide revenue to the state. These are generally
at a lower rate and not intended to exclude imports. They are usually levied on imports of consumption
goods.
6. Protective tariffs, on the other hand, are designed to curtail imports of certain goods to protect
domestic production.

Effects of tariffs
Tariffs can affect import volume, prices, production and consumption. They also affect the terms of trade,
the balance payments etc. the various effects of tariffs have been discussed in the following sections. For
this purpose, we may draw a diagram of partial equilibrium framework relating to the market for a
particular commodity. In the following diagram, we have assumed that demand and supply relationships of
commodity X are given and remain unchanged throughout the analysis. Factors influencing demand such as
income, tastes , habits of consumers are constant and prices of substitutes remain unchanged.

Similarly, there is no change in technology, no change in factor prices, or no such other changes which may
affect the supply position.

Effects of Tariff

Y
S
D

Price and Tariff

P3
a

P2
e

P1

f
D

S
O

M1

M2

M3

M4

Quantity

1. Price Effect
Assuming that the foreign price of a commodity is unchanged, we find that the price in the tariffimposed nation would rise by the full amount of the tariff duty. Increase in the price of a commodity
imported due to imposition of tariff is called the price effect. Diagrammatically, thus P1P2 price-rise
is the price effect in the above figure. In this case, the incidence of tariff falls on the domestic
consumers.
The exact price effect thus depends upon the volume and elasticity of supply and demand in the trading
countries. The elasticity of supply, however, depends upon the costs conditions-constant, increasing or
decreasing-which play an important role in determining the price effect of the tariff.
2. The protective effect
A tariff is a restrictive measure which seeks to control the quantity of import so that domestic industry
may be protected. a tariff duty is purely protective only if it is so high as to prohibit total imports of a
commodity. In practise, however, in its restrictive effect upon the quantity of imports, tariffs, no matter
how high, need not prove absolutely protective. Obviously, any imports may flow in after the payment
of duties, unless regulated otherwise.

The protective effect of a tariff can be seen in the expansion of domestic production of a
commodity which becomes possible due to rise in prices in the domestic market. High prices
enable the home producers to cover theirhigh rising marginal costs on a largeroutput.
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In the above figure, the tariff by raising domestic price to a higher level from P1 to P2 enables domestic
producers to increase production from M1 to M2.
This increased production M1M2 measures the protective effect of the tariff in terms of domestic
production alone.
However, the protective effect in money terms can also be seen from the producer
s increased receipts.
Out of the total increase in receipts P1 P2 a d, the triangular areas a d e is the purely protective effect of
tariff. This a d e portion of receipts enables producers to cover their marginal costs on the larger output.
3. Revenue effect
Tariffs which are not totally prohibitive certainly bring some revenue to the state. Usually, the
government collects customersrevenue equal to the duty multiplied by the volume of imports.
Increase in the total revenue of the government due to imposition of tariff is called the revenue
effect.
In the above figure, if import duty is fixed at P1P3 which is extremely high and prohibits imports, it has
zero revenue effect. But if it is reasonably put like P1P2, then the imports would be M2M3. Thus,
revenue effect may be measured by the rectangular area a b c d.
4. Transfer or redistribution effect
After the imposition of a tariff, domestic prices will rise; hence receipts of producers will increase,
while consumer
s surplus to that extent declines. This is called transfer effect or redistribution
effect. Thus the increase in receipts which is in excess of marginal costs is an
to the producers, which
is derived by subtraction from consumer
s surplus.
In the above figure, with the rise in domestic price by P1 P2 and expansion in the sale of domestic output
of X upto OM2, producersadditional revenue increases by P1P2 a d, out of which the area a d e is to be
deducted to meet the increase in costs of increased output. Hence, the area P1P2 a e is the net excess
earnings remaining with the producers. It may be described as
redistribution effect.
5. Consumption effect
A tariff generally reduces the total consumption of a commodity because of the rise in its price.
Decrease in the total consumption of a commodity in the importing country due to imposition of
tariff is called the consumption effect.

In the above figure, the consumption effect of the tariff is the reduction in total consumption by M3M4.
Thus, there is a loss in consumer
s satisfaction shown by the difference between the possible total utility
of larger quantity at a lower price, and the actual total quantity brought at a higher price after tariff. It is
the real cost of tariff out of the gross loss in consumer
s satisfaction, the revenue received by the state
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and transferred to producer should be deducted to find the society

s net loss in consumer satisfaction as
a result of tariff. This net loss is represented by the areaa d e and b c f in the diagram.
6. Terms of trade effect
The imposition of a tariff may serve to improve a country
s terms of trade (i.e, the amount of imports it
receives in exchange for a given quantity of exports). Thus the tariff can do easily when the foreign
demand for the exports of the tariff imposing country is both large and inelastic. In such a situation, the
effect of tariff is to reduce imports to some extent, thereby making it difficult for foreigners to earn
(through their exports to this country) for their imports from the country.
7. Balance of payments effects
When a tariff affects the volume of imports and prices, it also affects the country
s balance of payments
position. A country having a deficit balance of payments position can restore and maintain equilibrium
by means of tariff restrictions upon imports.
Tariffs restrict imports through price rise and contraction in demand, and may lead to improvement in
terms of trade also under appropriate circumstances, which helps in bringing about a balance of
merchandise accounts.
8. Income and employment effect
The imposition of tariff would lead to expansion of employment and incomes. This is called as the
income and employment effect.
By reducing imports, tariffs stimulate employment and output in the import-competing industries. A
new flow of income will be generated with its
multiplier effect
. In an expanding economy, more
capital goods investment will also be made which produces
acceleration effect
. Thus under conditions
of less than full employment, the interaction of multiplier-accelerator will lead to a cumulative
expansion of investment, employment, output and income in the country.
Another possible impact of tariffs is that the imposition of tariff duties may attract foreign capital in the
country concerned, when they find that they may lose market for their products in the country due to
contraction of import demand and expansion of home industries under the protective effects of tariffs.
3. NON TARIFF BARRIERS
Reduction in NTBs was one of the principles and also the objectives of the GATT. In late 1970s and
during 1980s due to slowing down of economic growth of industrial economies, each country by using
the loopholes in the GATT provisions restricted imports from other advanced countries as well as from
the developing countries specially of those products which disturbed the domestic market. Policy of
protectionism was adopted by many countries by imposing NTBs. They have been imposed in the form
of quotas, voluntary export restraints and many other forms, which are disc used below:
1.Import Quotas: These typically specify the maximum quantity of a product that can be imported
from a particular country over a specific period.
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The most famous example of a quota system is the multi-fibre-agreement ( MFA) under which the
executive council allots to each of the major textile producers( India, China, Malaysia, Korea etc.) a
specific limit for each textile product.
With a quota, prices in the home market are higher than they otherwise would be-so that the effect is
similar to a tariff but less transparent and does not generate any revenue for the home government.
Because of their lack of transparency they are likely to create more distortion than tariffs; hence the
WTO has emphasized their phased but rapid dismantling.
2. Voluntary export restraints: Advanced countries have attempted to restrict imports whenever their
domestic industries are threatened. Such a threat arises when the home industries fail to adjust
themselves to face the competition from the industries abroad. The automobile industry agreement
between the USA and Japan is an example of such a problem. The Japan announced voluntary
restriction on its exports in order to avoid restrictive legislation by the USA government.
Unfortunately the so called voluntary restraints are not voluntary at all.
3. Anti-dumping and countervailing duties: A number of countries both developed and developing
have resorted to anti-dumping and countervailing duties whenever their domestic industries are
threatened by other countries. WTO has provisions for anti-dumping measures which could be
introduced in a more restrictive situation and with rigid tests to prove the dumping.
4. Subsidies: An alternative form of protection is to subsidize domestic producers. 2 types of subsidies
may be distinguished.
A). those which focus upon the industry in general (e.g. cheap credit, tax incentives and direct
subsidies.).
B). those which focus upon the export activity of the industry (export credit, shipment credit, loan
guarantees etc.). Unlike tariffs which generate revenues for the government, subsidies involve
expenditure for the exchequer.
5. Regulatory Barriers: In recent years several new forms of protectionism have emerged. These can
generally take 3 forms.
i. Specifying standards for certain products, so that the products do not harm the health of domestic
consumers' standard example pertaining to leather products and pharmaceuticals.
ii. Specifying standards for certain products, so that the domestic environment
is not damaged. For e.g. pollution standards for imported cars.
iii. Specifying conditions under which certain products are produced. For e.g. child labour in the
carpets and clothing industry.
While very often these standards are levied with genuine considerations about the health of the
domestic consumers or general welfare concerns, there is the very genuine possibility that some times
these regulatory barriers may be intentionally used to limit imports.
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6. EFFECTS OF NON-TARIFF BARRIERS

ON DEVELOPING COUNTRIES
Trade policies under the GATT and subsequently under the WTO was tilted against the developing
countries.Tariffs imposed by the advanced countries though over a period of time were reduced
substantially, yet the effective tariffs remained very high. This has discouraged the industrialization of
developing countries. Further the variety of Non-Tariff barriers created negative effects on developing
countries. Some of these effects are mentioned as below:

The developing countries could not reap the benefit of their changing comparative advantage as
the rich countries adopted a number of non-tariff barriers to restrict the entries of manufacturers
from the developing nations.

Voluntary export restraints were imposed wherever the advanced countries felt threatened with
developing countries exports.

Many labour intensive goods which are favourable to developing countries were restricted under
the clause of social dumping.

Subsidies granted to the domestic industries in developed countries made the developing countries
less or noncompetitive in the international market.

The highly protected European agriculture under the common agriculture policy made the
developing countries non-competitive in primary and agricultural products.

All the provisions of TRIMS, TRIPS, GATS make the developing countries more and more open
economies and force them to compete in the global economy. Developing countries are worried
about their ability to compete in the global market.

The world economic order under GATT and subsequently under WTO according to the
developing countries is tilted against them. In spite of the safeguards provided, the developing
countries feel their domestic industries will not have the required protection.

A sudden change in international economic environment under WTO makes the developing
countries feel unprepared to meet the new challenge. Earlier under GATT it was a case of not
securing enough access to the markets of advanced countries. Now it is throwing them in the open
to meet the challenge of competition.
The developing countries are required to strike balance of safe guard their economies from the new
threats and also at the same time to preparing themselves to face the challenges.
7. MISCELLANEOUS PROTECTION TECHNOLOGIES

A. DUMPING
Meaning of Dumping:
Dumping, in economic terms, is when a country lowers the sales price of one of its exports for the express
purpose of gaining unfair market share in that industry in another country. The exporter usually lowers the
price below what it would sell for at home, and sometimes even below its actual cost to produce.
Objectives of Dumping:
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1. To capture the foreign market.

2. To sell surplus commodity.
3. To extend the market for the product.
4. To establish the new trade rerlations.
Advantages of Dumping:
1. The main advantage of dumping is being able to sell at this unfairly competitive lower price.
Generally a country will have to give the exporting businesses a huge subsidy to enable them to sell
the export below cost.
2. The country is willing to take a loss on the product to increase its comparable advantage in that
industry. It may do this because it wants to create jobs for its residents.
3. It often uses dumping as an attack on the other country's industry, in the hopes of putting that
country's producers out of business, and dominating that industry.
Disadvantages of Dumping:
1. The main disadvantage of dumping is that it's very expensive to maintain. It can take years for
dumping to work. Meanwhile, the cost of subsidies can add to the export country's sovereign debt.
2. The second disadvantage is retaliation by the trade partner. This can lead to trade restrictions and
tariffs.
3. The third is censure by international trade organizations, such as the World Trade Organization
(WTO) or the European Union (EU).
Types of Dumping:
1.Social dumping:A domestic country imports goods with lower cost from the foreign countries where
there are low-standard labour legislations. The domestic country gains a competitive advantage by selling
goods with lower cost in domestic market. The proliferation of social dumping over the world has made
known to public long time ago.
Here are two examples to illustrate facts resulted from minimizing the cost of products imported:Nike, the
most famous sports shoe company in the world, sells millions of shoes and clothes every year. However,
Nike does not produce products by itself. The company made contracts with manufacturing bases in
almost every country in the world. Amongst these foreign countries, Indonesia, China and Vietnam are
major places from where Nike products are made. The reason why Nike focuses on these countries is that
these countries got poorly forced labour legislation and much cheaper labour.
Another case of social dumping is child labour. Apart from being accuse of low wages and poor health and
safe circumstance, GAP, a popular apparel company, was also accused of using child labour in many
countries like Bangladesh, Indonesiaand Mexico. The disclosure of the sweatshop by Observer has become
a social scandal of GAP. Many young children who are as young as 10 work like slaves in terrible
circumstance in the factories in India. It has been released that many Indian children were bought from their
families and work like 16 hours even without paid in the beginning. In terms of the working conditions,
kids handcraft products with very simple tools and the working circumstance was dirty, unsafe. As for
living conditions, what employers provided them was dirty and crowded dormitory.
2.Spoaradic or Intermittent Dumping: It is adopted under exceptional circumstances when the domestic
production of the commodity is more than the target or there are unsold stocks of the commodity even after
sales. In such a situation , the producer sells the unsold stocks at a low price in the foreign market without
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reducing the domestic price.

3.Persistent dumping: When a monopolist continuously sells a portion of his commodity at a high price in
the domestic market and the remaining output at a low price in the foreign market, it is called persistent
dumping.
4.Predatory dumping: The predatory dumping is one in which a monopolist firm sells its commodity at a
very low price or at a loss in the foreign market in order to drive out competition. But when the competition
ends, it raises the price of the commodity in the foreign market.

Price output determination under dumping

Given the above assumption the Price output determination under dumping can be explained with the help of
following diagram.

In the above diagram AR(H ) and MR(H ) are the respective average and marginal revenue curves for the home
market. As perfect competition exists in the foreign market, the monopolist faces a horizontal straight line
demand or average revenue curve which coincides with the marginal revenue.
Therefore, P(F) = AR(F) = MR(F) for the foreign market. The marginal cost curve of the total output is represented
by MC.
To decide the price and output" monopolist has to find out the equilibrium point, where MC equals the
combined marginal revenue (CMR = MC). The combined marginal revenue curve is obtained by adding MR(H )
and MR (F) .
In the diagram NRD is the combined marginal revenue curve which intersects MC curve at point E. At this
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point, equilibrium level of output is OQ.

The firm distributes the OQ output between the home market and foreign market in such a way that MR (H ) =
MR (F) = MC.
At point R, MR (H ) = MR (F) , Where OM output is supplied and OP (H ) Price charged in the home market.

Impact of dumping
Negative impact ofdumping
1. Violation of human rights: It can be seen that social dumping is concerned with the human rights and
the labour problems. The reason why there is social dumping is the difference of labour standards between
the importing country and the exporting country, which causes the difference of labour costs in these two
countries. For example, in Asian countries like India, the labour legislations are relatively weak; employers
take it granted to make people work overtime and hire young kids. These people do not know how to
struggle for their own rights and a large surplus of labour makes the labour cost lower than that in other
countries.
2.Exploitation of employees in exporting countries: The unfair situation that the workers in the exporting
countries are confronted with has become one of the most severe ethical issues. It is unethical for
employers to take advantage of workers weak awareness of their own rights and poorly forced law. The
ethical issue was mainly arisen in three aspects:
1) Low payment: Employees cannot afford the basic needs due to the low payment, not to mention the fact
that they cannot afford the education for themselves and their kids. Social dumping obviously has
jeopardized the benefits of the large population of the workers and their families in terms of quality of life
and education.
2) Bad working conditions: The harmful chemicals and the mechanical injuries accidents make workers
situation really tough. It is immoral and evil for the employers to make money at the price of employees
lives and abandon the workers who lost their working capacity due to the severe health problem. It is the
antipode of virtue that the company saves the money from using the old and damaged equipment and
providing no welfare like health insurance and annual leave to the staff.
3) Overtime working: It is unethical to force workers to work for extra hours because when their bodies and
minds are exhausted. They may have frequently faints, sudden death, and commitment of suicide or run
away from work. It seems that female workers were treated even worse because they had to face the gender
discrimination in work.
3. Child labour in exporting countries: Child labour caused many other ethical issues in the society. A lot
unethical things like impoverished family sell its kids to factory as bonded labour, manager in
manufacturing factories assault kids badly happened often. It is unethical for companies to abuse
children for gaining competitive advantages(low cost of commodities) in global market. It is a violation of
virtues that companies in importing country sell the products which are at the price of childrens chance to
go to school and good health. From exporting countries point, it is also immoral for the customers in the
importing countries to get the products made with children sweat and blood at a cheap price.
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4. Industry and environment in exporting country: To achieve the low price of the products, companies
try to minimize the cost of production through avoiding expenditure of new equipment. It is unethical for
company to use poor-quality equipment because it led to inefficient production. Inefficient production is
one of the reasons why employees had to work overtime and got health problems. Inefficient production not
only led to the waste of human resource but also the natural resource. Environment was heavily polluted
and natural resources were overly consumed due tothe incorrect ways of productions.
5. Government in exporting countries: With the huge amount of exporting products, the export tax
rebates is huge. Though it is good for making the cost of goods lower, lower cost of products increases the
financial burden of the government. With the huge amount of exporting products, the export tax rebates is
huge. Though it is good for making the cost of goods lower, lower cost of products wins the competitive
advantages for the exporting countries in the international trades.
However, it is unethical for government to practice export tax rebates because tax is used for improve the
whole country
s wellbeing by building up the public facilities, constructing loads, investing funds in
national market, founding public organizations for helping kids and females. Therefore the huge outflow of
tax jeopardizes citizens benefits in exporting countries.
7. Employees in importing countries: Employees in the importing countries also are facing the tough
situation. It is unethical for the national company to set the manufacturing bases overseas because local
people have fewer opportunities to get jobs. As the company can cost less by importing cheap products
instead of manufacturing locally, foreign employees are preferred. Therefore local employees welfare goes
down because the demand of local labour declines. It is unfair for the local people to lose jobs and be
confronted with more stressed situation because of unfair overseas competitiveness. It is also unethical for
local suppliers to decline the labour standards because other companies in the same industry got unfair
competitive advantage of low cost.
8.Shareholders of the company in exporting countries: Though the social dumping may bring huge
profit to the company in the short run, it may lead to the end of business to company in the long run due to
the terrible social reputation. A company
s social reputation is very important to the development
of company and stands for the quality of products in certain extent. Customers do not buy the products from
the company which is not reliable and criticized a lot in the public. It can be easily told that shareholders
would get more dividends from long-term operation. Therefore, it is unethical for the company to only
focus on short-run profit and harm the shareholders benefits from the long term.
Positiveaspectsof dumping
However, some people recognize that dumping is beneficial to a certain group and it is just one of the
business strategies. In terms of business strategy, it is unavoidable to have side effects when the main goals
are achieved. It is business ethics that Companies should always obey when they set goals for the best
interest of customers and shareholders. Thus, it is ethical from the standpoint of the company to maximize
its shareholders and customer
s benefits by practicing dumping.
1. Company in exporting country: Through selling products which are with lower prices, company gains
competitive
advantage
in the domestic
market. It is
obviously
good for the company
which practices dumping. It can still win the huge profit and be more competitive than its competitors in
terms of price. Making huge profit is in this way is ethical for the employer because employer is
responsible for his company to gain the capital that is useful for the company to expand its market and
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increase its market shares.

