A Framework For Free Trade

A. Das

Introduction

International economic grouping and cooperation is a concept that has withstood the test of time as a means of promoting synergistic economic advancement and stability among member countries.  A cursory survey of the world economy today reveals a plethora of such trading blocs, some highly effective and some not so effective. 

An undisputed contemporary success in this arena is of course the European Union (EU)[i], which in 1950 was nothing more than an idea in the minds of such visionaries as Jean Monnet[ii] and Konrad Adenauer[iii].  It can be safely said that, in the intervening span of 5 decades, their brainchild has more than exceeded any expectations its bold progenitors may have had.  The Association of South East Asian Nations (ASEAN)[iv] and the North American Free Trade Area (NAFTA)[v] are other success stories worthy of emulation.

Failures and under-performers also abound among international economic groupings.  The Council for Mutual Economic Cooperation (COMECON)[vi] and the Greater East Asia Co-Prosperity Sphere[vii] were spectacular 20^th century failures in this realm, while the South Asian Association for Regional Cooperation (SAARC)[viii], the South American Cone Common Economic Zone (MERCOSUR)[ix] and the Economic Community of West African States (ECOWAS)[x] are acknowledged present day under-performers[xi].

Unlike MERCOSUR and ECOWAS, SAARC’s under-performance is an issue that has real and tangible ramifications for India’s own long-term economic growth outlook. 

This paper will:

1. Attempt to summarize the evolution of SAARC thus far
2. Try to encapsulate lessons from the EU, ASEAN and NAFTA for other aspirant groupings, and assess SAARC and other Indian endeavors in their light
3. Utilize these lessons to propose a framework for successful free trade groupings in the Indian context.

The SAARC Saga

SAARC was established in 1985 by mutual agreement of the Heads of State or Government of the seven nations of the Indian sub-continent, Bangladesh, Bhutan, India, Maldives, Nepal, Pakistan and Sri Lanka.  Its stated aims were “to work together in a spirit of friendship, trust and understanding” and “to accelerate the process of economic and social development in Member States”[xii].

The seventeen years since have not been entirely unsuccessful in making progress towards these aims.  India, home to the overwhelming majority of SAARC’s population, has made impressive strides [xiii] in the last two decades.  Increases in agricultural productivity, economic liberalization, widening of the industrial base, and advances in information technology have consolidated India’s position as an emerging global contender.  Among other SAARC members, Bangladesh has made resolute and impressive progress[xiv], considering its historical under-development and the immense Malthusian[xv] pressures on its resource base.  Bhutan[xvi] and the Maldives[xvii] have made steady and respectable progress, in keeping with the overwhelming emphasis placed by their leadership on social stability.  Nepal[xviii] and Sri Lanka[xix] have seen their national energies dissipated by internal political instability, a condition that has fed on a volatile mixture of economic aspirations and chauvinistic tendencies.  Then there is Pakistan, where every indicator of human development [xx] has either shown stagnation or regression over the past two decades.  Its ability to be a reliable partner in collective economic development is also in some question, as it has barely escaped categorization as a “failed state”[xxi] and as a “rogue state” [xxii].  The Pakistani economy[xxiii]^,[xxiv] has staved off disaster thus far largely due to largesse from the international community.  Smuggling, of arms, narcotics and illegal emigrants, is another significant lifeline

Now, imagine the negative impact on the EU or NAFTA or the ASEAN if one of their members were as worrisome as Pakistan.  Pakistan’s fate is the most dramatic demonstrator of SAARC’s failure to uniformly improve the lot of its member country populations.

Lessons from the EU, ASEAN and NAFTA 

What lessons do the success stories of the EU, ASEAN and NAFTA hold for an India seeking an ideal international trade framework for itself?  What do they have in common that SAARC doesn’t?  The following characteristics stand out:  

i)                   A tightly-knit “Inner-core” of member countries with Concentric Circles of secondary, looser knit groupings

