South Asia: Does Preferential Trade Liberalisation Make Sense?

Abstract

This paper systematically analyses the issue of trade liberalisation in the South Asia region and offers a qualitative assessment of alternative approaches. I compare two broad approaches to trade liberalisation: non‐discriminatory and preferential. The former approach can be pursued on a unilateral basis by each country in the region, on a concerted basis by the countries in the region, or multilateral basis under the auspices of the WTO. The latter approach can take the form of criss‐crossing bilateral free trade areas between various countries in the region or a region‐wide free trade area. The view I take in the paper is that the move towards preferential trading is a mistake, at least from the viewpoint of India. India continues to have very high trade barriers so that the scope for trade diversion and the losses accompanying it are likely to be considerable. Business lobbies being relatively powerful in most of the countries in the region, they are likely to exploit the rules of origin and sectoral exceptions in these arrangements in ways that will maximise trade diversion and minimise trade creation. Inasmuch as the rules of origin give bureaucrats power, employment and opportunities to share in the rents created by tariff preferences, they too will become active parties to the diversionary tactics of business lobbies. Therefore, the member countries are better advised to proceed along non‐discriminatory lines in achieving further liberalisation.