2. Shareholders in exporting country: As for shareholders, they are better off when the company runs
well. It is ethical for them to get more dividends since they made investment in the business. What is more,
it did not violate ethics when the company wins a huge profit, which encourages more customers to buy
shares in that company. From staff
s point, it would always be ethical for the whole company to get larger
investment for its business and more customers. Apart from the different standpoints above, attracting more
people to buy shares in that company also develop the economy in the local stock market, that is, it is
ethical for the sake of the stock market.
3. Customers in importing country: There is another group would not feel guilty of social dumping. It is
the group of customers in the importers country. Because there is nothing wrong for customers to get
commodities with their own money. For them, it is just a normal transaction. They would definitely be very
happy when getting a pair of handcrafted gloves at low price. At the same time, they might wonder how the
gloves could be that cheap. However, they would not think that much about social dumping.
4.Industry in importing country: Last good point for the domestic industry might be that the fierce
competition result from dumping requires more advanced technology and human resource management. In
other words, it is good for other domestic companies and employees to get more motivations from the
competition and make their best effort to survive in the industry, hence make the whole industry more
efficient and productive. From this point, dumping is not unethical for the development of national industry.
5. Employment in exporting country: When considering the situation in exporter
s country, we might find
that there is huge increase in the job positions. It should be considered ethical to help impoverished people
get jobs. Another thing, for people who want experience, it is ethical for them to get more chances of work.
An event should be considered ethical when it improves a group of people
s lives in certain extent and
makes people motivated.
6. Government and investment in exporting country: There is a reason why many governments in
exporter
s countries made lax legislations. Because trade goods with relatively low costs make the exporter
countries have a competitive advantage in the international trade.
Anti-dumping
A country prevents dumping through trade agreements. If both trade partners stick to the agreement, then
they can compete fairly and avoid dumping. However, violations of the dumping rules can be difficult to
prove and expensive to enforce. Unfortunately, trade agreements don't prevent dumping with countries
outside of the agreements. Therefore, more extreme measures must be taken.
Anti-dumping duties or tariffs remove the main advantage of dumping. A country can add an extra duty, or
tax, on imports of goods that it considers to be involved in dumping. However, if that country is a member
of the WTO or EU, it must prove that dumping existed before slapping on the duties. These organizations
want to make sure that countries don't use anti-dumping tariffs as a way to sneak in good old-fashioned
trade protectionism.
The Role of the World Trade Organization in Anti-dumping
Most countries are members of the World Trade Organization. Member countries adhere to the GATT multi
-lateral trade agreement. Countries agree that they won't dump, and that they won't enforce tariffs on any
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one industry or country. Therefore, to install an anti-dumping tariff, WTO members must prove that
dumping has occurred.
The WTO is very specific in its definition of dumping. First, a country must prove that its local industry has
been harmed by dumping. It must also show that the price of the dumped import is much lower than the
exporter's domestic price. The WTO gives three ways to calculate this price:

1. The price in the exporter

s domestic market.
2. The price charged by the exporter in another country.
3. A calculation based on the exporter
s production costs, other expenses and normal profit margins.
The disputing country must also be able to demonstrate what the normal price should be. When all these
have been put in place, then the disputing country can institute anti-dumping tariffs without violating the
GATT multi-lateral trade agreement. (Source: WTO, Anti-dumping, subsidies, safeguards: contingencies,
etc.)
The EU and Anti-Dumping
The EU enforces anti-dumping measures through its economic arm, the European Commission (EC). If a
member country complains about dumping by a non-member country to the EU, then the EC conducts a 15month investigation. Like the WTO, the EC must find that material harm has occurred to the industry.
Unlike the WTO, the EC doesn't specifically define dumping by using a formula to determine that the price
is lower than in the exporter's market. In addition, the EC must find two other conditions must be met
before it imposes duties:
1. Dumping is the causeof the material harm.
2. Sanctions don't violate the best interests of the EU as a whole.
If found guilty, the exporter can offer to remedy the situation by agreeing to sell at a minimum price. If the
EC doesn't accept the offer, it can impose anti-dumping duties. These can be in the form of an ad valorem
tax, a product-specific duty, or it can impose its own minimum price.
Examples:
China has been suspected of dumping shrimp into the U.S. market to dominate this industry.

B.SUBSIDIES
Meaning and definition
The most basic form of a subsidy, and the one that still defines a subsidy in some dictionaries, is a cash
payment or grant. Although few grants are paid out in currency any more (most are paid via cheque or bank
transfer), it is still common to refer to them as "cash" grants, payments or subsidies.
A subsidy is assistance paid to a business or economic sector. Most subsidies are made by the government
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to producers or distributed as subventions in an industry to prevent the. decline of that industry (e.g., as a
result of continuous unprofitable operations) or an increase in the prices of its products or simply to
encourage it to hire more labour (as in the case of a wage subsidy). Examples are subsidies to encourage the
sale of exports; subsidies on some foods to keep down the cost of living, especially in urban areas; and
subsidies to encourage the expansion of farm production and achieve self-reliance in food production.
Subsidy has been used by economists with different meanings and connotations in different contexts.
Subsidies are often regarded as a form of protectionism or trade barrier by making domestic goods and
services artificially competitive against imports. Subsidies may distort markets, and can impose large
economic costs.
Financial assistance in the form of a subsidy may come from one's government, but the term subsidy may
also refer to assistance granted by others, such as individuals, or non-governmental institutions.
Examples of industries or sectors where' subsidies are often found include utilities, gasoline in the United
States, welfare, farm subsidies, and (in some countries) certain aspects of student loans.

Types of subsidies:
There are many different ways to classify subsidies, such as the reason behind them, the recipients of the
subsidy, the source of the funds (government, consumer, general tax revenues, etc.). In economics, one of
the primary ways to classify subsidies is the means of distributing the subsidy.

1. Grants: Normally, a grant refers to a time-limited payment, either in connection with a specific
investment, or to enable an individual, company or organization to cover some or all of its general
costs, or costs of undertaking a specific activity, such as research. Many countries provide grants in
order to encourage people who are out of work to undergo training in new skills.
2. Bounties:Other direct payments may be linked to the volume of production or sales. In previous
centuries, and still in Australia, these types of subsidies were called bounties.
3. Cash payments: Cash payments to producers are also sometimes linked to prices. The main form is
a deficiency payment, which makes up the difference between a target price for a good (typically an
agricultural commodity) and the actual price received in the market. Various cash subsidies are paid
to workers. Canada, for example, provides targeted wage subsidies to assist individuals to prepare
for, obtain and maintain employment
4. Direct subsidies: In some states of the United States, for example, companies producing liquid biofuels receive direct subsidies for every gallon of ethanol they produce.
5. Vouchers: Consumers also benefit from vouchers, particularly for the purchase of necessities, like
food, medicine or heating fuels. Alternatively, a government may regulate the consumer price for a
good or service, and instead pay a subsidy to the supplier of that good or service, to cover its losses.
6. Interest subsidies: Many developed Countries give low interest loans to exporters A very obvious
14

example of this is the low interest loans provided by the US Export Import Bank. It was found that
countries like Japan, France and Germany have been extending loans at very concessional rates.
This became one of the most serious trade complaints which U.S. had against the other
industrialized nations.The amount of subsidy can be measured by the difference between the interest
rate that would have been paid on a commercial loan and what is in fact paid at the subsidized rate
the Unites States provided $1 billion by way of subsidies in 1996 and the amount given out by
countries like Japan, France and Germany Amounted to 3 times more than that of U.S.
Export subsidies:
Export subsidies are direct payments or the granting of tax relief and subsidized loans to a nation's
exporters or' low interest loans to foreign buyers , so as to stimulate the nation's exports. Export subsidies
can be regarded as a form of dumping. In spite of the fact that export subsidies are illegal by international
agreement, many nations provide them in disguised or undisguised forms.
Government helps to exporters, generally in two forms :
a) Servicesubsidy: trade information, trade shows, feasibility studies,foreign representation, etc.
b) Cash subsidy:
i)Indirect cash subsidy: Rebate on imported raw materials and duty-free import of manufacturing
equipment is called indirect cash subsidy.
ii) Indirect cash subsidy: The percentage of the value of exports is paid back to the exporters is called
direct cash subsidy,
Although World trade Organization (WTO, formerly GATT) recognizes that subsidies hinder fair
competition and distort trade practices, it has not been able to define precisely what kind of assistance
constitutes a subsidy.

Positive effects of subsidy:

1. A subsidy may be an efficient means of correcting a market failure..
2. Subsidies are linked to the concept of economic transfers from one group to another, therefore it
may create equitable distribution of income in the country.
3. In standard supply and demand curve diagrams, a subsidy will shift either the demand curve up or
the supply curve down. Both cases result in a new economic equilibrium.
4. A subsidy that increases the production will tend to result in a lower price, and benefits the
consumers
5. Subsidies may help the government to encourage domestic production and employment and thereby
overall development of the country.
6. The export subsidies will encourage the exports of the country and helps in improving the balance
of payment situation of the country.
15

Negative effects of subsidy:

1. Subsidies would generally be considered by economists to be bad, as economics is the study of
efficient use of limited resources, but subsidies encourage inefficiency
2. Subsidy payments by the government may increase the tax burden on the tax pauers of the country.
3. It always benefits rich countries to control the world market because they have resources to pay
subsidies to their producers.
4. This discourages fair trade in the international market.
5. It will have only short term benefits.
A subsidy may be an efficient means of correcting a market failure, however, the choice to enact a
subsidy is a political choice. It is essential to consider elasticity when estimating the total costs of a
planned subsidy: it equals the subsidy per unit (difference between market price and subsidized price)
times the new equilibrium quantity.
. The recipient of the subsidy may need to be distinguished from the beneficiary of the subsidy, and this,
analysis will depend on elasticity of supply and demand' as well as other factors.
C.INTERNATIONAL CARTELS
Meaning
An international cartel is an organization of suppliers of a commodity located in different nations (or a
group of governments) that agrees to restrict output and exports of the commodity with the aim of
maximizing or increasing the total profits of the organization. Although domestic cartels are illegal in the
United States and restricted in Europe, the power of international cartels cannot easily be countered because
they do not fall under the jurisdiction of anyone nation.
An international cartel is a group of producers in the same industry located in different countries which
agrees to limit competition and to regulate the production and sales in order to earn high profits. According
to Kind1eberger, "Cartels are international business agreements to regulate price division of markets or
other aspects of enterprise. They make agreements to restrict selling competition."
The most infamous of present-'day international cartels is OPEC (Organisation of Petroleum Exporting
Countries), which by restricting production and exports, succeeded in quadrupling the price of crude oil
between 1973 and 1974. Another example is the International Air Transport Association, a cartel of major
international airlines that meets annually to set international air fares and policies.An international cartel is
more likely to be successful if there are only a few international suppliers of an essential commodity for
which there are no close substitutes.
Since the power of a cartel lies in its ability to restrict output and exports, there is an incentive for
anyone supplier to remain outside the cartel or to "cheat" on it by unrestricted sales at slightly below the
cartel price.
There have been many international cartels in such goods and services as sugar, coffee, steel, bauxite,
tobacco, diamond, oil, air and rail services, but it is only OPEC (Organisation of Oil Exporting Countries)
16

which. has been successful.

The reasons for forming an international cartel are:

First, cut-throat competition among producers of a world-traded commodity
Second, the fear of fall in world prices in the event of production of the commodity exceeding current
demand.
Third, to have monopoly control in order to earn higher profits
Objectives of International Cartels
International cartels aimat :
(a) to fix the world price of the commodity above the competitive price;
(b) to earn high monopoly profits;
(c) to restrict production and supply of the commodity as per the quota allocation to each member;
(d) to allocate a specific territory to each member for the supply of the commodity in order to avoid
competition;
(e) to decide about the quality of the commodity;
(f) to control technological research and development of the commodity; and
(g) to adopt other measures to limit or alleviate competitive pressure among members.
Conditions for the Success of Cartels
The following conditions are necessary for the success of a cartel :
i) The world market for the commodity. has a few large suppliers.
ii) The commodity is produced on a large scale by members so that the cartel controls a major portion of the
total supply.
iii) The price elasticity of world demand for the commodity is low.
iv) The commodity does not have any close substitutes.
v) The cartel members follow the cartel price and the output quota allotted to them.
Merits of cartels:
The following arguments are usually given in support of the formation of international cartels:
i) Stable Prices : International cartels .encourage members to produce on a large scale and thus help in
stabilizing the prices of commodities.
ii) Eliminate Cut-Throat Competition : The formation of a cartel eliminates cut-throat competition an~
price-war among producers of a commodity.
iii) Low Tariffs : International cartel for a commodity can force an importing country to lower or
remo.ve tariffs on it. This will tend to maximize world welfare.
iv) Saving in Advertisement. Expenditure : With the formation of a cartel, there is little need for
advertising its product in the world markets because the purchasing countries know about the suppliers.
Thus there is saving in advertisement expenses.
v) No Excess Capacity: In a cartel, each producer of the commodity is allocated a fixed quota of the
commodity to be produced in keeping with the world demand for it. There is no excess capacity and waste
of production under a cartel.
I
vi) Providing Technical Knowhow : International cartels provide their members with the most up to
17

date and cost-saving technical knowhow for the production of goods. This helps in reducing costs and
improving the products.
vii) Promote Interactional Co-operation : International cartels are based on mutual agreements among
producers of goods. Thus they are instruments of economic co-operation among nations.
Demerits of cartels:
However, the majority of economists do not favour the formation of international cartels for the following
reasons:
i) Restrict Output: International cartels deliberately restrict the output of cartelized goods so as to
charge higher prices from the importing countries. This, is due to the absence of competition.
ii) Inferior Commodity: In the absence of competition, the cartel often produces and supplies an
inferior commodity.
iii) Misallocation of Resources : In view of lack of competition, international cartels lead to
underutilization and misallocation of the world's resources when they restrict output and follow the system
of production quotas.
iv) Do not Reduce Tariffs: International cartels do not help in reducing or removing tariffs, as is
generally argued. As pointed out by Haberler, "they are not a suitable instrument for demolishing tariff
walls within any measurable time. Many of the present international cartels owe their own existence to
tariffs. They are therefore scarcely adopted for destroying tariffs.
v) Short-Lived: Cartels are usually short-lived because of the mutual distrust,' threatening attitude of
large producer-member~ and bargaining resorted to by them. Thus cartels tend to be unstable.
D. INTERNATIONAL COMMODITY AGREEMENTS
Introduction:
International commodity market has been facing problems of fluctuating prices putting either producers or
suppliers at a disadvantage. Developing countries which export primary commodities usually complain
about adverse tcrm of trade. However there are cases, like that of petroleum products exported by OPEC
members charging high prices. To mitigate fluctuating prices, producers and at times both producers and
consumers (importers) entered into agreements.
Meaning:
Commodity agreements are international agreements designed to stabilise commodity prices in the
interest of producers and- consumers. They can include mechanisms to influence market prices by adjusting
export quotas and production when market prices reach certain trigger price levels. They sometimes employ
buffer stocks which release stocks of commodities onto the market when prices rise to a certain level and
build them up when they fall.
The term "international commodity agreement" (ICA) refers to a treaty agreement between
governments of both producing and consuming countries to regulate the terms of international trade in a
specified commodity. An international commodity agreement is an undertaking by a group of countries to
stabilize trade, supplies, and prices of a commodity for the benefit of participating countries. An agreement
usually involves a consensus on quantities traded, prices, and stock management. A number of
international commodity agreements serve solely as forums for information exchange, analysis, and
18

policy discussion.

