Do Poor Countries Lose Out as a Result of Free Trade Agreements?

Abstract

International trade is exchange of goods and services between nations either due to demand for goods and services owing to scarcity in that particular nation. In the process of cross border trade some nations may be at a disadvantage and are likely to put barriers like tariffs and restrictions in place to save their local manufacturers. Free Trade Agreements (FTA) are a way to open trade selectively with other nations while protecting their local manufacturers. But there is a notion among the poor nations that signing an FTA would put their economy at a disadvantage. The major motivation of this research paper is to study and prove that this is only a myth and not a fact. Analysis is done for various FTAs signed by India with other nations in the region. I explored import and export data of these nations with India before and after they signed the FTA.

Introduction

I. INTRODUCTION

Trade has been an important part of our human civilization. International trade is a vital element of globalisation. With nations trading goods and services with each other, international trade is complex with trade barriers like tariff quotas, technical regulations. These barriers can hinder the free trade between nations. Free Trade Agreements are a method of overcoming these trade barriers and ensure smooth trade flows between nations thereby offering goods and services to their consumers at low prices.

The FTA is signed between two nations to increase economic cooperation between them and mutually benefit is called bilateral Free Trade Agreement. An example of the is the Indo-Sri Lanka Free Trade Agreement (ISFTA). An agreement between a group of nations sharing similar interests is called a multilateral free trade agreement. A multilateral free trade agreement could be signed between nations of a closed region like the South Asian Free Trade Agreement (SAFTA) signed by India and its neighbouring nations. Another example is the North American Free Trade Agreement (NAFTA) signed by USA, Canada and Mexico.

II. ISSUE

Free trade agreements or FTAs are agreements between two nations agreeing to form a free trade area between them. The FTAs can be of two types bilateral and multilateral. Bilateral FTAs are signed between two nations allowing free movement of goods and reduction in tariffs on export and import subject to certain conditions. Multilateral FTAs are trade agreements between three or more nations that form a close group or share common interests. The main aim of the FTAs is to decrease the trade barriers between these nations thereby lowering the prices of certain goods for consumers. Multilateral FTAs are difficult to negotiate.

The idea of FTA looks good but however the poorer or smaller nations are always of the notion that the richer/developed nations will dominate their markets with cheaper goods using advanced production facilities there by killing the homegrown industry. And this leads to job losses and political unrest. This is a reason why poor nations hesitate to sign FTAs with developed nations. This paper examines whether the FTAs are beneficial to the poorer nations or richer nations. For the case study I have taken FTAs signed by India with poorer nations like Sri Lanka, Bangladesh, Afghanistan, Bhutan and Pakistan. At the same time I have included nations like Japan, Singapore and Malaysia in the case study to check if India gained with FTAs with these developed nations.

III. WHAT I FOUND

FTAs are supposed to increase the trade between the nations. All the data analysis done support this theory.

All the poor nations that India signed FTAs like Sri Lanka, Bangladesh, Bhutan and Afghanistan showed an increased trade flow and also narrowed their trade balance with India after signing the FTA. The only exception is Pakistan where the trade gap has widened due to bilateral political tensions.

When it comes to the trade with nations like Japan, Singapore and Malaysia the trade flow has increased barring Japan for some reasons to be investigated. But India being poorer than these has narrowed its trade gap with these nations to some extent.

IV. METHODOLOGY ADOPTED FOR THE STUDY

This paper provides trends of trade flows between the nations for 5 years before the FTA was signed and for 5 years after the FTA was signed. The average volume exports and imports are used for comparison by using the trade statistics. I have calculated the growth in exports of a nation with India for a period of 5 years before the FTA was signed with growth in the aftermath of signing the FTA. Similarly, growth in imports was also calculated for the two periods for comparison.

V. DOES FTA INCREASE TRADE?

In theory international free trade between nations allow businesses in each nation to make best use of their resources and focus to produce and sell goods while other businesses import goods that are scarce or otherwise expensive the produce locally. This concept of local production mixed with foreign trade allows nations to grow faster while serving their citizens at lower costs.

This view was first popularized in 1817 by economist David Ricardo in his book, "On the Principles of Political Economy and Taxation." He argued that free trade expands the diversity and lowers the prices of goods available in a nation while better exploiting its homegrown resources, knowledge, and specialized skills

But to safeguard their local producers and be self-sufficient nations aften put barriers like duties and restrictions to discourage their citizens from importing. Nations try to strike a trade balance using these techniques.

