Sep 18, 2003|
Trade alliances: An imperative
Amidst all the chaos that formed part and followed the failure of talks at the Cancun ministerial meet of the WTO, there are a couple of developments that seem to have been sidelined. One of them relates to the WTO itself – the emergence of the G-21 alliance of developing countries as a force to reckon with. The second is a proposed alliance between the Southeast Asian nations to combat competition from India and China. In this write-up, we would discuss the benefits of forming trade and economic alliances (or trading blocs), and how important a role these play in the growth of participating economies.
Apart from providing higher bargaining power at global trade fora, these alliances (like ASEAN, SAARC, Cairns group, etc.) serve as a route for countries with common interests to voice their concerns regarding developmental issues. Also, in a way similar to the most-favored nation (MFN) status provided as per WTO rules, these alliances serve to provide 'equal' treatment rather than 'special' treatment to its members, thus paving a way for the growth of one and all of its constituents.
Let us take the example of India and China, despite the fact that these countries are not part of any regional alliance. The chart below shows the growing trade relationship between the two countries. In 2002-03, while Indian's exports to China grew by a substantial 106%, mainly led by increased exports of steel and manufactured goods. On the other hand, China's exports to India grew by 86%. This is indicative of the potential that each country promises for the other in the future, and this potential could increase several-folds if we have an alliance on trade and economic fronts. While this is not an example of a trade alliance, the issue we are trying to highlight here is that, the creation of a formal alliance between the two countries will definitely help exploit the trade potential between them to the fullest.
In one of the earlier reports, we had mentioned ways how India and China can benefit from the synergies of working together towards the goal of making this the 'Asian century.' In that, we had also mentioned that these two giants could benefit from forming an economic union of the type of ASEAN, which would enable them to participate in each other's growth. And the recent proposal of the Southeast Asian nations forming an alliance to counter competition from India and China increases the need for these two countries to form a partnership on the economic front. This could then be furthered to involve financial, social and cultural aspects.
Over the long-term, the benefits of a formal alliance accrue in forms of increased competition (thus improved efficiency), economies of scale (through better utilisation of capacities due to increased exports), increased investment levels (leading to higher employment and rising income levels), and efficient usage of resource (through free movement of labour and capital).
While we have enumerated the benefits of forming a trade alliance, we cannot disregard the need for a strong financial system in place to handle the same. The financial system has to be sound and strong enough to facilitate trade and withstand shocks of any mis-adjustments (like capital outflow). A sound financial system plays a very important role in improving confidence of foreign investors, thus adding to the benefits that accrue in the long-term from being part of trading alliances. One must understand that with increasing globalisation of world markets, risks going forward are bound to increase. In that case, additional strength can be gained by initially being part of regional alliances with other developing countries.
As the world seems divided between the developed and developing nations (as seen at the Cancun meet), the need to form regional alliances increases, especially for the developing nations. And the sooner we realise that, the better it would be for our (developing countries) development in the long-term.
More Views on News
Jul 25, 2017
Equitymaster HQ has been infiltrated. Valuable stock ideas have been leaked. Who's responsible?
May 27, 2017
What happens when minority shareholders are short-changed in the normal course of business?
Feb 15, 2017
PersonalFN believes SEBI has taken a step back-apparently in the admission of it going overboard with the regulations.
Aug 24, 2016
And here's your chance to claim a free copy of this book...
Aug 12, 2016
And Why India's demographic dividend could turn out to be a doubtful debt...
More Views on News
Aug 10, 2017
Don't miss these proxy bets on growing companies or in a few years you will be looking back with regret.
Aug 8, 2017
'Yes, it looks like a bubble. And, yes, it's like buying a lottery ticket. But there's something happening that has never happened before. It's an evolutionary leap in money itself.'
Aug 8, 2017
Bharat-22 is one of the most diverse ETFs offered so far by the Government. Know here if you should invest...
Aug 12, 2017
The India VIX is up 36% in the last week. Fear has gone up but is still low by historical standards.
Aug 10, 2017
Bitcoin hits an all-time high, is there more upside left?
Copyright © Equitymaster Agora Research Private Limited. All rights reserved.
Any act of copying, reproducing or distributing this newsletter whether wholly or in part, for any purpose without the permission of Equitymaster is strictly prohibited and shall be deemed to be copyright infringement. LEGAL DISCLAIMER:
Equitymaster Agora Research Private Limited (hereinafter referred as 'Equitymaster') is an independent equity research Company. Equitymaster is not an Investment Adviser. Information herein should be regarded as a resource only and should be used at one's own risk. This is not an offer to sell or solicitation to buy any securities and Equitymaster will not be liable for any losses incurred or investment(s) made or decisions taken/or not taken based on the information provided herein. Information contained herein does not constitute investment advice or a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual subscribers. Before acting on any recommendation, subscribers should consider whether it is suitable for their particular circumstances and, if necessary, seek an independent professional advice. This is not directed for access or use by anyone in a country, especially, USA or Canada, where such use or access is unlawful or which may subject Equitymaster or its affiliates to any registration or licensing requirement. All content and information is provided on an 'As Is' basis by Equitymaster. Information herein is believed to be reliable but Equitymaster does not warrant its completeness or accuracy and expressly disclaims all warranties and conditions of any kind, whether express or implied. Equitymaster may hold shares in the company/ies discussed herein. As a condition to accessing Equitymaster content and website, you agree to our Terms and Conditions of Use, available here
. The performance data quoted represents past performance and does not guarantee future results.SEBI (Research Analysts) Regulations 2014, Registration No. INH000000537.
Equitymaster Agora Research Private Limited. 103, Regent Chambers, Above Status Restaurant, Nariman Point, Mumbai - 400 021. India.
Telephone: +91-22-61434055. Fax: +91-22-22028550. Email: firstname.lastname@example.org. Website: www.equitymaster.com. CIN:U74999MH2007PTC175407