Following are some of the commodity agreements entered in :

I. Wheat Agreement: It was signed in 1949 and was revised or extended in 1953,1956, 1959 and 1962.
It was replaced in 1967 in the form of Wheat Trade Convention. Subsequently it was revived in 1971.
It was an agreement signed between a wheat exporting and wheat importing country with objective of
stabilising price:
II. The International Tin Agreement, 1954 : This agreement was a mixture of a buffer stock and
export control arrangement. It was not much of a successful agreement and finally dissolved in 1990.
III. The International Coffee Agreement : It was established in 1963, with an export quota system. The
agreement was revived five times. The agreement was not much of a success due to differences in
interest between large and small producers and between producers and consumers.
IV. The International Cocoa Agreement: It was signed in 1973. It involved buffer stock arrangement.
The agreement was periodically extended till 1992. It could not operate successfully as it was unable
to increase prices.
V. International Natural Rnbber Agreement: It was the tirst agreement under the UNCT AD
integrated programme. It was fairly. successful in maintaining prices
VI. The International Sugar Agreement, 1954: It was by and large an unsuccessful one. According to
many economists, sugar producers would have been better off under free market without any
agreement.
There is also a large number of "study group" style agreements whose functions are information collection
and dissemination, market promotion and, in certain cases, the fostering of research and development. With
the ending of international commodity control, where they have survived, the previously active agreements
have taken on this form and a market for manufacturer of advanced countries.
Advantages of Commodity agreements:
1. They will stabilize the market prices.
2. The commodity agreements will protect the interests of both buyers and sellers.
3. This will discourage the market distortion.
4. The international commodity agreements encourage optimum utilization of resources internationally
Limitations of Commodity Agreements:
Most of the commodity agreements except the cartel formed by OPEC were not very effective. Some of
them did not last long. The reasons for unsuccessful functioning are :

Non-inclusion of all the producers.

Failure to fix appropriate price.
Attempt to have a complete price stabilization which was neither possible nor desirable.
Failure to have an effective management of buffer stock.
They constitute an obstacle to the effective operation of free market forces.

Buffer stocks and stabilization of price;

Commodity agreements aims at stabilisation of price, hence it naturally requires to hold buffer stocks. It
19

enables to control the world price of a commodity in question. The buffer stock operation requires holding
stock of the commodity and also the stock of money. Buffer stock requires to purchase the commodity
when price is Iowan sell it when price is high. Here, unlike the private stockholder the intention is to
stabilise the prices and also earn reasonable profit

Diagramatic explanation of buffer stock and price stability

Y
D
P3

S1
E

P2
P1

S2
F
G

Price

D
Q1

Q2 Q3

Quantity

In the diagram , the demand curve is assumed to be stable. Supply may turn out to be either S1 or S2.
The target buffer stock price is OP2. The free market price is either OP1 or OP3.
If price is high i.e, OP3 because of less supply , an additional sale of Q1Q2must take place to bring
down the price to OP2. Similarly if prices are low at OP1, a purchase of Q2Q3 must be done to increase the
price to OP2.
The buffer stock operation , though aims at stabilization of prices, it very often end with destabilizing
the prices.

20

MODULE-2
ECONOMICS OF INTEGRATION
A. MEANING AND TYPES OF INTEGRATION
The term
economic integration has been in different ways : Timbergen defines economic integration as,

the creation of most desirable structure of international economy, removing artificial hindrances to the
optimum operation and introducing deliberately all desirable elements of coordination and unification.
Types or forms of economic integration:
There are five important types of economic integration they are:

Preferential Trading agreement

Free trade area
Customs Union
Common market
Economic Union

1)

Preferential trading agreement:

It is the loosest form of economic integration. Under this, a group of countries have a formal
agreementto allow each other
s goods to be traded on preferential However, the member countries
retain their original tariffs against the outside world. A good example of this type is common wealth
preference system (1932) between Great Britain and its associate nations.

2)

Free trade area:

This allows for tariff-free trade, a complete removal of tariffs on goods traded between the members
of the free trade area. The member countries are free to levy their own tariffs on imports of countries
other than in free trade area (for example NAFTA). Sometimes, a free trade area is formed only for
certain classes of goods, such as an agricultural free trade area. An important problem faced by free
trade areas is that goods from outside the area may enter, a high-duty member through a low-duty
member country and thus avoid the high import duty.

3)

Customs Union:
A customs union is a mixture of both free-trade areaand an agreement to establish common barriers to
trade with the rest of the world. Since they have a common tariff against the outside world, the
members need neither customs control on goods moving among themselves nor rules of origin. A
21

good example of customs unions is the European community which was formed by the Treaty of
Rome in 1857.
4)

Common market: The important features of common market are :

a) It has free movement of all factors of production (labour and capital) among the common market
countries.
b) The countries under common market, abolish all trade restrictions on their mutual trade.
c) It establishes a common external tariff, as a customs union.
Common markets are advantageous as they attract FDIs, allow large scale production and improve
efficiency of member nations.

5)

Economic Union:
An economic union is the most complete form of economic integration between countries. It
involves a common market and also the harmonization of economic policies. The coordination of
economic policy requires a high-level of cooperation between the member governments, central
banks and other institutions. The member countries in the economic union function as a single
economy. The
European Unionprovides the best example.
Economic integration can thus be viewed as
a spectrum
. At one extreme-we can envision a truly
global economy in which all countries share a common currency and agree to a free flow of goods,
services and factors of production. At the other extremes there would be a number of closed
economies, each independent and self-sufficient. The various integrative agreements in effect today,
lie along the middle of this spectrum. The important differences and similarities among the last four
types of economic integration can be shown with the help of following table:

Type of
Integration
Free trade area
Customs Union
Common market
Economic Union

Important features of Integration

Abolition of
Common
Free movement Unification
tariffs
barriers of trade
of factors
of economic
among
for the rest of
among members
policies
members
the world
YES
NO
NO
NO
YES
YES
NO
NO
YES
YES
YES
NO
YES
YES
YES
YES

B. ARGUMENTS IN SUPPORT and AGAINST ECONOMIC INTEGRATION

(Advantages & Disadvantages)
Advantages
The important arguments in support of economic integration are discussed below.
1.

Trade Creation: The Economic integration tends to increase competition among the member
countries and this represents a movement towards free trade. This, may improve resource allocation
22

and welfare, depending upon the respective strengths of trade creation

Trade creation occurs when some domestic production in a country that is a member of the customs
union (or an economic integration) is replaced by lower-cost imports from another member country.
This increases the welfare of member countries because it leads to greater specialization in production
based on competitive advantage.

2.

Production Effects:
The formation of a customs union (economic integration) causes some products that were formerly
produced domestically to be imported from other member country due to the elimination of tariffs. In
this case, the shift in production is from a higher-cost domestic producer to a lower-cost producer of a
member country.

3.

Consumption Effects: Formation of customs union leads to increase in consumption. Trade creating
economic integration increases specialization in production and welfare in the member countries. It
also increases the welfare of non-members, since some of the increase in real income of member
countries spills over into increased imports from the rest of the world. On the other hand, a trade
diverting economic integration leads to both trade creation and trade diversion and may increase or
decrease welfare, depending on the relative strength of these two opposing forces.

4.

Increased competition: Economic integration is likely to result in increased competition. As trade

barriers are eliminated the market expands and the number of potential competitors increases.
Inefficient firms must either become efficient or close down. The increased level of competition is
also likely to stimulate the development and utilization of new technology.
This creates a stimulus conducive to managerial efficiency and technology improvements. This
creates an environment for faster economic growth.

5.

Economies of scale: Formation of customs union leads to expansion of the size of the market,
increase in competition and greater degree of specialization. Firms will be able to exploit internal and
external economics.

6.

Technical change: Increased competition and expansion of the market encourage research and
development, innovation and technical change. Economic integration will be conducive to
technological improvement since large scale economies can be reaped.

7.

Investment: The formation of customs union may stimulate investment. The increase in competition
and technical change leads to additional investment, which is necessary to take advantage of the
newly created opportunities.

8.

Economic Growth: Increased competition, technical changes, economies of scale and increased
investment may lead to increase in income and employment among the member countries of the union.
This may lead to higher economic growth which could be sustained with continuing changes in
business expectations, higher investment and new production technique in the union countries.
23

9.

Better Utilization of Resources: In a common market, the free movement of labour and capital is
likely to result in better utilization of the economic resources of the entire community.

Disadvantages
1.

2.

3.

4.
5.

6.

Unhealthy competition: Economic integration tends to provide relatively more protection against
trade and competition from the rest of the world and this represents a movement towards greater
protection. This will provide undue advantage to the member countries and disadvantage to the nonmember countries. This may worsen resource allocation and welfare, depending upon the respective
strengths of trading countries
Trade diversion; Trade diversion occurs when lower-cost imports from outside the customs union (or
economic integration) are replaced by higher cost imports from a union member. This results from the
preferential trade treatment given to member countries. This will be an injustice to the low cost nonmember country..
Against global interest: The formation of a customs union (or economic integration) causes some
products that were formerly imported from a lowest cost producer in a foreign country to be shifted to
a higher cost producer of a member country. This results in trade diversion. Trade diversion worsens
the international allocation of resources and it works against the global interest.
Negative impact on political relations; The economic integration will work against the international
peace and harmony. There is a possibility og conflict among the various international associations.
Here trade may lead to political rivalry among various countries.
Wastage of resources; Another negative outcome of economic integration can be wastage of
resources. The economic integration always beneficial to the member country even though that
country is cost ineffective. This will lead to wastage of resources in the cost effective countries due
lack of demand.
Un ethical control over World economy; The economic integration will provide unwarranted
benefits to the stronger association they may use this power to dominate the international agencies
like UNO ,IMF or WTO.

Thus economic integration may provide both positive and negative benefits to the member countries

C. EUROPEAN UNION:
Introduction:
The most complete form of economic integration is
Economic Union
. The European Union provides the
best example. In 1952The European Union (EU) started with 6 members, in 1995 it has become a union of
15 independent states based on the European communities and founded to enhance political, economic and
social co-operation. On December 2007 there are 27 members in the European Union. By far it is the most
successful of the regional economic integration schemes.

24

Origin and growth of European Union (EU)

The origin and growth of European union can be seen as below:
v 1952- Immediately after Second World War, France, Belglum, West Germany, Italy Luxembourg,
and Nether lands formed the European Coal and Steel Company. This removed trade restrictions on
coal and steel.
v 1957- These six countries signed the treatry of Rome and created
European Economic
Community(EEC)
v 1973 -UK, Denmark, Ireland joined the EEC .and total membership becomes 9.
v 1979- The first direct elections to the EuropeanParliament.
v 1981 -Greece joined and total membership rose to 10
v 1986- Spain and Portugal and membership rose to 12. EEC was then made a European Community
Market (ECM)
v 1992- Maastricht Treaty was signed supporting single market act.
v 1st November 1993 European Community was known as European Union.
v 1995 Austria, Sweden and Finland joined EU and membership rose to 15.
v Jan 1999 Agreement for creating the common currency Euro for member countries making the
price system much more transparent and eliminating the exchange rate risk.
v 2002- Euro replaced the national currencies of 12 countries. Now 15 members accepted the Euro
has a common currency.
v 2004- Ten more countries joined total members became 25
v 2007- Two more countries Bulgaria and Romania became the member of European Union and the
total membership became 27.
v 2009-The Lisbon Treaty comes into force, changing theway the EU works.
Aims of European Union (EU)
1.

To establish the foundations of an ever-closer union among the European people.

25

2.
3.
4.
5.

To establish a common market and closer economic cooperation between members.

To harmonies national economic policies especially taxation and monetary policies.
To achieve balanced regional development lf the economy as a whole.
To establish a common agricultural policy and a commitment to free and fair competition.

The EU
s mission in the 21st century is to:
1. Maintain and build on the peace established between its member states;
2. Bring European countries together in practical cooperation;
3. Ensure that European citizens can live in security;
4. Promote economic and social solidarity;
5. Preserve European identity and diversity in globalised world;
6. Promulgate the values that Europeans share.
Institutions of European Union
The basic institutional structure of European Union was developed during the Treaties of Paris and Rome.
Institutional system of European Union is the only one of its kind in the world. It includes following
independent yet interlinked institutions.
1.

Council of the European Union: It is the main decision making legislative body of European Union.
It is made up of ministers from each of the member governments. The presidency of the council of
Ministers rotates between member governments at six-monthly intervals. The council meets in
different compositions such as foreign affairs, finance, education, telecommunications etc.

2.

European Parliament: Members of European parliament are directly elected by citizens in their
respective countries for every five years depending on their population. It exercises political
supervision over all other institutions. It represents the democratic will of people of the European
Union.

3.

European Commission: It is the main administrative body responsible for day-to-day

administration of European Union
s policies. It consists of commissioners nominated from member
countries. It acts as the executive body, drafting authority and as a guardian of the Treaties for
European Union.

4.

Court of justice: It is the highest legal authority in the European Union. It consists of one judge
from each state, appointed by consensus. It ensures that community law is uniformly interpreted and
effectively applied. It has jurisdiction in disputes involving member states European Union
institutions, businesses & individuals etc.

5.

European Central Bank: It came into operation in 1998. It frames and implements European Union
s monetary policy. Primary objective is price stability. Its other responsibilities include control over
the issue of euro notes and coins, Foreign exchange operations and official reserves.
Apart from these institutions, other institutions are court of Auditors, Economic and Social Committee,
Committee of the Regions, European investment Bank and ombudsman.
26

Important policies of European Union :

The European Union acts in a wide range of policy areas where its action is beneficial to the member states.
These include:
Innovation policies, which bring state-of-the art technologies to fields such as environmental protection,
research and development (R & D) and energy;
Solidarity policies (also known as cohesion policies) in regional, agricultural and social affairs.
The Union funds these policies through an annual budget which enables it to complement and add value to
action taken by national governments. The EU budget is small by comparison with the collective wealth of
its member states: it represents no more than 1.23 % of their combined gross national income.
Some of the important policies are mentioned below:
1.

Exchange Rate Policy: That aims at exchange rate stability in Europe.

2.

Single market : It was inaugurated on January 1, 1993 in order to facilitate the free movement of
people and capital

3.

Tax Policy: The policy aims at eliminating tax induced distortions of competition within European
Union.

4.

Agricultural Policy: The policy aims to stabilize markets, to assume food supplies and to make food
available at reasonable prices.

5.

Industrial Policy: It provides conductive environment to business development in European Union.

6.

Competitive policy:
innovation.

7.

Transport Policy:
It aims to create an integrated transport system which is safe, reliable and
environmentally sustainable.

It aims to preserve the benefits of choice, price, quality, efficiency and

Benefits of European Union:

1. There will be gains from elimination of the transaction costs associated with Border patrols, customs
procedures and so on.
2. The member countries are going to enjoy the economies of scale due to the concentration of production
facilities.
3. The firms earlier with monopoly now has to face competition from the firms from other countries. This
will provide benefits of competition to all the member countries among EU.
27

4. The introduction of euro has benefited all the member countries. Now all the member countries of
European union can enjoy the gains associated with the strong international currency.
5. The products of European Union can be freely sold across borders. In a borderless Europe; firms can
have access to many more millions of consumers.
6. The free movement of factors will allow the firms to sell securities, raise capital and recruit labour
throughout Europe. There can also be substantial economies of scale in production and marketing.
7. Multinational firms from non-member countries can take advantage of the new economies of scale by
standardis.ing their products and processes to exploit the new opportunities.
8. It has brought down the barriers to trade and business. The companies of the member states benefit
from access to the largest single market for trade and investment in the world.
9. The economic reforms adopted by the new members increase their purchasing power and thus the
demand for EU goods and services.
10. The international competitiveness of ED companies has increased. They benefit from cheaper inputs,
a larger and more diverse labour market, additional opportunities for technology transfers
11. The consumer from member countries will enjoy cheaper and a wider choice of imports.
12. The creation of a wider single market has provided businesses with more export opportunities
Achievements:
1. The single market is one of the European Union
s greatest achievements. Restrictions on trade and
free competition between member countries have gradually been eliminated, thus helping standards
of living to rise. The single market has not yet become a single economy: some sectors (in particular
services of general interest) are still subject to national laws.
2. Freedom to provide services is beneficial, as it stimulates economic activity.
3. The financial crisis in 2008-09 has led the EU to tighten up its financial legislation. Over the years
the EU has introduced a number of policies (on transport, competition, etc.) to help ensure that as
many businesses and consumers as possible benefit from opening up the single market.
4. Citizens of European Union countries can travel, live and work anywhere in the EU.
5. The EU encourages and funds programme, particularly in the fields of education and culture, to
bring EU citizens closer together. A sense of belonging to the European Union will develop only
gradually, as the EU achieves tangible results and explains more clearly what it is doing for people.
People recognize symbols of shared European identity such as the single currency and the European
flag and anthem.
6. A
European public sphereis beginning to emerge, with Europe-wide political parties. Citizens
vote every five years for a new European Parliament, which then votes on the new European
Commission.

28

Future Prospects and Challenges:

Changing world scenario and European Union: The solidarity between Europe
s peoples and nations
must constantly be adapted to deal with new challenges posed by a changing world. Completion of the
single market in the early 1990s was a great achievement, but it was not enough.