The answer to whether trade increase with FTAs is YES. As of 31st Dec 2008, as per the WTO 243 Regional trade agreements are in existence of which 91% are Free Trade Agreements. And many of these FTAs are overlapping and allow some nations to become a hub in the FTA network. An example is though India does not have FTA with USA or China, it has FTA with South Korea. Hence USA and China are using Korea as manufacturing hub to export goods to India using their FTA with South Korea. This is a classic example of how trade increases with FTA. With careful negotiations between the nations some goods and be exported and imported without killing their local producers thereby increasing trade.

VI. THE FTAs SIGNED BY INDIA

So far, India has signed 13 Free Trade Agreements (FTAs) with its trading partners, including the 3 agreements, namely India-Mauritius Comprehensive Economic Cooperation and Partnership Agreement (CECPA), India-UAE Comprehensive Partnership Agreement (CEPA) and India-Australia Economic Cooperation and Trade Agreement (IndAus ECTA) signed during the last five years. The list of FTAs signed by India is as under:

1. India-Sri Lanka Free Trade Agreement (FTA)
2. Agreement on South Asian Free Trade Area (SAFTA) (India, Pakistan, Nepal, Sri Lanka, Bangladesh, Bhutan, the Maldives and Afghanistan)
3. India-Nepal Treaty of Trade
4. India-Bhutan Agreement on Trade, Commerce and Transit
5. India-Thailand FTA - Early Harvest Scheme (EHS)
6. India-Singapore Comprehensive Economic Cooperation Agreement (CECA)
7. India-ASEAN CECA - Trade in Goods, Services and Investment Agreement (Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar, Philippines, Singapore, Thailand and Vietnam)
8. India-South Korea Comprehensive Economic Partnership Agreement (CEPA)
9. India-Japan CEPA
10. India-Malaysia CECA
11. India-Mauritius Comprehensive Economic Cooperation and Partnership Agreement (CECPA)
12. India-UAE CEPA (*)
13. India-Australia Economic Cooperation and Trade Agreement (ECTA) (*)

VII. BACKGROUND ON TARIFFS

Nations around the world have limited natural and human resources that limit their ability to produce certain goods and services. They trade with other nations wo meet the demands of their consumers. However, trade isn’t fair between nations. Policies, Politics, Competition make trading partners unhappy.

Governments use tariffs as a means to deal with nations they disagree with. A tariff is a tax imposed by one country on the goods and services imported from another country to influence it, raise revenue, protect domestic industries, or exert political leverage over another country. Tariffs often result in unwanted side effects, such as higher consumer prices.

VIII. CHANGES IN EXPORTS TO INDIA

Figure 1 and 2 illustrates changes in FTA partner 5year average exports to India before and after the FTA was implemented. Sri Lanka’s average exports to India was a paltry 38 million USD in the 5 years prior to the implementation of the FTA and increased to an average of 312 million USD in the 5 years after FTA implementation. This indicates that ISFTA has worked well and increased the trade between India and Sri Lanka.

IX. CHANGES IN EXPORTS FROM INDIA

Figure 3 and 4 illustrates changes in FTA partner 5year average exports to India before and after the FTA was implemented. Sri Lanka’s average exports to India was a paltry 38 million USD in the 5 years prior to the implementation of the FTA and increased to an average of 312 million USD in the 5 years after FTA implementation. This indicates that ISFTA has worked well and increased the trade between India and Sri Lanka.

Conclusion

Free trade agreements (FTAs) result in more trade between trading partners due to lower tariffs and increase cooperation between them. The result is more trade, lower prices for consumers, and more export opportunities for producers. A review of the literature indicates there is a no relation that a poor nation loses when it enters into an FTA with a rich/developed nation. It is found that the trade between the nations decreased only in case of Pakistan with India due to political tensions and terrorist activities. The general consensus is that trade agreements are beneficial.

References

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Copyright

Copyright © 2023 Saurish Reddy Dirisala. This is an open access article distributed under the Creative Commons Attribution License, which permits unrestricted use, distribution, and reproduction in any medium, provided the original work is properly cited.