It is instructive to note that the EU, ASEAN and NAFTA can be regarded as constituting a tightly knit Inner-core, surrounded by other bi-lateral and multi-lateral groupings, such as the General Agreement on Tariffs And Trade (GATT)[xxv] and its successor organization, the World Trade Organization (WTO)[xxvi].  In some cases, the Inner-core is knit even tighter by shared membership in such deliberative economic policy-planning bodies as the Group of Eight Industrial Democracies (G-8)[xxvii] and the Organization of Economic Cooperation and Development (OECD)[xxviii].  In addition, there are also bi-lateral trade relationships with other partners either individually by an Inner-core country (examples include the US-Jordan Free Trade Pact[xxix] and the Canada-Israel Free Trade Pact[xxx]), or collectively by the Inner-core with third party nations (such as the EU Pact with South Africa[xxxi]).  Taking the case of the EU as an illustrative example, the Inner-core is followed by an immediate outer Circle, constituted by the European Free Trade Area (EFTA)[xxxii], NAFTA and Japan, with all other partners falling in an outermost layer.  For ASEAN, NAFTA and Japan constitute the immediate outer Circle while for NAFTA, the EU and Japan assume that position[xxxiii].

ii)                 A center within the Inner-core:

We can define the center as an Inner-core member country economy or multiple economies that play a role of natural leadership in terms of industrial growth, consumer demand and access to capital markets.

In the case of the EU, Germany and France, followed by the UK and Italy are key drivers of industrial growth and consumer demand.  Capital markets leadership is shared by the UK and Germany [xxxiv].

Within ASEAN, this role ironically belongs to tiny entrepot Singapore [xxxv], acting as the principal regional proxy for US and Japanese consumer demand, industrial growth and capital.

The US economy is naturally [xxxvi] the anchor for NAFTA.

iii)               An overarching mutual security architecture that clearly separates the Inner-core from others:

Traditionally in the case of the EU, this architecture comprised of a Western Europe protected by NATO and arrayed against the Soviet Union.  Currently this architecture sees the EU as a bloc of European nations[xxxvii] bounded by Eurasian Russia and Anatolia in the east and the Hejaz, the Levant and the Maghreb in the south.

In the case of ASEAN, the overarching security paradigm was the creation of a US-backed front against Chinese communism in the 1960s-70s and against non-ideological Chinese expansionism subsequently [xxxviii].

In the case of NAFTA, the security architecture is one that has the US providing strategic defense, historically due to the Monroe Doctrine[xxxix] and currently under American obligations to NATO and the OAS[xl].

iv)              A convergence of Inner-core leadership interests:

The opinion-shapers and leaders of each Inner-core member country have to believe that joining an Inner-core and actually making that Inner-core work are good for them personally and good for their country, in that order.

While leaders like Monnet and Adenauer may have had laudable intentions, the EU owes its success to the benefits it represented to the three most powerful elites in member countries [xli].   Firstly, politicians and bureaucrats saw in Brussels[xlii] additional opportunities for personal advancement.  Secondly, businessmen across national boundaries very quickly appreciated the benefits of a common market.  Finally, European Integration received the full backing of the military in most member countries as it neatly dovetailed with their own cooperative endeavors within NATO.

Looking at ASEAN, the same factors are again at play.  The leaders used ASEAN to gain assurances from each other that their “benignly dictatorial” internal policies would not be questioned [xliii].  The business community among member countries, overwhelmingly dominated by Overseas Chinese, saw in ASEAN an opportunity to benefit [xliv] from their hitherto disadvantageous Diaspora status.  The respective militaries utilized the aegis of ASEAN to formalize their cooperation, launching ARF[xlv]

Taking the case of NAFTA, US thought leadership had so captivated Canadian and Mexican political elites that NAFTA was embraced with greater gusto [xlvi] by them than some protectionist US politicians [xlvii] and interest groups [xlviii].  Business people[xlix] in all three countries saw nothing but greater opportunity in the venture and so did the respective militaries.

SAARC is no Inner-core

Only one of the three characteristics of an effective Inner-core is found in SAARC as it stands today.  A mutual security architecture that includes India and Pakistan seems utopian in the current context.  India has the economic momentum to anchor economic growth and be the center of an Inner-core comprising all of SAARC.  But elites in Pakistan see nothing to gain from cooperation with India, as their constituencies do not approve of it (Politicians and Militaries have more to gain from tension than from friendship, leaving businesspeople as the sole possible elite beneficiaries of true cooperation). 

What we see today within SAARC are member countries acting in manner that suggests that SAARC may as well not exist.  We have India[l], Pakistan[li] and Bangladesh[lii] negotiating bi-lateral trade deals with as many of the others as possible.  Thus, SAARC as an organization cannot be categorized as a true Inner-core.