Coordination of national economic policies To make the market work effectively, the euro had to be
invented making its appearance in 1999. To manage the euro and ensure price stability, the European
Central Bank was set up. but the financial crisis of 2008-09 and the debt crisis of 2010 showed that the
euro is vulnerable to attack by global speculators. What is needed, in addition to the ECB, is
coordination of national economic policies a much closer coordination than currently provided by
the Euro group. So, will the EU soon be laying plans for genuinely shared economic governance.

Principle of equal rights and respected minorities: The European Union will soon have more than 30
member states, with very different histories, languages and cultures. Can such a diverse family of
nations form common political
public sphere
? Can its citizens develop a shared sense of
being
Europeanwhile remaining deeply attached to their country, their region and their local
community? Perhaps they can, if today
s member states follow the example of the very first European
Community the ECSC which was born from the rubble of the Second World War. Its moral
legitimacy was based on reconciliation and consolidating the peace between former enemies. It adhered
to the principle that all member states, whether large or small, had equal rights and respected minorities.

Multiplication of arrangements: Will it be possible to keep pushing ahead with European integration,
claiming that the EU
s member states and their peoples all want the same thing? Or will EU leaders
make greater use of
reinforced cooperationarrangements, whereby ad hoc groups of member
states can move ahead without the others in this or that direction? The multiplication of such
arrangements could lead to an la carte or
variable geometryEurope, with each member state free to
choose whether to pursue a particular policy or to be part of a particular institution. This solution might
appear attractively simple, but it would be the beginning of the end for the EU, which works by
anticipating the common interests of its member states, in both the short and the long term. It is based
on the concept of solidarity which means sharing the costs as well as the advantages. It means having
common rules and common policies. Exemptions, derogations and opt-outs should be exceptional and
of short duration. Transitional arrangements and phasing-in periods may sometimes be necessary, but
unless all the member states keep to the same rules and work towards the same goals, solidarity breaks
down and the advantages of being in a strong and united Europe are lost.

International competition: Globalisation obliges Europe to compete not only with its traditional rivals
(Japan and the US) but also with fast-rising economic powers such as Brazil, China and India. Can it
continue restricting access to its single market in order to protect its social and environmental standards?
Even if it did so, there would be no escape from the harsh realities of international competition.
The only solution is for Europe to become a real global player, acting in unison on the world stage and
asserting its interests effectively by speaking with one voice. Progress in this direction can only be
achieved by moving towards political union. At the same time, the EU needs to become more
democratic.

The European Parliament: The European Parliament has been given greater power with each new
29

treaty is directly elected by universal suffrage every five years. But the percentage of the population
actually voting in these elections varies from country to country, and the turnout is often low. The
challenge for the EU
s institutions and national governments is to find better ways of informing and
communicating with the public

European union and international affairs: Finally, Europe should punch its full weight in
international affairs. One of the EU
s great strengths is its ability to spread European values beyond its
borders. Values such as respecting human rights, upholding the rule of law, protecting the environment
and maintaining social standards in the social market economy. Imperfect as it is, the EU can hardly
claim to be a shining model for the rest of humanity. But to the extent that Europe is successful,
other regions will look to it as an example. What would count as success for the EU in the years
ahead? Bringing its public finances back into balance. Coping with the ageing of its population in away
that does not unfairly penalise the next generation. Finding ethical responses to the huge challenges
posed by scientific and technological progress particularly in biotechnology. Ensuring security for its
citizens without undermining their freedom. If it can do these things, Europe will continue to be
respected and will

Conclusion
To conclude, the member countries of European Union have benefited in all aspects and will continue to
enjoy cheaper transaction costs, reduced currency risks. Consumers and business will enjoy price
transparency and increased price based competition. At the same time the unification of Europe can be a
danger to many firms in other countries.

D. NORTH AMERICAN FREE TRADE AGREEMENT (NAFTA)

Introduction:
Economic integration refers to a process whereby two or more countries combine into a larger economic
group by removing discriminations existing among national frontiers. One of the important types of
economic integration is free trade Area. The classic example of Free Trade Area is NAFTA i.e. North
American Free Trade Agreement between three countries viz., United States, Canada and Mexico. This
process created a trade block based of the continent of North America. The North American Free Trade
Agreement took place on January 1st,1994 and took in effect as the Canada superseded between the boarder
of United States and Canada. This agreement will remove most of the barriers to trade and investments
among the three countries.

Origin of NAFTA

1988 An agreement was signed between Canada and the US to drop all trade barriers on all goods
and most non-government services.
1993 Canada and USA renegotiated to include Mexico and NAFTA was formed.
1. Jan 1994 NAFTA was implemented to eliminate all tariffs on products moving among the three
countries and other barriers to services and investment of capital within North America.
30

NAFTA Agreements:
Agreement on Elimination of non- tariff barriers: Under the NAFTA, all non-tariff barriers to
agricultural trade between the United States and Mexico were eliminated. In addition, many tariffs were
eliminated immediately, with others being phased out over periods of 5 to 15 years. This allowed for an
orderly adjustment to free trade with Mexico, with full implementation beginning January 1, 2008.
Agreements on provisions under agriculture:The agricultural provisions of the U.S.-Canada Free Trade
Agreement, in effect since 1989, were incorporated into the NAFTA. Under these provisions, all tariffs
affecting agricultural trade between the United States and Canada, with a few exceptions for items covered
by tariff-rate quotas, were removed by January 1, 1998.
Agreement on market Access: Mexico and Canada reached a separate bilateral NAFTA agreement on
market access for agricultural products. The Mexican-Canadian agreement eliminated most tariffs either
immediately or over 5, 10, or 15 years. Tariffs between the two countries affecting trade in dairy, poultry,
eggs, and sugar are maintained.

Objectives:
The objectives of this Agreement, as elaborated more specifically through its principles and rules, including
national treatment, most-favored-nation treatment and transparency, are to:
a) Eliminate barriers to trade in, and facilitate the cross-border movement of, goods and services between
the territories of the Parties;
b) Promote conditions of fair competition in the free trade area;
c) Increase substantially investment opportunities in the territories of the Parties;
d) Provide adequate and effective protection and enforcement of intellectual property rights in each Party's
territory;
e) Create effective procedures for the implementation and application of this Agreement, for its joint
administration and for the resolution of disputes; and
f) Establish a framework for further trilateral, regional and multilateral cooperation to expand and enhance
the benefits of this Agreement.

Important Provisions under NAFTA:

1.

Elimination of Trade barriers: On 1 January 1994, tariffs on many agricultural commodities

between Mexico and the United Stated were immediately eliminated and other were to be phased out
over a period of 5, 10 or 15 years. More than half the value of agricultural trade became duty free
when the agreement went into effect. Both Mexico and United Stated protected their import-sensitive
31

sectors with larger transaction periods, tariffs-rate, quotas and for certain products, special safeguard
provisions.
2.

Protection for import sensitive crops : NAFTA contains special agricultural provisions to provide
relief against import surges. These provisions allow only a specified quantity of a selected product to
enter at low or preferential NAFTA duty rates. Higher tariffs are automatically triggered when imports
reach a specified level. United States applies special safeguards on imports of onions, tomatoes,
eggplants, chilli peppers and watermelons. Mexico applies special safeguard on three groups of
products i.e. live swine and most pork products, apples and potatoes products.

3.

Sanitary and Phyto-sanitary Measures: The NAFTA imposes disciplines on the development
adoption and enforcement of sanitary and phytosanitary measures. Theseare measures taken to protect
human, animal or plant life or health from risks that they may arise from animal or plant pests or
diseases or from food additives or contaminants.

4.

Export Subsidies: In order to achieve the elimination of export subsidies, United States and Canada
will be allowed to provide export-subsidies into the Mexican market to counter subsidized exports
from other countries. Both United States and Canada are required to consider Both United States and
Canada are required to consider the export interests of the other whenever subsiding agricultural
exports to a third country.

5.

Rules of Origin: NAFTA provides for though rules origin to ensure that maximum benefits accrue
only to those items produced in North America. The NAFTA rules of origin for agricultural products
were constructed to prevent Mexio from becoming an expert platform for processed products made
from subsidized raw materials originating in Non-NAFTA Countries.

Committees of NAFTA
1.

The NAFTA Committee on Agricultural Trade: The committee provides a forum for the three
countries to consult regularly on trade issues and other matters related to implementation of the
agreements.

2.

The NAFTA Committee on Sanitary and Phytosanitary measures (SPS) measures: It facilitates
technical co-operation including consultations technical co-operation including consultations
regarding disputes involving SPS measures.

3.

The NAFTA Advisory Committee on private Commercial Disputes Regarding Agricultural Goods: It
aims to achieve prompt and effective resolution of commercial disputes, with special attention to
perishable items..

General Benefits of NAFTA

NAFTA created a free trade area among developed and developing economies. It is one of the first
agreements to include agriculture as well as other industries. The implementation of NAFTA has not
always proceeded smoothly and disputes continue to affect trade in some commodities. However, NAFTA
32

has had significant impact on agricultural trade among the NAFTA countries. The important economic
benefits are explained below.
1.

Access to markets of member countries: It has facilitated greater exports by increasing access to the
US, Mexican and Canadian markets and by ensuring a climate of greater openness, stability and
certainty for producers, importers, exporters and investors throughout the region.

2.

Increase in trade: During 1993 and 2005, trade among the NAFTA
from $ 297 billion to $ 810 billion. .

3.

GDP growth: The dismantling of trade barriers and opening of markets have led to economic growth
and rising prosperity in the US, Mexico and Canada. During the period 1993 to 2005, real GDP
growth in US and 48%, Mexico 40% and in Canada 49 percent.

4.

Increase agricultural trade: Two-way agricultural trade between the US and Mexico increased by
149 percent since 1993 reaching $ 15.8 billion in 2004. Trade in agriculture between US and Mexico
has been balanced. US agricultural exports to Mexico increased by $ 5.7 billion and US agricultural
imports from Mexico increased by 5.6 billion during 1993 and 2005. Two ways agricultural trade
between the US and Canada increased by more than 112 percent since 1993 reaching 21.1 billion in
2004.

5.

Rise in productivity: The productivity has risen in the 3 countries during 1993 to 2003. Productivity
rose 28% in US, 55% in Mexico and 23% in Canada.
.

6.

Intangible benefits: NAFTA has encouraged commitment to reforms and led to major advances in
government procurement and intellectual property rights.

7.

Environmental provisions: NAFTA was the first trade agreement to explicitly include environmental
provisions. For this purpose the North American Agreement on Environment till Cooperation was
developed to address environmental concerns. Since then, all three countries have benefited from
coordination on environmental issues.

nations rose by 173 percent

Benefits to United States1.

2.
3.
4.
5.

Free trade access to Mexico allows US industries to import labour-intensive components from Mexico.
Some of the industries that have benefited from this include industries in computers, autos,
petrochemicals, financial services and also agricultural sector.
The trade between the US and Mexico more than doubled.
There is an increase in the employment.
The consumers are benefited in USA due to reduced prices of the commodities and increased
competition.
There is an expansion of trade not only with NAFTA members but also with other countries.

Benefits to Mexico:
33

1. It has resulted in greater export-led growth resulting from increased access to huge US market.
2. It has encouraged the return of the capital that left Mexico in search of higher and more secure return
abroad.
3. It has fostered more rapid structural reforms in Mexico,
4. It has encouraged higher regulatory standards in Mexico and more cross border cooperation.
5. It has helped speed up of Mexicos economic and political transformation.

Benefits to Canada:
1.
2.
3.

There is an increased exports.

There is an higher economic growth.
There is also optimum utilization of the resources.

In this way, the free trade area called NAFTA between three North American countries helped grow them
in length and width.

Achievements:
Despite its critics, NAFTA's record is clear: by lowering trade barriers, the agreement has expanded trade,
increased employment, provided more choices for consumers at competitive prices, and increased
prosperity for all three countries.
1. Largest free trade area: NAFTA created the world's largest free trade area with about 450 million
people and $17 trillion worth of goods and services. Since it came into force in 1994, trade has
blossomed, investment has increased, and all three countries have become more competitive.
2. Employment generation: Over 39 million NAFTA related jobs have been created and the benefits
of expanding trade have flowed to businesses, farmers, workers, and consumers all over the region.
3. Trade creation: From 1993 to 2008, trade among the NAFTA countries more than tripled, from
$288 billion to $902 billion. On average, each one of the NAFTA countries conducts nearly $1.9
billion in daily trilateral trade.
4. Mutual benefits: NAFTA has been good for Mexico but so it has been for the United States.
5. Agricultural trade: An interesting success story for the United States is the role that NAFTA has
played in making US agricultural goods more competitive.
6. Investment destination: U.S. investors have also found NAFTA an attractive destination for their
businesses.
7. Trade facilitation: The tariff agreements scheduled at the time of NAFTAs signature were
implemented either on time or ahead of schedule. As a result, NAFTA has evolved to a more advanced
stage of trade facilitation.
8. Most economically competitive region: In 2009 the governments of the three countries defined new
and creative ways to further increase trade among themselves. To make North America one of the most
economically competitive regions in the world, trade officials agreed to push regulatory cooperation
as the new top priority of the agreement. These actions have the potential to strongly reduce costs to
businesses and prices to consumers by eliminating unneeded regulatory differences on standards.
34

Looking to all the progress achieved in the past ten years, one is forced to agree that NAFTA works and
increases employment and competitiveness in the region. NAFTAs progress and results underline the
advantages that a fuller integration would bring to all the countries in the North American region.

Failures:
1.
2.
3.
4.

NAFTA Production Declines More Than Other World Regions.

Capacity Utilization Is 30% Below 2008 Levels.
The Great Recession of 2008-2009 affected the Entire NAFTA Region.
The
Great RecessionHas Technically Ended, But The U.S. Economy Still Faces Major
Challenges

Future Prospects and Challenges:

Path of growth for future: Twenty years after NAFTA

s establishment, there is much evidence of
its positive effects on the agricultural sectors and economies of its members. Agricultural trade
within the region rapidly expanded, accompanied by tremendous growth in FDI in the agri-food
value chains of all three countries. With NAFTA now fully implemented, it is of interest to ask what
path NAFTA partners might choose to capitalize on opportunities that freer trade and global
markets offer.
Regional trade agreements: NAFTA leaders have intermittently floated the idea of a free trade area
that would encompass all of the Western Hemisphere. NAFTA members have negotiated separate
bilateral and regional trade agreements (RTAs) with countries outside the region. Despite
occasional irritants, the overall consensus is that NAFTA has been beneficial for all three
members.
North American Competitiveness Council (NACC):Convinced that it was through private sector
cooperation that regional integration could progress at a faster pace, in March 2006 Mexicos
President, Vicente Fox, suggested the constitution of an important working group the North
American Competitiveness Council (NACC), composed of top businessmen from the region. The
NACC provides a voice for the trilateral business community and engages the private sector in
finding solutions for better integration within NAFTA. No matter what form the future regional
partnership may take, the experience over the past two years of the NACC demonstrates the clear
benefits of close cooperation on both strategic and specific issues among North America
s business
communities, as well as its governments. Other business organizations have extended this
cooperation over the past year in launching productive new initiatives addressing issues such as
border costs, sector

Conclusion:
The North American Free Trade Agreement (NAFTA) has enhanced prosperity in all three countries
through increased trade and investment, stronger economic growth, and lower prices for consumers.
Nonetheless, NAFTA
s benefits are not universally understood and the current economic environment of
the United States is creating public misperceptions about the value of further regional economic integration.
This misperception is unfortunate because it limits possible cooperation between the governments of the
35

three countries in making the region more competitive, its businesses more efficient and the offer of new
jobs more sustainable.
A regional approach is the only opportunity that NAFTA countries have to strengthen their competitiveness
and security.

E. ASIA-PACIFIC ECONOMIC CO-OPERATION (APEC)

Introduction: Asia-Pacific Economic Co-operation (APEC) was established in 1989 to further enhance
economic growth and prosperity for the region. APEC is the premier forum for facilitating economic
growth, co-operation, trade and investment in the Asia-Pacific region.
APEC has 21 member countries, viz., Australia, Brunei, Canada, Chile, China, HongKong, Indonesia,
Japan, Republic of Korea, Malaysia, Mexico, New Zealand, Paupa New Guinea, Peru, Philippines, Russian
Federation, Singapore, Chinese Taipei, Thailand, United States and Vietnam. These 21 member counties
account for 41% of the world
s population, about 55% of the world GDP, and about 49% of world trade. It
is also the most economically dynamic region in the world having generated about 70% of global economic
growth in its first 10 years.
APEC is the only inter governmental grouping in the world operating on the basis of non-binding
commitments, open dialogue and equal respect for the views of all participants. Unlike the WTO or
other multilateral trade bodies, APEC has no treaty obligations required of its participants Decisions made
within APEC are reached by consensus and commitments are undertaken on a voluntary basis.
India has requested membership in APEC and has received initial support from US, Japan and Australia.
In addition to India, Mongolia, Pakistan, Laos, Columbia and Ecuador are also seeking membership of
APEC by 2008.

Goals of APEC:
APEC was established in 1989 to further enhance economic growth and prosperity for the region and to
strengthen the Asia-Pacific community. Since its inception, APEC has worked to reduce tariffs and other
trade barriers across the Asia-Pacific region, creating efficient domestic economies and increasing exports.
The imports goals of APEC are specified in the
Bogor Goalsfor free and open trade and investments in
the Asia-Pacific by 2010 for industrialized economies and 2020 for developing economies. These goals
were adopted by Leaders at their 1994 meeting in Bogor, Indonesia.
1.

