A key session at the recent Pan Asia conference on India at the Stanford Center for International Development was devoted to “Trade and Regional Integration.”

In this article, we draw upon the conference and the two papers and comment on the wisdom of PTAs.

During the 1990s, as the rest of the world succumbed to the temptation of discriminatory and preferential trade, India and its Asian neighbours remained steadfastly committed to non-discrimination in trade policy.

But lately, like its newly converted neighbours throughout Asia, India too is signing PTA agreements at breakneck speed. Trade economists have been skeptical of PTAs for two key reasons. First, these arrangements remove trade barriers preferentially among member countries, leaving the barriers against non-members intact. Such liberalization leads to “trade diversion”: when India eliminates tariff on imports from Thailand but not China, Thailand can take markets away from China even though its costs of production are higher.

The reason the GATT/WTO system places non-discrimination in trade policy at the centre of the global trading system is that it allows the lowest-cost trading partner to supply a country’s imports of any given product.

Second, once a set of PTAs is in place, the tariff depends on whether the product originated in a PTA partner and if so at what stage implementation is the agreement and what is the rule of origin applicable. This is in contrast to a discrimination-free system in which product origin is irrelevant to the tariff.

During the 1990s, trade economists had repeatedly warned the PTAs would Balkanize the global trade system into a complex web of PTAs with overlapping members and diverse rules. But while winning the intellectual debate, however, they failed to counteract the tide of the PTAs.

... contd.