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Trade alliances: An imperative

Sep 18, 2003

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.

Source: CII

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.

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