According to Bogor goals, free and open trade and investment helps economies to grow, creates jobs
and provides greater opportunities for international trade and investment.

2.

APEC also tries to create an environment for the safe and efficient movement of goods, services and
people across borders in the region through policy alignment and economic and technical co-operation.

3.

APEC leaders meeting in Bangkok, Thailand in 2003 has considered counter-terrorism as a

complementary mission to Bogor Goals.
36

4.

It has also agreed to strengthen efforts to build knowledge-based economies and to promote sound and
efficient financial systems and to accelerate regional structural reform.

Operation of APEC:
The APEC secretariat is based in Singapore and it operates as the core support mechanism for the APEC
process It provides co-ordination, technical and advisory support as well as information management,
communications and public outreach services.
The APEC secretariat performs a central project management role, assisting APEC Member Economics and
APEC forum with overseeing more than 230 APEC funded projects. APEC
s budget is also administered by
the APEC secretariat.
The APEC secretariat is headed by an Executive Director and a Deputy Executive Director. These positions
are filled by officers of Ambassadorial rank from the current and incoming host economies respectively.
The positions rotate annually.

Growth and Achievements of APEC:

The Asia-Pacific region has consistently been the most economically dynamic region in the world. Since
APEC's inception in 1989, APEC's total trade has grown 395%, significantly outpacing the rest of the world.
1 In the same period, GDP (in purchasing power parity terms) in the APEC region has tripled, while GDP
in the rest of the world has less than doubled.
APEC's work under its three main pillars of activity, Trade and Investment Liberalisation, Business
Facilitation and Economic and Technical Cooperation, has helped drive this economic growth and improve
employment opportunities and standards of living for the citizens of the region.
The important growth of APEC are:
1)

Exports increased by 113 percent to over US$ 2.5 trillion.

2)

Foreign direct investment grew by 210 percent overall, and by 475 percent in lower income APEC
countries.

3)

Real goals national product grow by about a third overall, and by 74 percent in lower income APEC
countries.

4)

Gross domestic product per person in lower incomeAPEC economies grew by 61 percent.

5)

Over 30 bilateral free trade agreements (FTAs) have been concluded between APEC Member
Economies.
37

6)

APEC is also pursuing trade and investment liberalisation through its Regional Economic Integration
agenda. Progress to date includes:

7)

Investigating the prospects of and options for a Free Trade Area of the Asia-Pacific.

8)

The development of 15 model measures for RTAs/FTAs that serve as a reference for APEC members
to achieve comprehensive and high-quality agreements.

9)

APEC has also acted as a catalyst in the advancement of World Trade Organisation multilateral trade
negotiations over the past 20 years.

10) APEC is strategically important to the United States because it is a primary venue for multilateral
engagement with the Asia-Pacific on economic and other key interests. APEC
s growing economic
importance is clear. The 21 APEC members account for 55 percent of world GDP; 45 percent of
global trade; and 40 percent of the world
s population.
11) The Asia-Pacific economies are leading the global recovery, with recent forecasts suggesting that
emerging Asian economies could grow by at least 5 percent in 2009 while the G-7 economies contract
by 3.5 percent.
The achievements of APEC can be mentioned as below:
A. Economic Growth: Since its inception in 1989, the APEC region has been the most economically
dynamic part of the world. During its first decade, APEC member countries generated about 70% of
global economic growth.
B. Benefit to the People in APEC Region:
Consumers in Asia-Pacific have both directly and indirectly benefited from the collective and
individual actions of APEC member countries. Important direct benefits are increased job
opportunities, more training programmes, stronger social safety nets and poverty alleviation.
C. Improvements in Information and Telecommunications: In 1990, an average of only 0.6% of those
living in APEC member countries were cellular subscribers and only 008 percent used internet. Within
a space of 15 years those figures rose to 55 percent and 30 percent, respectively. Since 1990.
D. Benefits to Low Income APEC Countries: Economic growth leads to social advancement. During the
first decade of APEC
s existence the low income APEC countries had the following benefits.
a. The United Nations Development Programme (UNDP) Human Development Index for lower
income APEC countries improved by about 18 percent.
b. Poverty in East Asian APEC countries has fallen by about a third (165 million people), mostly on
account of strong economic growth.
c. About 195 million new jobs have been created in APEC member countries, including 174 millions
in lower income countries.
d. Infant mortality has fallen and life expectancy has improved in lower income APEC countries on
account of significant improvement in access to sanitation and safe water, and expanding public
38

expenditure on health.
e. There has been heavy investment in human capital with rising education enrolment ratios and
growing expenditures on education.
E. Regional priorities: APEC has also been able to evolve its agenda to include pressing regional
priorities. Examples include: counter-terrorism (The Shanghai Statement in 2001, and the CounterTerrorism Task Force); human security (Health Working Group); emergency preparedness (Task Force
for Emergency Preparedness); climate change, energy security and clean development (The Sydney
Declaration in 2007); and the global financial crisis (The Lima Statement in 2008).
F. APEC initiatives to facilitate trade:
a. The introduction of electronic/paperless systems by all member economies, covering the payment
of duties, and customs and trade-related document processing
b. The Single Window Strategic Plan, adopted in 2007, provides a framework for the development of
Single Window systems which will allow importers and exporters to submit information to
government once, instead of to multiple government agencies, through a single entry point.
c. Providing business with a concise one-stop repository of customs and trade facilitation related
information for all APEC economies through the APEC Customs and Trade Facilitation Handbook
d. The APEC Tariff Database provides users with easy access to APEC member economies' tariff
schedules, concessions, prohibitions and other information.
e. In 2008, a groundbreaking Investment Facilitation Action Plan was endorsed; it aims to improve the
investment environment in Member Economies.
f. The APEC Privacy Framework provides guidance and direction to both APEC Member Economies
and businesses on implementing information privacy protection policies and procedures. By
facilitating information flows it will facilitate trade and e-commerce.
g. The APEC Business Travel Card (ABTC) provides substantial time and cost savings to business
people and facilitates their travel in the region, by allowing visa free travel and express lane transit
at airports in participating economies.
h. APEC is also removing behind-the-border barriers to trade through its Structural Reform agenda,
which focuses on reforming domestic policies and institutions that adversely affect the operation of
markets, and the capacity of businesses to access markets and to operate efficiently.

Major Challenges:
v
v
v
v
v

APEC process may be moving too slowly, because of flexibility.

APEC could be focusing on too many issues.
APEC process may be too expensive with costs greater than benefits.
APEC
s progress is not clear, as performance indicators are not provided.
APEC continues to be criticized for not doing enough for business and for not convincingly achieve the
Bogor Goals.

Future prospects:

APEC
s role is particularly important in the current economic environment. Although nations on
both sides of the Pacific have taken individual steps to respond to the economic crisis.

APEC is unique in that it already has the tools and focus to ensure regional economic prosperity by
39

promoting policies that will spur long-term economic growth, and ensure all the citizens have the
opportunity to thrive in the global economy. It promotes free and open trade and investment, and
initiatives to build healthy and resilient economies by tackling such issues as energy security, food
security, and preparing workforces for an increasingly competitive global economy.

On the economic front, APEC provides the best and most established regional mechanism for practical
cooperation and action.

With almost half of the G-20 being APEC members, APEC has an important role to play in supporting,
reinforcing, and implementing G-20 principles for global economic recovery and future economic
growth.

APEC is already leading efforts to facilitate reforms that will prevent future crises and improve the
business environment throughout the region. Reform efforts include initiatives aimed at improving
corporate governance and promoting regulatory reform.

APEC is also using the World Bank

s
Ease of Doing Businessindicators to spur progress on making
it faster, cheaper, and easier to do business in APEC economies, covering such areas as starting a
business, obtaining credit, the efficiency of conducting trade, and enforcing contracts.

APEC provides a forum for leaders of these economies to coordinate on macroeconomic, financial
and structural policies that will promote strong and balanced global demand, led by thriving private
sectors.

Regarding sustainable growth, including efforts to stem the impact of climate change APEC has an
increased role for in advancing energy security and "green" development.

APEC
s
human securityagenda can make a vital contribution to ensuring the prosperity and
resiliency of societies against a multitude of threats.

APEC is fostering closer collaboration among regional emergency management agencies, examining
the impact of climate change on disaster management, and helping school children prepare for disasters.
Going forward, APEC will continue to strengthen public-private partnerships and capacity building for
emergency preparedness.

APEC is also working to protect the region

s financial and economic system from attack and abuse
by terrorists.

F. ASSOCIATION OF SOUTH EAST ASIAN NATIONS (ASEAN)

Introduction: The Association of South East Asian Nations (ASEAN) contains several of the so called
Asian
tiger-economiesmost of which have suffered in the Asian financial crisis. Its number nations lie
close to the sea lanes between Europe China and Japan. ASEAN is sometimes seen as political counter
weight to China
s dominancein the region.
ASEAN established in 1967 to address the following issues:
40

No regional group in Southeast Asia before

Conflict-resolution: Indonesia-Malaysiaconflict called Konfrontasi.
Communist rebellions (backed by China and USSR) against pro-Western governments in Thailand,
Malaysia, Singapore, Indonesia and Philippines
Superpower intervention during the Cold War- Indochina
Economic Nationalism and underdevelopment

Origin of ASEAN
8 August 1967 ASEAN was established in Bangkok by five original member countries viz. Indonesia,
Malaysia, Philippines, Singapore and Thailand.
8 January 1984 Brunei, Darussalam joined ASEAN
28 July 1995 Vietnam joined ASEAN
23 July 1997 Laos and Myanmar joined ASEAN
30 April 1999 Cambodia joined ASEAN.

Peculiarities of ASEAN :
ASEAN does not function as a regional trade arrangement, but it has become an effective means for
cooperation in economic matters and foreign affairs with Organization for Economic Cooperation and
development (OECD).
There are significant political and religious differences among the countries for example Democracy is
well established in the Philippines, Burma (now Myanmar) still continues with its military dictatorship. The
regions religions are also varied, consisting of Islam, Buddhism, Christianity and animism. In addition,
several countries have a less homogenous population.
Despite their political, economic and cultural diversity the countries are recognize their mutual needs to
promote the regionsdevelopment and thus respect each other
s independence in internal politics.
Diverse cultures: Muslim, Buddhist, Christian, Confucian
Divergent colonial history:
- British (Malaysia, Singapore, Myanmar)
- Dutch (Indonesia)
- French (Vietnam, Cambodia, Laos)
- Spanish/American (Philippines)
- Portugese (East Timor)
Different political systems:
- Military Myanmar), communist (Vietnam, Laos), soft-authoritarian (Malaysia and
41

Singapore), stable democracy (Indonesia), unstable democracy (Thailand and Philippines)

parliamentary democracy, presidential democracy

Objectives of ASEAN
The ASEAN declaration in Bangkok on 8 August 1967 stated the following aims and objectives of ASEAN:
1. To accelerate economic growth, social progress and cultural development in the region in order to
strengthen the foundation for a prosperous and peaceful community in Asia.
2. To promote regional peace and stability in the region.

Fundamental Principles :
At the first Asian Summit in Bali in February 1976, the member countries signed the Treaty of Amity and
spelled following fundamental principles of ASEAN
1)
2)
3)
4)
5)
6)

Mutual respect for the independence, sovereignty, equality, territorial integrity and national identify of
all nations,
The right of every state to lead its national existence free from external interference, subversion or
coercion.
Non interferencein the internal affairs of one another.
Settlement of differences or disputes by peaceful means.
Renunciation of the threat or use of force.
Effective co-operation among themselves.

Structure and Organisation:

The highest decision-making organ of ASEAN is the meeting of the ASEAN Heads of state and
government. The ASEAN summit takes place every year. Ministerial meetings on several sectors such as
economy energy environment etc, are also held. To support these ministerial bodies there are 29
committees of senior officials and 122 technical working groups. The secretary, General of ASEAN is
appointed on merit and accorded ministerial status for five years. ASEAN also consists of other specialized
bodies such as ASEAN University Network, ASEAN centre for Energy etc.

Achievements ASEAN:
1. Political co-operation: The ASEAN security community is formed to bring ASEAN
s political and
security co-operation to a higher plane to ensure that countries in the region live at peace. At the 1992
Singapore summit, the SEAN leaders declared that ASEAN will move towards a higher plan of political cooperation to secure regional peace and prosperity.
2. Economic co-operation: When ASEAN was established, trade among the member countries was
insignificant. To tackle this, the Preferential Trading Agreement (PTA) was established in 1977 and further,
ASEAN Free Trade Area (AFTA) was launched in 1992. The elimination of tariffs and non-tariff barriers
among the member countries promoted greater economic efficiency productivity and competitiveness. In
1997 the ASEAN Leaders adopted the ASEAN vision 2020, which aimed at creating a stable, prosperous
42

and highly competitive ASEAN Economic Region in which there is free flow of goods, service,
investments, capital etc.
3. Other achievements:
o No major conflict among members since founding
o Inclusive membership: Vietnam joining in 1995 key development
o
Key role in the resolution of Cambodia conflict
o Engaging all the major powers of the world China, US, Japan, India, Russia, EU) through dialogue
and cooperation
In this way, as a result of this greater regional integration ASEAN has helped the member countries in
all directions.

Problems:
1. Economic Cooperation: intra-ASEAN trade still around 25% of total trade, mechanisms for financial
crisis untested
2. Persisting Intra-ASEAN Conflicts: Thailand-Cambodia, Singapore-Malaysia, Maritime disputes
3. South China Sea Dispute: China, Vietnam, Philippines, Malaysia, Brunei, and Taiwan
4. Transnational Threats: Environmental degradation, Deforestation and haze problem, Piracy,
Terrorism, Drug trafficking, People Smuggling, Natural disasters

Challenges:

Rise of China and India, a multipolar world

Increasing burden: scope of issues, and membership, and partnerships
Sovereignty and non-Interference in an age of globalization and transnational challenges
Compliance with new rules and the Charter: National interest version regional interest
ASEAN
s unity and cohesion

G. SOUTH-ASIAN ASSOCIATION FOR REGIONAL CO-OPERATION.

Introduction:
To bring about regional co-operation among South Asian Countries, The South Asian Association for
Regional Co-operation (SAARC) was formally launched on 7-8 December 1985, through the idea was first
marked in November 1980. The SAARC comprises of eight countries of South Asia that is Bangladesh,
Bhutan, India, the Maldives, Nepal, Pakistan, Sri Lanka and Afghanistan.
43

Objectives of SAARC:
SAARC was established to achieve the following objectives:
1)
2)
3)
4)
5)
6)
7)
8)

To promote the welfare of the people of South Asia and to improve their quality of life.
To accelerate economic growth, social progress.
To promote and strengthen collective self-reliance among the countries of South Asia.
To contribute to mutual trust, Understanding and appreciation of one another
s problems.
To promote active collaboration and mutual assistance in the economic, social, cultural, technical and
scientific fields.
To strengthen co-operation with other developing countries.
To strengthen co-operation among themselves in international forms on mattes of common interest.
To cooperate with international and regional organizations with similar aims and purposes.

Principles of SAARC:
Among the various programmes of the SAARC, the two most important are:
1) Poverty Eradication: Poverty Eradication has been placed high on the social Agenda of SAARC since
the 6th SAARC summit (Colombo, 1991). A consensus on poverty eradication was adopted at the 7 th
SAARC summit (Dhaka, 1993). The summit expressed its commitment to eradicate poverty from south
Asia preferably by the year 2002. It is through an agenda of action which would include a strategy of
social mobilization and human development. The summit also stressed that within the conceptual
approach of
Dhal-Bhaat
, the right to work and primary education should receive priority.
2) Trade and Economic Co-operation
SAARC has taken important steps to expand co-operation among member countries in the core
economic areas.
A committee on economic Co-operation (CEC) comprising the commerce secretaries of member states
was established in July 1991 to acts as the forum to address economic and trade issues. The committee
is charged with the responsibility of monitoring the progress in the implementation of decisions relating
to expansion of trade and economic co-operation under the frame work of SAARC.

Achievements :
SAARC was not able to play a very important role in integrating South Asia due to political and military
rivalry between India and Pakistan. However, at the same time SAARC has made some achievements
which are stated below.
a.
b.
c.

SAFTA: The signing of the frame work agreement on South Asia Free Trade Area was a major mile
stone. This is bound to increase inter-regional trade.
SAARC Social Charter: It is another important achievement. The charter aims at bringing needed
social change in the living conditions of South Asians.
Environmental Plan: The SAARC also recognized the importance of undertaking regional
44

d.
e.
f.

g.

cooperation in conservation of water resources, environment, pollution prevention, etc. Thus it has
stressed the need for effective implementation of environmental plan of action.
Anti-terrorist stand: SAARC summits categorically condemned terrorist violence in all its form and
manifestations. The SAARC declaration envisages South Asia to be a peaceful and stable region.
Active collaboration: SAARC tries to strengthen cooperation among the member states in
international forums on matters of common interest.
Asian Development Bank (ADB) assistance: ADB and SAARC singed a MOU in 2004 to
strengthen the co-operation between the ADB & SAARC. The MOU provides a frame work for ADB
assistance to SAARC
s regional co-operative activities such as transport, energy, trade, investment
and private sector development.
South Asia Development Fund : The South Asia Development Fund has been established to serve as
an umbrella financial institution for all SAARC projects and programmes. It comprises of three
windows the social window, infrastructure window, and economic window.