Looking East

SAARC’s inherent limitations do not seem to have been lost on the Indian leadership.  Recent years have seen concerted efforts by India to forge new partnerships in the extended neighborhood to the east of India[liii].  These efforts, labeled as the “Look East” policy, have led to the successful launching of the Bangladesh, India, Myanmar, Thailand-Economic Cooperation (BIMSTEC)[liv] grouping as well as the Mekong-Ganga Cooperation (MGC)[lv] project.  India also attempted, without success, to join expanded versions of ASEAN + 3[lvi] and the Asia Pacific Economic Council (APEC)[lvii],[lviii].

Looking Elsewhere

In 1997, India joined several other countries of the Indian Ocean littoral to launch the Indian Ocean Rim Association for Regional Cooperation[lix] (IOR-ARC).  India also continued, albeit in a low-key manner, to lend sustenance to such cold-war era initiatives as the Group of 15 Countries for South-South Cooperation and North-South Dialog (G-15)[lx], the Group of 77 Developing Countries (G-77)[lxi] and the Indian Technical and Economic Cooperation (ITEC)[lxii] program.

Situation Synopsis

Analyzing India’s trade cooperation landscape using the Inner-core and Concentric Circles paradigm, it becomes very clear that the secondary and outer Concentric Circles are adequately filled with viable and beneficial partnerships, potential and actual.  Attractive bilateral trade deals with global economic players like the EU, NAFTA, ASEAN or Japan remain a future possibility, but those suitors will find it even more meaningful to engage with an India that represents the center of an Inner-core than with an India standing alone all by itself.  Conversely, India will find it easier to lead a burgeoning Inner-core if it benefits from the momentum arising out of such seminal bi-lateral deals.

Thus, India faces two inter-related challenges, building an Inner-core for localized free trade and establishing it as an attractive global trading bloc.

An Ideal Free Trade Framework for India  

Sayonara SAARC? 

Over the years, the Indian leadership has consistently demonstrated diplomatic finesse in handling international groupings that take unsympathetic stances or lose their relevance to Indian interests.  The United Nations (UN)[lxiii], the Organization of the Islamic Conference (OIC)[lxiv] and the Commonwealth[lxv] have each been often unsympathetic to Indian interests in the past, but India has found ways to meaningfully engage with them.  India, a charter member of the Non-Aligned Movement (NAM)[lxvi] has bid a gentle adieu to that organization’s founding rationale, if not formally to the organization itself.  Similarly, India should desist from making a dramatic exit from SAARC, as SAARC may continue to play a limited role as a facilitator of political dialog in the sub-continent.  But, as far as SAARC’s potential as an economic grouping is concerned, India should expect nothing substantial.

Building a True Inner-core for India

Membership in a future India-led Inner-core should derive from the ease with which applicants can support the conditions necessary to be productive Inner-core members, not from any mindless “South Asian” geography.  Hence, it would be a good idea to abandon a strictly geographic regional fixation and adapt a more flexible composition as has been successfully done by groups like the G-8, the Shanghai Five[lxvii] and the OECD. 

Member nations of India’s outer Concentric Circle groupings like SAARC, BIMSTEC, MGC, IOR-EC etc. that have contributed productively and meaningfully to those groupings should all be considered as candidates for induction into the Inner-core.  Some may be clear candidates for selection in the very first iteration, while others may take some more time.

The intent should be to create a system for cooperation that attracts an ever-increasing list of aspirants, seeking to buttress their WTO memberships with a more specific cooperation arrangement that features India as a key partner.  Once India demonstrates that it is serious about enabling other countries to benefit from its economic resurgence, partner nations will find it easier to come on board.  In that vein, it would be appropriate to identify the critical framework and mechanics of this ideal grouping. 

a)     Mutual Security Architecture : India has recruited Nepalese[lxviii] citizens into its armed forces for a long time.  India also has security cooperation arrangements with Afghanistan[lxix], Bhutan[lxx], the Maldives[lxxi], Myanmar[lxxii], Mauritius[lxxiii], Sri Lanka[lxxiv] and Tajikistan[lxxv], among countries in India’s extended neighborhood.  All Inner-core candidates must have at least this level of security cooperation as a starting point.  India needs to work on mechanisms to recruit Inner-core citizens into the ranks of its armed forces, not just the Army, but also the Navy, Coast Guard, Para-Military Forces and the Air Force.  Recruitment in the Officer Cadre should also be given some serious thought, as candidates for these positions would presumably come from influential groups in these countries and can play an integral role in getting elite buy-in.  Besides recruitment, India should work on extending its Nuclear Umbrella to select Inner-core nations.  Cooperation in the fields of intelligence, law enforcement, land border management and control of Sea Lines of Communication (SLOC) needs to be a critical component of this endeavor.

b)    India – The Center of the Inner-core   : India’s market already acts as a giant vacuum for commerce, both legitimate and contraband, from all over the sub-continent and beyond.  To take a few examples, India is Bangladesh’s[lxxvi] and Nepal’s[lxxvii] largest market for excess labor, Bhutan’s largest market for forest products[lxxviii], and Afghanistan’s largest market for dry fruits[lxxix].  India is also a key target market for the Sri Lankan tourist industry[lxxx] and the Mauritian Financial Services industry[lxxxi].  

