Trading blocs, intra-regional trade, regional groupings and SAARC

1. Meaning of a trading bloc

A trading bloc (regional trade agreement or regional economic grouping) is an agreement among a group of countries, usually neighbours, to reduce or remove barriers to trade among themselves while keeping their own or common barriers against outsiders. GATT Article XXIV permits customs unions and free trade areas as an exception to most-favoured-nation treatment, provided they cover “substantially all the trade” between members.

2. Types: stages of economic integration

Bela Balassa (The Theory of Economic Integration, 1961) ranked forms of integration by depth:

• A preferential trade agreement, below a free trade area, only lowers (does not remove) tariffs on listed goods — SAPTA was of this kind.
• Free trade area: each member keeps its own tariff against outsiders, so rules of origin are needed to stop goods entering through the lowest-tariff member. Examples: USMCA, SAFTA, the ASEAN Free Trade Area.
• Customs union: MERCOSUR (Argentina, Brazil, Paraguay, Uruguay, 1991), the Southern African Customs Union.
• Common market: the European Economic Community’s single market.
• Economic and monetary union: the European Union with the euro.

3. Major trading blocs

• European Union: from the European Economic Community (Treaty of Rome, 1957) to the EU (Maastricht Treaty, 1992, in force 1993); single market from 1993; euro from 1999; 27 members since the United Kingdom left in 2020.
• USMCA: the United States–Mexico–Canada Agreement replaced the North American Free Trade Agreement (NAFTA, 1994) from 1 July 2020.
• ASEAN: founded at Bangkok in 1967; ten members; ASEAN Free Trade Area from 1992. India has a goods agreement with ASEAN (2009, in force 2010).
• RCEP: the Regional Comprehensive Economic Partnership of ASEAN with China, Japan, Korea, Australia and New Zealand, signed November 2020. India left the negotiations in November 2019, citing the risk of cheap imports from China.
• Others: APEC (a forum, not a binding bloc), the African Continental Free Trade Area, the Gulf Cooperation Council, EFTA.

4. Growing intra-regional trade

A large share of world trade now takes place inside regions. Reasons: lower transport costs between neighbours; regional agreements; regional production networks (East Asian supply chains); cultural closeness; and slow progress in the WTO’s Doha Round, which pushed countries towards regional and bilateral deals.

Effects (Jacob Viner, The Customs Union Issue, 1950): trade creation when cheaper production by a partner replaces costlier home production (gain), and trade diversion when imports switch from a cheaper outside supplier to a costlier partner because of the preference (loss). Blocs also bring larger markets, economies of scale, competition, investment and bargaining power, but they discriminate against outsiders and can split the world into rival blocs.

5. SAARC

The South Asian Association for Regional Cooperation was established by its Charter at Dhaka on 8 December 1985. Members: Bangladesh, Bhutan, India, Maldives, Nepal, Pakistan and Sri Lanka, with Afghanistan admitted in 2007 — eight in all. The Secretariat is in Kathmandu. Decisions are taken unanimously, and bilateral and contentious issues are excluded.

Objectives (Charter, Article I): welfare of the peoples of South Asia, economic growth, social progress and cultural development, collective self-reliance, mutual trust, and cooperation in economic, social, cultural, technical and scientific fields.

Trade arrangements:

• SAPTA (SAARC Preferential Trading Arrangement), signed 1993, in force 1995: tariff concessions on listed products.
• SAFTA (Agreement on South Asian Free Trade Area), signed at Islamabad in January 2004, in force 1 January 2006: phased tariff cuts to 0–5 per cent, with longer timetables and special treatment for the least developed members, and “sensitive lists” of products excluded from cuts.
• The SAARC Agreement on Trade in Services (SATIS, 2010) and the SAARC Development Fund.

6. SAARC’s effect on Indian business

Positive effects

1. Lower tariffs gave Indian manufacturers (vehicles, machinery, pharmaceuticals, textiles, cotton yarn) preferential access to neighbouring markets.
2. India runs a trade surplus with most SAARC members and is the main supplier of many goods to Nepal, Bhutan and Bangladesh.
3. Indian firms invested in the region — Bharti Airtel in Sri Lanka and Bangladesh, Tata in Bangladesh and Nepal, banks and insurers across the region.
4. Transit and connectivity projects (motor vehicle agreements, power trade with Bhutan and Nepal) opened new business.

Limits

1. Intra-SAARC trade remains a small share of the members’ total trade, among the lowest of any regional grouping.
2. Long sensitive lists, non-tariff barriers, poor transport links and slow customs.
3. India–Pakistan hostility: Pakistan did not grant India MFN status, and after 2019 trade between them almost stopped; no SAARC summit has been held since Kathmandu in 2014 (the 2016 Islamabad summit was cancelled).
4. Smaller members fear Indian dominance; similar export baskets (textiles, garments) mean the members compete more than they complement each other.

India has therefore worked through bilateral agreements (with Sri Lanka in 1998, Nepal and Bhutan) and through BIMSTEC (the Bay of Bengal Initiative, 1997, linking South and South-East Asia without Pakistan).

How this is examined

The types-of-blocs essay: definition, Article XXIV in one line, Balassa’s stages with the table and an example of each, trade creation and diversion, and merits and demerits. The SAARC essay: formation, members, objectives, SAPTA and SAFTA, then the positive effects and the limits on Indian business, ending with BIMSTEC and bilateral deals as India’s alternative route.