Future Prospects :
South Asia needs increased co-operation among its countries to face challenges posed by hikes in food
prices, recurrent disasters and climate change. Due to geographic, economic, cultural and other strategic
reasons. South Asia has distinct advantages to co-operate in many areas including cross-border
infrastructure and services, health trade, finance, and regional public goods.
1. Due to its strategic geographic location, South Asia can play an important role in the wider Asian
integration. Through there are significant achievements in co-operation and integration has been slow.
The SAARC has tremendous prospectus to expediate the integration process.
2. Regional co-operation can help to achieve economic and social development. Cross-border
development of basic infrastructure, such as highways, railways, shipping and air-connectivity, inland
waterways, power grids, and telecommunication links, can reduce physical barriers to the movement
of goods and people across national boundaries. It can in turn help to expand regional trade and
tourism, increase in foreign exchange earning capacities, generating employment opportunities etc.
3. SAARC has a vital role to play in poverty reduction and building a more integrated and prosperous
Asian region.
4. To change the functioning of SAARC in to a more vibrant and result oriented body, there is a need to
over come the differences and disputes among the member countries and create a climate of mutual
trust and confidence.
5. The recent steps such as social charter, SAFTA etc. are in the positive direction and their goals appear
achievable. The political will to do so appears forthcoming now. This looks good for the future of the
SAARC.

Conclusion :
The absence of conflicts and the beginning of normal relations among the member states are the minimum,
not the maximum expectation of the people of the region. Ideally friendship among them is a prior
requirement to enable and sustain friendly co-operation among the SAARC member governments.
45

To achieve economic integration in South Asia, it is necessary for member countries to give priority to the
serious socio-economic problems and at the same time reducing the political tensions. India can help the
other members by providing technology in all the sectors, specially in agriculture and service sector and the
required administration expertise.
A serious attempt is required by all the member countries to make the SAARC an effective economic
region rather than only a political and cultural gathering.

H. REGIONALISM VS MULTILATERALISM
Introduction: The debate on regionalism versus multilateralism is growing as economists and political
scientists try to manage with the question whether regional integration arrangement (RIA) are good or bad
for the multilateral system. Are regional integration arrangements (RIA) building blocks, or stumbling
blocks or stepping stones towards multilateralism? Due to the emergence of large number of regional
integration arrangements (such as the EU, NAFTA, APEC, the ASEAN Free Trade Area (AFTA) the
SAFTA and so on) there arises a question among the economist about the ability of the WTO to maintain
the momentum towards global free trade.

Meaning of Regionalism: Regionalism refers to any policy designed to reduce trade barriers between a
subset of countries regardless of whether those countries are actually contiguous or even close to each other.

Rationale and Benefits of RTAs:

1)

Unresolved issues in WTO negotiations: Everybody would agree that multilateral agreement is the
preferred instruments for liberalizing international trade. Such agreements ensure a nondiscriminatory approach, which provides political and economic benefits for all. But the current
political environment is not particularly favourable for multilateral trade negotiations.
Countries are taking RTAs route because such agreements are often a more practical and feasible way
to liberalize trade. RTAs can bring faster results than multilateral process. RTAs can be valuable in
dealing with different issues such as services, government procurement etc. which often cause
deadlocks on the multilateral negotiations.

2)

3)
4)
5)

Promote Freer Trade: Regional arrangements promote freer trade and multilateralism. According to
them, on account of regional integration trade creation has generally exceeded trade diversion. Further,
regionalism has contributed to both internal and international dynamics that enhance rather than
reduce the prospects of global liberalization.
Create Interest in Multilaterism: According to the proponents of regionalism, regional initiatives
can accustom officials, governments and countries to the liberalization process and thus increase the
probability that they will subsequently move to similar multilateral actions.
Positive Political Effects: Trade and broader economic integration has bought about peace between
neighbouring countries and thus has positive rather than negative political effects.
More Practical and Feasible: Everybody would agree that multilateral agreements are the preferred
46

instruments for liberalizing international trade. There are many important and unresolved issues
.Under this background, more and more countries have turned to RTAs. Countries are taking RTAs
route because such agreements are 'often a more practical and feasible way to liberalize trade. RTAs
can bring faster results than multilateral process. RTAs can be valuable in dealing with different
issues such as services, government procurement, etc. which often cause deadlocks on the multilateral
negotiations.
6)

7)

8)

9)

Contribute to Multilateralism: They seem to be contradictory, but often regional trade agreements
can actually support the WTO's multilateral trading system. Regional agreements have allowed groups
of countries to negotiate rules and commitments that go beyond what was possible at the time
multilaterally. In turn, some of these rules have paved the way for agreement in the WTO. In other
words, regional integration should complement the multilateral trading system and not threaten it.
Demonstration Effects: The proponents of regionalism note that it often has important demonstration
effects. Regional initiatives can accustom officials, governments and nations to the liberalization
process and thus increase the probability that they will subsequently move on to similar multilateral
actions.
Positive Political Effects: Trade and broader economic integration has brought about peace between
neighbouring countries and thus has positive rather than negative political effects. The supporters of
regionalism contend that it has had positive rather than negative political effects. Trade and broader
economic integration has created
Compatibility: The supporters of regionalism note that Article 24 of the GATT, and now the WTO,
explicitly permits regional agreements and thus acknowledges their compatibility with the multilateral
trading system.

Costs and Consequences of RTA

s are:
1.

Trade Diversion: Regional agreements divert trade by creating preferential treatment for member
countries vis--vis non-members. They can divert trade away from lower cost producers outside the
bloc.

2.

Undermine the Multilateral System: Countries may lose interest in the multilateral system when
they engage actively in regional initiatives. RTA
s

3.

Geopolitical Impact: Extensive and intensive regional ties may lead to conflicts that range beyond
economics to broader spheres of international relations.

4.

Prevents developing countries from active participation: There are concerns that RTAs are
incomplete, unequl or counter-productive. The volume of RTA activity stretches negotiation
capacities to their limit, and in the case of developing countries, prevents them from actively
participating in all proceedings. The WTO has partnerships with the United Nations and the World
Bank to build capacity in smaller countries and give aid money to support participation in trade
negotiations.Further, there is a fear that in agreements formed outside the WTO, developing countries
do not have the power of collective bargaining to negotiate RTAs.

5.

Hurt the interest others : Under some circumstances regional trading arrangements could hurt the
trade interests of other countries. Normally, setting up a customs union or free trade area would
47

violate the WTO's principle of equal treatment for all trading partners ,that is "most-favoured-nation
agreement".

Meaning of Multilateralism: Multilateralism is a characteristic of the world economy or world

economic system. It ultimately depends on the behaviour of individual countries, that is, the extent to which
they behave in a multilateral fashion. For any one country, the multilateralism is a positive function of:
a) The degree to which discrimination is absent, that is the proportion of trade partners that receive
identical treatment, and
b) The extent to which the trading regimeapproximates free trade.
There are problems in the world that cannot be confronted with any success by a single state, no matter how
powerful. Big environmental issues and world hunger and poverty, along with many regional peacekeeping
needs and most economic and trade-related problems, etc., can be tackled effectively through the process of
multilateralism.
The multilateralism is the consensus-driven process that democratically pulls countries together for
collective problem solving, usually under the auspices of an umbrella organisation such as the United
Nations or the World Trade Organisation.

Advantages of Multilateralism:
1. Cannot be dominated by the major players: In this process, when priorities are set, they cannot be
dominated by the major players.
2. Best for liberalizing an economy: A free and fair multilateral trading system serves best the interests of
any liberalizing economy. Although there has been a huge proliferation of bilateral/regional free trade
agreements in recent years, no one questions the primacy of the multilateral trading system.
3. Contributed to India's growth: India's engagement with the multilateral trading arrangement helped it
to sustain the trade liberalisation process which was started in 1991. The inclusion of agriculture in the
WTO agreement helped India bring about some policy changes even in the agricultural sector, which had
remained highly protected after the initial round of reforms. While the agricultural sector is still reasonably
protected with high tariffs, the phasing out of quantitative restrictions (QRs) has arguably been the single
most successful area of trade liberalisation in this sector and has happened mainly because of India's WTO
commitments.
4. Better Economic performance: The protagonists of trade liberalisation claim that open trade policies
lead to better economic performance. Virtually all growth miracles are associated with rapid expansion of
trade rather than wholesale substitution of imports by domestic production
5. Other advantages: Beyond the. welfare gains achieved through the reduction of tariffs in manufacturing
and agriculture, additional gains tend to accrue with the introduction of scenarios that incorporate trade
liberalisation in the services sector, reduction of non-tariff barriers, trade facilitation, effective utilisation of
dispute settlement mechanism etc.

Disadvantages of Multilateralism:
1.Slow process: The biggest disadvantage to multilateralism is that in the process every country has the
right to have their opinions taken into account, and they usually take advantage of it. It can slow things
down a lot.
.
48

2. Increasing use of Non- Tariff Barriers (NTBs): Another important problem in the multilaterism is the
increasing use of Non- Tariff Barriers (NTBs) to restrict trade from developing countries. The term 'NonTariff Barriers' has not been defined under the WTO but its usage and understanding broadly refers to any
'border measure' other than a tariff, which acts as a barrier to trade. This includes internal measures that,
despite in several instances being in line with WTO rules and serving legitimate policy objectives may
discriminate or unnecessarily restrict access to markets, translating in additional costs for the exporters or
importers. Nontariff barriers (NTBs) are trade barriers that restrict imports but are not in the usual form of a
tariff.
Some common examples of NTB's are antidumping measures and countervailing duties. Some non-tariff
trade barriers are expressly permitted in very limited circumstances, when they are deemed necessary to
protect health, safety, or sanitation, or to protect depletable natural resources. Their use has risen sharply
after the WTO rules led to a very significant reduction in tariff use. They are being used by developed
countries against developing countries.
3. Domination of rich developed countries: The multilateral arrangements are dominated by rich
developed countries. This creates groupism and works against poor developing countries and restricts the
success of such arrangements.
In general the disadvantages of multilateralism can be considered as the advantages of regionalism.

Conclusion:
More and more countries are joining preferential arrangements at the same time the pace of multilateral
trade negotiations has solved markedly in the recent years.
According to some estimates there are about 250 regional or bilateral free trade agreements either in force
or under negotiation. Asian countries such as Japan and China, which have traditionally shunned RTAs, are
actively negotiating such agreements with their neighbours and even more distant trading partners. The EU
has been active in this areafor years.
The US has now joined the parade of signing more RTAs. Until 2001, the US had only three RTAs namely,
Israel, Canada and NAFTA. Since then, the US concluded and put into effect RTAs with Jordan, Chile and
Singapore. It has concluded negotiations on other agreements with Australia, the five Central American
countries plus the Dominican Republic and Morocco Talks are underway with many other countries.
The multilateral trading system, as embodied in the GATT-1947 and now the WTO, has completed more
than 60 years of existence. The basic philosophy behind multilateralism is that open markets, nondiscrimination and global competition in international trade are conducive to the national welfare of all
countries. The key guiding principles of this system is non-discrimination, which is embodied in the MFN
clause and National Treatment.
WTO rules require that each member accord Most Favoured Nation (MFN) status to other WTO members.
However, GATT Article XXIV allows exceptions to the MFN principles for RTAs so long as they meet
certain conditions. Theseconditions are:
1. The agreement must lower trade barriers within the regional group.
2. The agreement cannot raise trade barriers against non-participating members.
49

3. The agreement is supposed to cover substantially all trade among the RTA partners.
In reality, RTA participants do not meet all these conditions very often, the trade coverage of many RTAs
is incomplete with many
sensitivesectors exempted from trade liberalization.
The focus of debate shifts from the immediate consequences of regionalism for the economic welfare
of the integrating partners to the questions of whether the regionalism integration sets up forces that
encourage or discourage evolution towards globally freer trade. The EU is the only RTA that is both big
enough to affect the multilateral system and long-enough lived to have currently observable consequences.
However, the EU does not accept the hypothesis that one act of regionalism necessary leads to the collapse
of the multilateral system.
RTAs are a reality and will not go away. What is needed is to ensure that RTAs conform to WTO rules as
far as possible.

MODULE-3
TRENDS IN WORLD TRADE, WTO AND DEVELOPING COUNTRIES
A. RECENT TRENDS IN GLOBAL TRADE
International trade plays very important role in economic development The global economy has grown
continuously since the Second World War. Global growth has been accompanied by rise in global trade and a
change in the pattern of trade, which reflects ongoing changes in structure of the global economy.

The past few decades have seen important changes in trends and pattern of global trade In recent years, the
expansion in trade is mostly in non commodity exports, especially of high-technology products such as
computers and electronics. It is also characterized by growing regional concentration and an ongoing shift of
technology content. The following trends highlights the changing trends in global trade.
1. Expansion in global trade:
World trade has grown steadily since World War II, with the expansion accelerating over the past decade.
The world merchandise exports have increased from US $ 3395.4 billion in 1990 to US $ 15763.3 billion in
2008, i.e. by 4.6 times, and it has fallen to US $ 12177.6 billion in 2009 due to financiall crisis. The same trend
is seen with respect to developed and developing countries. The merchandise exports of developed countries
have risen from US $ 2496.6 billion in 1990 to US $ 9044.7 billion in 2008 i.e. by 3.6 times, but fell to US $
7019.4 billion in 2009. The merchandise exports of developing countries increased from US $ 793.4 billion in
50

1990 to US $ 6015.9 billion in 2008 i.e. by 7.6 times, but declined to US $ 4706.7 billion in 2009. This is shown
in the following table 1.
Table .1 : World Merchandise Exports (US $ billion)
Year
World
.Developed Countries .Developing Countries
1990
3395.4
2496.6
793.4
1995
5017.7
3536.2
1284.0
2000
6277.2
4212.4
1919.1
2008
15763.3
9044.7
6015.9
2009
J2177.6
7019.4
4706.7
The following factors are responsible for expansion in global trade.
1. The rise of emerging market economies (EMEs) as systemically important trading partners.
2. The growing importance of regional trade.
3. The shift of higher technology exports toward dynamic EMEs; (iv) the growing role of global supply
chains.
4. The rising trade liberalization since the early 1950s.
5. Decline in shipping, transportation and communication costs.
2. Growth in Merchandise trade:
During the period 1999-2009, the average annual growth of merchandise trade in volume (real terms) in the
world was 9.6 percent. The average annual growth of merchandise trade was below the world average in high
income countries (8.1 per cent) and the European Union (9.1 per cent). On the other hand, it was above the
world average in low- and middle-income countries (14.6 per cent). China experienced an average annual
growth of 21.9 percent in merchandise trade during 1999-2009, while India had 17.2 per cent annual average
growth in merchandise trade in the same period.
The leading Exporters and Importers in Merchandise trade in 2010 is shown in Table 2.
Table 2 : Leading Exporters and Importer in Merchandise Trade in 2010
Rank Exporters Value(in US Share Rank Importers Value(in US $
Share
$ billion)
(%)
billion)
(%)
1
China
1578
10.4
2
US
1278
8.4
3
Germany
1269
8.3
4
Japan
770
5.1
20
India
216
1.4
Source: World Trade Report 2011, WTO

1
2
3
4
13

US
China
Germany
Japan
India

1968
1395
1067
693
323

12.8
9.1
6.9
4.5
2.1

If we ignore trade between the 27 European Union members and treat the EU as a single entity, the leading
exporters were the European Union (US $ I. 79 trillion, or 15 per cent of the total), China (13 per cent), the
United States (II per cent), Japan (6.5 per cent) and the Republic of Korea (4 per cent).
51

The top importers excluding trade within the EU were the European Union (US $ 1.98 trillion or 16.5 per cent
of world imports), the United States (16 per cent), China (12 per cent), Japan (6 per cent) and die Republic of
Korea (US $ 425 billion, 3.5 per cent).
3. Trade between high income economies and low-and middle income economies:
Developing economies are becoming increasingly important in the global trading system. Since the early 1990s
trade between high-income economies and low- and middle-income economies has grown faster than trade
among high-income economies. The trade among low- and middle-income economies (i.e. developing countries)
accounted for about 9.2 % of the world's merchandise trade in 2009, compared with 4.5% in 1996. The share of
trade from low- and middle income economies to high-income economies increased from 14.1 per cent in 1996
to 19.7 per cent in 2009.

Trade flows between high-income and low- and middle-income economies reflect the changing mix of exports
to and imports from developing economies. While food and primary commodities have continued to fall as a
share of high-income economies'- imports, manufactures as a share of
goods imports trom both low- and middle-income economies have grown. And trade between developing
economies has grown substantially over the past decade, a result of their increasing share of world output and
liberalization of trade.
Low-income economies specialize in labor-intensive sectors, but their share in the global market of labor
intensive products is very small. Lower middle income economies provided most of the textiles, clothing, and
footwear traded globally in 2009. High-income economies accounted for the majority of trade in agricultural
products and manufactured goods.
4. Rising importance of developing countries in global trade:
Developing economies are an increasingly important part of the global trading system. Their share of world
trade rose from 15 percent in 1990 to 30 percent in 2009. Developing economies' share of world exports is
continuing a rising trend from 19 percent in 2000 to 27 percent in 2009. It is observed that developing countries
are increasingly becoming an important destination for the exports of developed countries.
5. Trade in services:
Trade in services makes up 22 percent of world Trade in 2010, up from 20 percent in 2000. In developing
economies the nominal value of trade in services grew 16 percent a year over 2000-09, doubling the rate of
growth over 1990-2000. It has surpassed that of high-income economies, which grew at 11 percent a year over
2000-09.
The leading exporters in world trade in commercial services in 2010 are US, Germany, UK and China and the
leading importers in world trade in services in 2010 are US followed by Germany, China, and UK. India ranks
tenth in exports and 7th in imports.
The leading Exporters and Importers in World Trade in Commercial Services in 2010 is shown in Table 3.