     India needs to formalize such trade to form the proposed Inner-core, ensuring unfettered market access to members and denying market access to non-members.  “Work Permits” and Passport-less travel privileges for citizens of Inner-core countries should be actively considered, accompanied by a crackdown on illegal immigration and human trafficking from non Inner-core members.  Citizens of Inner-core countries should also be offered subsidized access to Indian Educational institutions.  Transit trade agreements already exist with Nepal and Bhutan, enabling these two land-locked nations to enjoy a land corridor[lxxxii] to Kolkata port.  The Inner-core should formalize benefits like these to all its members.  Besides these two countries, other possible Inner-core candidates such as land-locked Afghanistan and Tajikistan may find this facility attractive. 

      A de facto Currency Board system[lxxxiii] already supports Indo-Nepalese and Indo-Bhutanese trade.  This needs to be formalized in the Inner-core, enabling member countries to leverage their trade-earned purchasing power within the Inner-core for goods from all over the grouping and outside.  The importance of this Rupee-denominated trade cannot be over-emphasized, as India has an obligation to shield the all potential Inner-core members from “Asian Flu” type disasters[lxxxiv] caused by external currency pressure. 

      India also has an obligation to offer the Inner-core shared access to key elements of its infrastructure, including airports, railways, highways and waterways.  India should freely share with other members the benefits of possible future breakthroughs in regional transportation, like the proposed Sethusamudram[lxxxv] and Akyab[lxxxvi] canal projects.  India should also be willing to provide Inner-core partners with access to its maritime Exclusive Economic Zones[lxxxvii] (EEZs) and protected shipping lanes for crucial commodity traffic.

c)     Convergence of leadership interest: The principle of Inner-core solidarity and cooperation has to enjoy the intellectual high ground among member country political, bureaucratic, business and military elites.  India must take the lead in establishing a self-reinforcing ecosystem of think tanks, academic institutions, media outlets and trained professionals that can ensure such thought leadership for the long term.

     The funding for this ecosystem will perforce come from India, the center of the Inner-core.  But the physical infrastructure and key human resources will have to be distributed throughout the Inner-core area so as to ensure that the vision percolates down to the grass roots among all of the Inner-core country populations.  Scholarships, fellowships and grants to support Inner-core political, bureaucratic and media opinion-leaders must be abundant; as must be the attention their views receive among the Indian leadership.

     Among the Inner-core business elite, the benefits of access to Indian industrial, consumer and capital markets need to be aggressively highlighted.   India must also undertake a deliberate and calibrated effort to legitimize as much of the current illicit trade as possible, not including narcotics and weapons. 

      Among the military and security elite, the benefits of access to Indian training, equipment, budgetary support and cooperative assignments must be made very apparent. 

The Way Forward

  To summarize, India clearly needs to supplant its WTO membership with participation in additional trading blocs.  In this pursuit, the EU, ASEAN and NAFTA are successful role models, worthy of emulation.  The paradigm that emerges from these role models is one that consists of a tightly knit Inner-core of member nations surrounded by Concentric outer Circles of looser arrangements.  The ideal Inner-core must feature an overarching collective security architecture, one or more economic powerhouses at its center and a clear confluence of interests among member country elites.  By these yardsticks, SAARC is not an Inner-core, but could conceivably constitute a Concentric Circle.

In its extended neighborhood, the onus of natural leadership clearly falls on India.  Hence, the initiative to create an Inner-core must perforce be led by India.  Member nations of SAARC, BIMSTEC, MGC, IOR-EC etc. represent a good pool of potential Inner-core candidates.  Creating a burgeoning Inner-core requires planning vision and execution discipline.  But it is well worth the effort, as a thriving Inner-core will most certainly enhance India’s appeal as a trading partner for the world’s leading national economies as well as other trading blocs.

References