As international trade regimes undergo their biggest structural changes since the creation of the WTO in 1995, Kannan Kumar (Pahle India Foundation) and Aakanksha Shrawan (IIT Delhi) argue that the South Asian Association of Regional Cooperation (SAARC) can hold the key to helping South Asian countries ride international trade disputes. Such answers for SAARC, an organisation that hasn’t met in the last four years, might lie with its South East Asia sister organisation.
The international trade regime is undergoing its biggest structural change since the induction of World Trade Organisation (WTO) in 1995. The weighted average tariff imposed on international trade has fallen consistently from 10.46% to 4.8% between 1995 to 2016. During the same period, international export of merchandise grew at a healthy rate of 300%, with an annual growth rate of 4.8%. Although unequal, this growth in trade has helped all economies of the world. Despite the opposition of trade unions, and anti-globalisation activists, international trade has always grown steadily in the last 25 years.
But recently the negative effects of globalisation and international trade have started receiving much more political significance in developed countries creating unfavourable outcomes for globalisation such as Brexit and US-China trade war. The recent trade growth predictions made by WTO have acknowledged this fact. The WTO expects the world merchandise trade to grow at 4.4% for 2018 and reduce to 4% by 2019, well below the long-term average of 4.8%. WTO also cautions that these predictions crucially hinge on governments pursuing appropriate trade policies.
Under these testing times, when developed countries are becoming more protectionist and with multilateral negotiations coming to a standstill, countries that are trying to create sustained economic growth in their economies should look at other avenues to create growth and engage actively within their regional groupings to get the best for their countries.
Learning from the Association of South East Asian Nations (ASEAN)
In this context, the regional intergovernmental organisation of the Association of South East Asian Nations (ASEAN) presents an interesting case study for the entire world. Lessons learnt from ASEAN could help countries around the world that are trying to create similar regional intergovernmental organisation. Moreover, for the South Asian Association of Regional Cooperation (SAARC) countries which face imminent threat of the ongoing trade war, could potentially reduce that risk by integrating their economies more efficiently if they could try to emulate the ASEAN bloc.
Despite entering into multiple trade treaties with its South Asian neighbours, South Asia remains amongst one of the least economically integrated regions in the world. However, ASEAN, a regional intergovernmental organisation which is similar to SAARC in terms of culture and history, has fared much better and has created a strong trading network within its region.
The differences between ASEAN and SAARC
Stark differences however between ASEAN and SAARC become very visible once we look closely at their trade figures. While intra-SAARC trade stands at 5.6%, intra-ASEAN trade is nearly seven times more at 36.3%. Additionally, while nearly 60% of SAARCs trade depend upon countries outside of Asia, ASEAN relies on around 42% of its trade with the rest of the world. This close intra-regional trade ties in ASEAN allows it to mitigate the current wave of protectionism by reducing its dependence on developed nations outside ASEAN. Despite being more integrated to the global value chains than their SAARC counterparts, the strong economic integration has provided ASEAN countries combined negotiation strength and better buffers to withstand international trade disputes.
Though multiple reasons (such as similar trade basket, low per-capita income and history of wars) could be seen as reasons for the low integration of SAARC, the fact remains that the true potential of economic integration of SAARC has been limited due to geo-political considerations and hostility between some countries. It is here that SAARC could take a leaf out of ASEAN’s book in trying to create better intergovernmental ties. They could do this by focusing on three key measures.
Common concerns of international trade regime
Firstly, the ASEAN countries came together to withstand the onslaught of communist influence in the region in the early 1960s. Though SAARC does not have a threat of that magnitude, the fact remains that all the countries are being negatively affected due to the changes brought about in the international trade regime. This is going to negatively affect their economies and disrupt the development in their countries. Hence, this should be used as a common point for all SAARC countries to unite.
Secondly, the geopolitical tensions between India and Pakistan are key reason why integration has been low. When ASEAN started Malaysia and Philippines were also locked in a dispute over Sabah. Despite these apparent differences, both the countries did not take the entire ASEAN forum as hostage for their personal dispute. Similarly, India and Pakistan have to side-line their differences over Kashmir as a bilateral issue and continue the negotiations within the SAARC framework. This along with stopping unnecessary delays would also increase the faith that other SAARC countries have about the organisation.
The glaring absence of a meeting in four years
Finally, nearly 50 years post the creation of ASEAN, the member countries have met between 33 times since its incorporation in 1967, with heads of the states meeting at least once a year. These continuous meetings have helped iron out differences on multiple issues. Unfortunately, at the time of writing this piece, the SAARC heads of states have not met even once in the last four years because of contentious issues between India and Pakistan. Since economic and regional integration is a political decision as much as an economic decision, conducting regular meetings and discussions between negotiators and the various heads of states would help in addressing this issue.
These arrangements would help all countries involved in the intergovernmental organisation hedge the risks associated with the ensuing international trade wars. While nearly 60% of SAARC trade is dependent on the rest of the world, member countries should come together and make more economically rational decisions. This heightened integration would increase trade within the region, give better negotiation strength at international forums, and could potentially help these countries manage the current trade war, along with helping them cope with a changing international trade regime more efficiently.
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Aakanksha Shrawan is Research Scholar at IIT Delhi. She holds a Masters in Development Economics from South Asian University, New Delhi and is currently pursuing her PhD in Economics from Indian Institute of Technology, Delhi (IIT, Delhi).
Kannan Kumar Associate Fellow at Pahle India Foundation. He has over 8 years of experience in finance and economics research. He completed his masters in economics from Madras School of Economics and is currently pursuing his PhD from TERI School of Advanced Studies, Delhi.