52

Table 3 : Leading Exporters and Importer in World Trade in Commercial Services in 2010
Rank Exporters Value(in US Share Rank Importers Value(in US $
Share
$ billion)
(%)
billion)
(%)
1
US
2
Germany
3
UK
4
China
10
India
Source: World Trade

515
14.1
230
6.3
227 _
6.2
170
4.6
110
3.0
Report 2011, WTO

1
2
3
4
7

US
Germany
China
UK
India

358
256
192
156
117

10.2
7.3
5.5
4.5
3.3

6. Terms of trade of developing and transition economies:

The large terms-of-trade fluctuations of the past few years have had large effects on national income and the
balance of trade of many economies. Countries lacking the means (such as adequate foreign-exchange reserves
or stabilization funds) to cope with swings of this magnitude tend to suffer adverse long-term growth
consequences because of the macroeconomic volatility caused by these shocks.

B. TRENDS IN GLOBAL TRADE DURING THE FINANCIAL CRISIS AND THE POST
CRISIS
The financiall crisis that struck high-income economies in 2008 reached low- and middle-income economies in
2009. Th low income group countries and developing countries recovered much faster after the financial crisis
than the rich and developed countries The changing trends during the financial crisis and post financial crisis
can be discussed as below:
World exports of goods and services fell 20 percent, from $ 19.6 trillion in 2008 to $ 15.6 trillion in
2009, more in high-income economies and somewhat less in low- and middle-income economies.
Imports of goods and services by high-income economies fell 22 percent, from $ 14.0 trillion in 2008
to $ 10.9 trillion in 2009; imports by low and middle income economies fell 19 percent. World trade
had declined by more than 11 per cent in 2009.
The global output grew by 3.6 per cent in 2010 and it was accompanied by expansion of the worldwide
volume of exports and imports of goods and services. The turnaround in trade took place in mid2009. The recovery was particularly strong between mid-2009 and mid-2010 when the trade
volume increased at an annualized rate of nearly 20 per cent. World trade recorded its largest ever
annual increase in 2010 as merchandise exports surged 14.5 per cent, Since then, however, world trade
growth has lost steam along with the slowdown in the recovery of the world economy.
53

Both trade and output grew faster in developing economies than in developed ones in 2010.
Exports in volume terms ( in real terms) were up 13 percent in developed economies while the increase
for developing economies was nearly 17 per cent. The difference between trade of developed and
developing economies was even greater on the import side, where developed economies' imports rose
by 11 per cent compared with 18 per cent in the rest of the world.
Developing countries have been leading the recovery in international trade in 2010, in line with
the stronger expansion of their economies. By September 2010, the trade volume of this group as a
whole had already surpassed the pre-crisis peak of April 2008 by 7 per cent, owing in particular to
strong trade growth in developing Asia. At the same time, trade by developed economies was still 9
per cent below the pre-crisis peak. As a result, the developing countries' share in global trade increased
from about one third to more than 40 per cent-between 2008 and 2010.
World trade in services has been severely hit by the financial and economic crisis. It is presumed
to have recovered during 2010.UNCTAD data indicate that the value of international trade in services
fell by 12 per cent in. 2009. But it was less than the 23 per cent decline in merchandise trade during the
same year. The weaker downturn in services trade during the global crisis could reflect a lesser
dependence on intermediate inputs as much as a lesser reliance on trade finance of certain services
sectors like communications. During 2009, international trade in services decreased by 13 per cent in
developed countries, by 10 per cent in developing countries and by 17 per cent in the economies in
transition. The worst performance of the economies in transition reflects a greater contraction in
all services sectors, but especially those related to construction, travel and transportation.
Primary commodity prices have fluctuated strongly compared with prices of manufactures in 2009 and
2010. As a result, countries specializing in exports of primary commodities and those with high
shares of imports of energy, food and industrial raw materials have had large swings in their
terms of trade.
During 2010, the terms of trade of the fuel exporters and exporters of minerals and mining products
improved significantly along with rebounding commodity prices, but remained below the peaks
reached in 2008 and 2007, respectively. On the other hand, exporters of manufactures saw part of
the gains in their terms of trade.
In 2010, exporters of agricultural products experienced an increase in the unit prices of both their
exports and imports but, on balance, saw a modest improvement in their terms of trade. The countries
that are net food importers and that do not export oil or mining products on a significant scale
suffered a slight deterioration in their terms of trade during 2010..
The economies in transition, Africa, Western Asia and Latin America and the Caribbean saw a
significant rebound in their terms of trade in 2010.. They had suffered important losses in 2009
following trends in primary commodity prices.
The predominantly manufactured exports in East and South Asia, in contrast, saw stagnant or
slightly declining terms of trade in 2010. They had a modest improvement during the global
recession in 2009. Similarly, developed countries saw little movement, on average, in their terms of
trade.
Trade imbalances Of leading economies widened in 2010, as exports and imports bounced back
from their depressed levels of 2009. However, for most countries the gap between exports and
imports was smaller after the crisis than before.
54

The trade deficit of US for the year 2010 increased 26 per cent compared with 2009. However, the
2010 deficit of roughly US $ 690 billion was 22 per cent less than.the corresponding deficit of US $
882 billion in 2008.
China's merchandise trade surplus for 2010 totalled US $ 183 billion, roughly 7 per cent less than
the US $ 196 billion it recorded in 2009, and 39 per cent less than the nearly US $ 300 billion
surplus of 2008.
The European Union had a trade deficit with the rest of the world of US$ 190 billion in 2010,
which was up 26 per cent from 2009 but down 49 per cent from the US$ 375 billion it recorded in
2008.
Japan was an exception to the trend towards smaller trade deficits/surpluses after the financial
crisis . In 2008 the country recorded a US$ 19 billion surplus of exports over imports, but this nearly
quadrupled to US$ 77 billion in 2010.

C. CHANGING PATTERNS OF GLOBAL TRADE

The world trade has grown steadily since World War II. As a share of global output, trade is now at almost three
times the level in the early 1950s. A large part of it is dlriven by the integration of rapidly growing emerging
market economies (EMEs). The expansion in trade is mostly accounted for by the growth in non-commodity
exports, especially of high-technology products such as computers and electronics. These developments in
global trade are changing the global trade patterns. According to IMF studies, the following patterns in global
trade is observed :
1. Emergence of new players in global trade:Emerging market economies have moved from peripheral
players to major centers of global trade. In the early 1970s, trade was largely confined to a handful of advanced
economies, notably the United States, Germany, arid Japan. They together accounted for more than a third of
global trade in the early 1970s. By 1990, the global trading landscape had become more diversified to include
several EMEs, especially in East Asia. By 2010, China became the second largest trading partner after the
United States, overtaking Germany and Japan.
2. The structure of trade: The structure of trade has been characterized by a rising share of higher technology
goods. The contribution of high-technology and medium-high-technology exports such as machinery and
transport equipment increased, whereas that of lower technology products such as textiles declined. Technology
-intensive export structures generally offer better prospects for future economic growth. Trade in hightechnology products tends to grow faster than average, and has larger spillover effects on skills and knowledge
intensive activities.
3. Growing Trade Interconnectedness: Growth in trade interconnectedness has increased the cross-border
transmission of shocks through the trade channel.
The IMF study shows the following important trends underlying the global trade network during 1999 and
55

2009.

There has been a marked shift in the relative rankings of individual countries, with China moving to first
place in 2009 up from ninth in 1999.

China has emerged as a major systemically important trading center 'along with the United States,
gaining prominence not only in terms of size but also by increasing the number of its significant trading
partners.
There has been a marked shift in the roles of China and Japan as strategic export destinations, with
China surpassing Japan as a more significant regional and. global consumer.
European countries have retained their importance as "central" in the global trade network, owing more
to their interconnectedness than size.
4. Strong interconnectedness between trade and financial sectors: There is strong overlap
between countries with trade and financial sectors of systemic importance. The IMF study shows there is an
almost perfect overlap between the top 25 jurisdictions with systemic financial sectors and the top 25
jurisdictions with systemic trade sectors in 2009. The only exceptions are Luxembourg and Ireland, whose
systemic importance is limited only to the financial sector, and Malaysia and Thailand, whose systemic
importance is limited only to the trade sector.
5. The Growing Role of Global Supply Chains: It has been observed countries that are part of a global supply
chain are expected to have a higher share of imported content in their exports because their exports rely on
importing intermediate inputs from other supply chain partners.
6.Change in Technology composition of Exporters : Changes in the technology composition of exports
confirm the rise of merging markets in global trade in high-technology products. Between 1995 and 2008, the
contribution of high-technology exports to overall export growth was more than 30 percent for China, compared
with 26 percent for the United States, 17 percent for Germany, and only 11 percent for Japan. However,
adjusting exports to exclude foreign content and show more clearly the domestic content of exports yields a
somewhat different picture. In (his case the contribution of high-technology exports to overall export growth is
now much lower in China (24 percent), whereas that of the United States rises to 29 percent and Germany to 20
percent.
7. Rising uniformity in Exports: Export structures of EMEs are becoming increasingly similar to those of
advanced economies. As China and other EMEs increasing their presence in sectors traditionally dominated by
advanced countries, the similarity in export structures has increased. This has increased the competitive pressure.
8. The impact of relative price change: The emergence of global supply chains is likely to change the way
trade responds to relative price changes. Higher imported content in exports is likely to lower the sensitivity of
trade to changes in the exchange rate. For instance an appreciation of the domestic currency against all trading
partners implies that while exports become more expensive, imported intermediates also become cheaper,
mitigating the impact of relative price changes on trade. Advanced countries whose exports tend to be
concentrated in medium-high-technology goods are therefore likely to be more sensitive to relative price
changes because of higher domestic value added (DVA), whereas those of EMEs are likely to be less sensitive.
7. Changes in global order : The integration of rapidly growing EMEs is likely to induce a gradual shift in the
sources of global demand away from advanced economies to EMEs. Since China has overtaken Japan as the
second largest economy in the world in 2010, East Asian countries are likely to emerge as the largest trading
bloc by 2015, surpassing NAFTA and the Euro area.
56

The global trade has changed over the past few decades. It has lead to increased interconnectedness and
strengthened trade new trade relations. The numbers of new key players has increased, but there has been a
shift in their importance in global Trade. The relative importance has changed from advanced economies such
as Japan and the United Kingdom to EMEs like China and India.The growing role of global supply chains is
associated with increased in interconnectedness. There is also strong interconnectedness between trade and
financial centers.

D.CONTENTIOUS ISSUES
On January 1ST 1995 GAAT was transformed into
the World Trade Organisation(WTO) This transformation
turned GATT from a trade agreement into a membership organization responsible for governing the contract of
trade relations among its members. The WTO
s work is not confirmed to specific agreements with specific
obligations. Member countries also discuss a range of other issue in Ministerial conferences, committees or
working groups. Some are old and some are new to the GATT-WTO system. The issues become contentious
due to disagreement between, mainly, developed and developing countries. They cover a wide range of subjects
including trade and investment, competition policy, transparency in government procurement, trade facilitation,
trade and labour standards, trade and environment, and electronic commerce. Some of the issues are discussed
below:
1. The Environment: The WTO has no specific agreement dealing with environment However, a number of
WTO agreements include provisions dealing with environment concerns. In the recent years there is an
increased emphasis on environmental policies. At the end of the Uruguay Round in 1994, trade ministers
from participating countries decided to begin a comprehensive work programme on trade and environmental
in the WTO. They created the Trade and Environment Committee. This has brought environmental and
sustainable development issues into the mainstream of WTO work.
When the issue is not covered by an environmental agreement, WTO rules apply. The WTO agreements are
interpreted to say two important things. First, trade restrictions cannot be imposed on a product purely
because of the way it has been produced. Second, one country cannot reach out beyond its own territory to
impose its standards on another.
A number of developing countries are worried that certain hazardous or toxic products are being exported to
their markets without them being fully informed about the environmental or public health dangers the
products may pose.
Developing countries want to be fully informed so as to be in a position to decide whether or not to import
them.
2. Investment and Competition: The Ministerial Conferences in Singapore in 1996 decided to set up Two
Working Groups to look at how trade relates to investment and competition policies. The working groups
tasks were analytical and exploratory. They are not to negotiate new rules or commitments without a clear
consensus.
3. Transparency in Government purchases: The WTO has an Agreement on Government Procurement. It
is plurilateral i.e. only some WTO members have signed it so far. The agreement covers such issues as
transparency and non-discrimination.
57

The first phase of the group

s work was to study transparency in government procurement practices, taking
into account national policies. The second phase was to develop elements for inclusion in an agreement.
4. Trade facilitations: Cutting red-tape at the point where goods enter a country and providing easier access to
this kind of information are two ways of
facilitatingtrade.
The 1966 Singapore Ministerial Conference has instructed the WTO Goods Council to start exploratory and
analytical work on the simplification of trade procedures in order to assess the scope of WTO rules in this
area.
5. Electronic Commerce: This area of trade involves goods crossing borders electronically. The most obvious
examples of products distributed electronically are books, music and videos transmitted down telephone
lines or through the internet.
The Second Ministerial Conference in Geneva in 1998 urged the WTO General Council to establish a
comprehensive work programme to examine all trade-related issues arising from global electronic commerce.
The General Council has adopted the plan for this work programme. In the meantime, WTO members have
agreed to continue their current practice of not imposing customs duties on electronic transmissions.
6. Labour Standards: This is the most controversial issue discussed so extensively in the WTO. It is
concerned with core labour standards
, that is, essential standards applied to the way workers are treated.
The term covers a wide range of things from use of child labour and forced labour, to the right to organize
trade unions and to strike.
At the Singapore Conference in 1996, WTO members have identified the International Labour Organization
(ILO) as the competent body to deal with labour standards. There is currently no work on the subject in the
WTO. The WTO agreements do not deal with any core labour standards.
7. TRIPs:
The WTO
s Agreement on Trade Related Aspects of Intellectual Property Rights (TRIPs) introduced
intellectual property rules into the multilateral trading system for the first time.
Inspite of its possible benefits, it is generally believed that the short-run impact of the TRIPs agreement on
the developing it likely to be negative.
Under TRIPs many countries have been seeking grater flexibility and clarity on the interpretation of the
Agreement on TRIPs in order to ensure affordable access to essential medicines and life saving drugs, in
keeping with the public health concern of developing countries. Developing countries have demanded that
the WTO should ensure that the TRIPs Agreement does not undermine the right of the WTO members to
formulate their own public health policies and adopt measures for providing affordable access to medicines.
The Doha declaration affirms that the TRIPs Agreement can and should be interpreted and implemented in a
manner supportive of WTO members right to project public health and in particular to promote access to
medicines for all.
8. GATS:
The General Agreement on Trade in services (GATs) is the first and only set of multilateral rules governing
international trade in services. It was incorporated in response to the huge growth of the services economy
over the past 30 years and the greater potential for trading services brought about by the communications
revolution.
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The important controversies attached to GATs are:

1) Positive list does not prevent an increase in restrictions on categories that have not been included.
2) The leeway given to governments to specify different types of restrictions according to modes of supply
could create incentives to design restrictions so as to divert

9. TRIMs:
The Trade related Investment Measure (TRIMs) Agreement applies only to measure that affect trade in
goods. Investment decisions exert indirect influences via the industrialization policy, trade policy, employment
policy etc.

The Agreement on TRIMs has been criticized for the following reasons;
1) There is no provision in the agreement to deal with the restrictive business practices of foreign investors.
2) The provisions of the TRIMs agreement, when applied to developing countries are likely undermining
the strategy of self-reliant growth based on technology, capital goods, etc.
While reviewing the implementation of the agreement on TRIMs developed countries are bound to make
attempts to extend the frontiers of TRIMs prohibited in the list of the agreement.

E. AGRICULTURE AND MARKET ACCESS

Introduction: Before the conclusion of the Uruguay Round, multilateral discipline did not govern trade in
agricultural products, and the agricultural sector remained one of the most protected in several industrial
countries. Farm price supports and quantitative restrictions resulted in the production of large surpluses which
were exported with heavy subsidies, thereby depressing international prices. Some developing countries have
also pursued distortional policies toward this sector.

Agreement on Agriculture: The Uruguay Round Agreement on Agriculture aims to establish a marketoriented agricultural trading system. A reform process should be initiated for this through negotiation of
commitments on support and protection and through the establishment of strengthened and more operational
rules especially through three types of measures, viz.
The elimination of non-tariff border measures such as quantitative restrictions and variables levies,
minimum market access commitments, and
Reduction of subsidies.
The main features of the agreement on agriculture relate to improving transparency and market access, and
reducing export subsidies and domestic support. Distinctions are also made between the commitments required
of developed and developing countries. A significant achievement of the Uruguay Round is to arrive at an
agreement to reduce export subsidies and domestic support to agriculture.
Domestic policies that have a direct effect on production and trade have to be cut back. Developed countries
agreed to reduce the domestic support by 20% over 6 years starting in 1995. Developing countries agreed to
make 13% cut over 10 years. Least-developed countries do not need to make any cuts.
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There are three types of provisions in the Agreement which are related to agriculture. They are:
1. Trade in agricultural goods,
2. Agricultural policies which have a bearing on trade and
3. Patenting of seed plants and micro organisms.

Market access to Agriculture and provisions under WTO: In many cases, tariffs were the only
form of protection for agricultural products before the Uruguay Round - the Round led to the "binding" in the
WTO of a maximum level for these tariffs. For many other products, however, market access restrictions
involved non-tariff barriers. On the market access to Agriculture, the Uruguay Round resulted in a key systemic
change: the switch from a situation where a myriad of non-tariff measures impeded agricultural trade flows to a
regime of bound tariff-only protection plus reduction commitments.
The key aspects of this fundamental change have been to stimulate investment, production and trade in
agriculture by
(i)
Making agricultural market access conditions more transparent, predictable and competitive,
(ii)
Establishing or strengthening the link between national and international agricultural markets, and thus
(iii)
Relying more prominently on the market for guiding scarce resources into their most productive uses
both within the agricultural sector and economy-wide.
The important provisions under WTO agreement on agriculture are mentioned below:
1.Tarrification : The Uruguay Round negotiations aimed to remove barriers to agricultural trade. For this
purpose, a "tariffication" package was agreed which, amongst other things, provided for the replacement of
agriculture-specific non-tariff measures with a tariff which afforded an equivalent level of protection. The
tariffs resulting from the tariffication process account, on average of the developed country Members, for
around one fifth of the total number of agricultural tariff lines. For the developing country Members, this share
is considerably smaller. Following the entry into force of the Agreement on Agriculture, there is now a
prohibition on agriculture-specific non-tariff measures, and the tariffs on virtually all agricultural products
traded internationally are bound in the WTO.
2.Schedule of tariff concessions: Each WTO Member has a "schedule" of tariff concessions covering all
agricultural products. These concessions are an integral part of the results of the Uruguay Round. The schedule
sets out for each individual agricultural product, or, in some cases agricultural products defined more generally,
the maximum tariff that can be applied on imports into the territory of the Member concerned. The tariffs in the
schedules include those that resulted from the tariffication process, which, in many cases, are considerably
higher than industrial tariffs, reflecting the incidence of agriculture specific non-tariff measures prior to the
WTO. Many developing countries have bound their previously unbound tariffs at "ceiling" levels, i.e. at levels
higher than the applied rates prior to the WTO.
Developed country Members have agreed to reduce, over a six-year period beginning in 1995, their tariffs by 36
per cent on average of all agricultural products, with a minimum cut of 15 per cent for any product. For
developing countries, the cuts are 24 and 10 per cent, respectively, to be implemented over ten years. Those
developing country Members which bound tariffs at ceiling levels did not, in many cases, undertake reduction
commitments. Least-developed country Members were required to bind all agricultural tariffs, but not to
undertake tariff reductions .
3.Tariff quota commitments and minimum access opportunities :As part of the tariffication package, WTO
Members were required to maintain, for tariffied products, current import access opportunities at levels
corresponding to those existing during the 1986-88 base period. Where such "current" access had been less than
5 per cent of domestic consumption of the product in question in the base period, an (additional) minimum
access opportunity had to be opened on a most-favoured-nation basis. This was to ensure that in 1995, current
and minimum access opportunities combined represented at least 3 per cent of base period consumption and are
60

progressively expanded to reach 5 per cent of that consumption in the year 2000 (developed country Members)
or 2004 (developing country Members), respectively.
The current and minimum access opportunities are generally implemented in the form of tariff quotas. In case
of minimum access, the applicable duty was required to be low or minimal, low that is either in absolute terms
or, at least, in relation to the "normal" ordinary customs duty that applies to any imports outside the tariff quota
In total, there are 1,374 individual tariff quotas. These tariff quotas constitute binding commitments as opposed
to autonomous tariff quotas which Members may establish at any time, for example, in order to stabilize the
domestic price after a poor harvest.
4. The prohibition of non-tariff barrier measures: Article 4.2 of the Agreement on Agriculture prohibits the
use of agriculture specific non-tariff measures. Such measures include quantitative import restrictions, variable
import levies, minimum import prices, discretionary import licensing procedures, voluntary export restraint
agreements and non-tariff measures maintained through state-trading enterprises. All similar border measures
other than "normal customs duties" are also no longer permitted.
5. Special treatment : The Agreement on Agriculture contains a "special treatment" clause under which four
countries were permitted, subject to strictly circumscribed conditions, to maintain non-tariff border measures on
certain products during the period of tariff reductions (with the possibility of extending the special treatment,
subject to further negotiations). As one of the conditions, market access in the form of progressively increasing
import quotas has to be provided for the products concerned. The products and countries concerned are: rice in
the case of Japan, Korea and the Philippines; and cheese and sheep meat in the case of Israel. As of 1 April
1999, Japan has ceased to apply special treatment.
6. The special safeguard provisions: As a third element of the tariffication package, Members have the right to
invoke for tariffied products the special safeguard provisions of the Agreement on Agriculture (Article 5),
provided that a reservation to this effect ("SSG") appears beside the products concerned in the relevant
Member's schedule. The right make use of the special safeguard provisions has been reserved by 38 Members,
and for a limited number of products in each case. The special safeguard provisions allow the imposition of an
additional tariff where certain criteria are met. The criteria involve either a specified surge in imports (volume
trigger), or, on a shipment by shipment basis, a fall of the import price below a specified reference price (price
trigger). In case of the volume trigger, the higher duties only apply until the end of the year in question. In case
of the price trigger, any additional duty can only be imposed on the shipment concerned. The additional duties
cannot be applied to imports taking place within tariff quotas.
7. Notification obligations: The bound agricultural tariffs and the tariff quota commitments are contained in
Members' schedules. There is no requirement for Members to notify their tariffs to the Committee on
Agriculture. Applied tariffs are, however, to be submitted to other bodies of the WTO, including the Committee
on Market Access and in the context of the Trade Policy Review mechanism. Members with tariff quotas and
the right to use the special safeguard provisions are required to make both ad hoc and annual notifications to the
Committee on Agriculture. At the beginning of the implementation period, an "up-front" notification was due,
setting out how each tariff quota is to be administered.
Members with the right to use the special safeguard provisions must notify its first use in order to allow its
trading partners to establish the parameters of the special safeguard action, such as the volume or price used to
trigger the special safeguard action. In the case of the price trigger, an upfront notification of the relevant
reference prices has also been possible. In addition, an annual summary notification of the use of the special
safeguard is required.

F. TRADE AND ENVIRONMENTAL ISSUES

Introduction: Sustainable development and protection and preservation of the environment are fundamental
goals of the WTO. They are enshrined in the Marrakesh Agreement, which established the WTO, and
complement the WTO
s objective to reduce trade barriers and eliminate discriminatory treatment in international
61

trade relations. While there is no specific agreement dealing with the environment, under WTO rules
members can adopt trade-related measures aimed at protecting the environment provided a number of
conditions to avoid the misuse of such measures for protectionist ends are fulfilled.
The WTO contributes to protection and preservation of the environment through its objective of trade
openness, through its rules and enforcement mechanism, through work in different WTO bodies, and
through ongoing efforts under the Doha Development Agenda. The Doha Agenda includes specific
negotiations on trade and environment and some tasks assigned to the regular Trade and Environment
Committee.

Sustainable development and environmental protection: Allowing for the optimal use of the world
s resources in accordance with the objective of sustainable development and seeking to protect and preserve
the environment are fundamental to the WTO. These goals, enshrined in the Preamble of the Marrakesh
Agreement, go hand in hand with the WTO
s objective to reduce trade barriers and eliminate discriminatory
treatment in international trade relations. For WTO members, the aims of upholding and safeguarding an open
and non-discriminatory multilateral trading system, on the one hand, and acting for the protection of the
environment and the promotion of sustainable development, on the other, can and must be mutually supportive.

Trade liberalization and the environment: An important element of the WTO

s contribution to
sustainable development and protection of the environment comes in the form of furthering trade opening in
goods and services to promote economic development, and by providing stable and predictable conditions
that enhance the possibility of innovation. This promotes the efficient allocation of resources, economic
growth and increased income levels that in turn provide additional possibilities for protecting the environment.

WTO rules and environmental protection: The commitment of WTO members to sustainable
development and the environment can also be seen in WTO rules. In general terms the rules, with their
fundamental principles of non-discrimination, transparency and predictability, help set the framework
for members to design and implement measures to address environmental concerns. Moreover, WTO rules,
including specialized agreements such as the Agreement on Technical Barriers to trade and the agreement
of Sanitary and Phytos sanitary measures, provide scope for environmental objectives to be followed and for
necessary trade-related measures to be adopted. WTO rules set up the appropriate balance between the right of
members to take regulatory measures, including trade restrictions, to achieve legitimate policy objectives (e.g.,
protection of human, animal or plant life or health, and natural resources) and the rights of other members under
basic trade disciplines.

WTO Dispute settlement body and environment related trade measures: Since the entry into
force of the WTO in 1995, the WTO Dispute Settlement Body has had to deal with a number of disputes
concerning environment-related trade measures. Such measures have sought to achieve a variety of policy
objectives.

WTO institutions of trade and environment linkages: The WTO also supports sustainable
development and the environment through its specialized committees and bodies. One unique institutional
venue is the Committee on trade and environment (CTE). As a forum for dialogue on trade and the
environment, the Committee is an incubator for ideas on how to move the discussion forward. Already, this is
bearing fruit. Some issues first raised in the CTE have become fully-fledged negotiations for instance, on
fisheries subsidies and on the relationship between the WTO and multilateral environmental agreements
(MEAs). Other WTO bodies are also important. For example, the committee administering the Technical (which
deals with regulations, standards, testing and certification procedures) is where governments share information
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on actions they are taking and discuss how some environmental regulations may affect trade.

International efforts on the environment:Since environmental problems often transcend national

borders, the response must involve concerted action at the international level. WTO members have long
recognized the need for coherence amongst international institutions in addressing global environmental
challenges. The current negotiations on the WTO-MEA relationship provide a unique opportunity for creating
positive synergies between the trade and environment agendas at the international level. In addition, there is
regular and routine contact between the WTO Secretariat and secretariats of multilateral environmental
agreements.

The Doha Development Agenda and the environment:The Doha round negotiations gives
members a chance to achieve an even more efficient allocation of resources on a global scale through the
continued reduction of obstacles to trade. The Round is also an opportunity to pursue win-win-win results for
trade, development and the environment. For example, the Doha Round is the first time environmental issues
have featured explicitly in the context of a multilateral trade negotiation and the overarching objective is to
enhance the mutual supportiveness of trade and environment. Members are working to liberalize trade in goods
and services that can benefit the environment. They are also discussing ways to maintain a harmonious coexistence between WTO rules and the specific trade obligations in various agreements that have been negotiated
multilaterally to protect the environment. Other parts of the Doha negotiations are also relevant to the
environment, for example aspects of the agriculture negotiations and also disciplines on fisheries subsidies. The
Doha Development Agenda also has a section specifying the priority items in the CTE
s regular work.

Situation after Doha round:

1. Greater market openings for environmental goods and services :As part of the Doha mandate, the
WTO members agreed to negotiate greater market opening in environmental goods and services, the
relationship between WTO rules and trade obligations set out in multilateral environmental agreements
(MEAs) and on the exchange of information between those institutions. Agreement in these areas would
undoubtedly help address climate change.
2.

A more open market for environmental goods and services: The elimination or reduction of barriers to
trade in this area will benefit the environment by improving countriesability to obtain high quality
environmental goods. It will facilitate access to these types of goods and foster a better dissemination of
environmental technologies at lower costs. According to a recent World Bank study on trade and climate
change, elimination of both tariffs and non-tariff barriers to clean technologies could result in a 14%
increase in trade in these products.The goods which fall within a broad range of environmental categories,
are air pollution control, renewable energy, waste management and water and wastewater treatment. Some
of these products are also relevant to climate change mitigation. They include products generating
renewable energy such as wind and hydropower turbines, solar water heaters. Members are also
considering issues related to non-tariff barriers, transfer of technology, special and differential treatment.

3. More coherence between trade and environment rules :To bring more coherence between trade and
environment rules, members have made a number of proposals highlighting the importance of national
coordination between trade and environment experts, particularly in the context of the negotiation and
implementation of MEAs. Proposals have also underscored the value of national experience-sharing in this
area, which can enhance the mutually supportive relationship of the trade and environment regimes.
4. Better cooperation between the WTO and MEAs :There is a strong support for consolidating some
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practices and mechanisms for co-operation between the WTO and the MEAs. Concrete suggestions have
been made regarding information exchange sessions with MEAs possibly through annual sessions,
document exchange and future collaboration in the context of technical assistance and capacity building
activities. The proposals set out criteria that could guide WTO committees in their consideration of
requests for observer status by MEAs.
5. Fisheries subsidies: Reducing fisheries subsidies is also part of the Doha mandate and could significantly
reduce overfishing which fosters species preservation. Members agreed to eliminate subsidies that distort
trade and seriously undermine the sustainable exploitation of fish stocks. Members are currently discussing
how this reduction could be defined and applied. An agreement would constitute a triple-win for trade,
environment and development which is at the centre of this negotiation.

G. DISPUTE SETTLEMENT MECHANISM

Dispute settlement is the central pillar of the multilateral trading system. The WTO
s unique contribution to the
stability of the global economy is its dispute settlement mechanism. Without a means of settling disputes, the
rules-based system would be less effective because the rules-based system would be less effective because the
rules could not be enforced. The WTO
s procedure makes the trading system more secure and predictable. The
system is based on clearly defined rules, with timetables for completing a case. The priority is to settle disputes,
through consultations if possible.
Disputes in the WTO are essentially about broken promises. A dispute arises when one country adopts a trade
policy measure or takes some action that one or more fellow WTO members considers to be breaking the WTO
agreements, or to be a failure to live up to the obligation. A third group of countries can declare that they have
an interest in the case and enjoy some rights.
Settling Disputes
Settling disputes is the responsibility of the Dispute Settlement Body (the General Council in another guise).
The Dispute Settlement Body has the sole authority to establish
panels of experts to consider the case, and to
accept or reject the panels finding or the results of an appeal.
It monitors the implementation of the rulings and recommendations and has the power to authorize retaliation
when a country does not comply with a ruling. The dispute settlement involves various stages.
First stage: Consultation
Before taking any other actions the countries in dispute have to talk to each other to see if they can settle their
differences by themselves.
Second Stage: The Panel
If consultations fail, the complaining country can ask for a panel to be appointed. The country
in the dockcan
block the creation of a panel once, but when the Dispute Settlement Body meets for a second time, the
appointment can no longer be blocked.
The panel
s final report should normally be given to the parties to the dispute within 6 months and in case of
urgency within 3 months.
The agreement describes in some detail how the panels are to work. The main stages are:
1) Before the first hearing: Each side in the dispute presents its case in writing to the panel.
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2) First hearing: the case for the complaining country and defence : The complaining country (or countries),
the responding country, and those that have announced they have an interest in the dispute, make their case at
the panel
s first hearing.
3) Rebuttals (disapprovals): The countries involved submit written rebuttals and present oral arguments at eh
panel
s second meeting.
4) Experts: If one side raises scientific or other technical matters, the panel may consult experts or appoint an
expert review group to prepare and advisory report.
5) First Draft: The panel submits the descriptive (factual and argument) sections of its report to the two sides,
giving them two weeks to comment. This report does not include findings and conclusions.
6) Interim Report: The panel then submits an interim report; including its findings and conclusions, to the two
sides, giving them one week to ask for a view.
7) Review: The period of review must not exceed two weeks. During that time, the panel may hold additional
meetings with the two sides.
8) Final Report: A final report is submitted to the two sides and three weeks later, it is circulated to all WTO
members.
If the panel decides that the disputed trade measure does break a WTO agreement or an obligation, it
recommends that the measures be made to confirm with WTO rules. The panel may suggest how this could be
done.
9) The Report Becomes a Ruling: The report becomes the Dispute Settlement Body
s ruling or
recommendation within 60 days unless a consensus rejects it. Both sides can appeal the report (and in some
cases both sides do).
Third Stage: The Appeals
Either side can appeal a panel
s ruling. Sometimes both sides do so. Appeals have to be based on points of law
such as legal interpretation they cannot reexamine evidence or examine new issues.
Each appeal is heard by three members of a permanent seven-member Appellate Body set up by the Dispute
Settlement Body and broadly representing the range of WTO membership.
The appeal can uphold, modify or reverse the panel
s legal findings and conclusions. Normally appeals should
not last more than 60 days, with an absolute maximum of 90 days.
The Dispute Settlement Body has to accept or reject the appeals report within 30 days and rejection is only
possible by consensus.
The Procedure after the case has been decided:
If a country has done something wrong, it should swiftly correct its fault. It must state is intension to do so at a
Dispute Settlement Body meeting held within 30 days of the report
s adoption. It it fails to act within this period
it has to enter into negotiations with the complaining country (or countries) in order to determine mutually
acceptable compensation.
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If after 20 days, no satisfactory compensation is agreed, the complaining side may ask the Dispute Settlement
Body for permission to impose limited trade sanctions against the other side. The Dispute Settlement Body must
grant this authorization within 30 days of the expiry of the
reasonable period of time unless there is a
consensus against the request. In any case, the Dispute Settlement Body monitors how adopted rulings are
implemented.

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