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South Asia: Does Preferential Trade Liberalization Make Sense?

  • Arvind Panagariya

    (University of Maryland)

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. Copyright Blackwell Publishing Ltd 2003.

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Paper provided by EconWPA in its series International Trade with number 0309011.

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Date of creation: 02 Sep 2003
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Handle: RePEc:wpa:wuwpit:0309011
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  1. Paul Krugman, 1991. "The move toward free trade zones," Economic Review, Federal Reserve Bank of Kansas City, issue Nov, pages 5-25.
  2. Jiandong Ju & Kala Krishna, 1998. "Firm Behavior and Market Access in a Free Trade Area with Rules of Origin," NBER Working Papers 6857, National Bureau of Economic Research, Inc.
  3. Rupa Duttagupta & Arvind Panagariya, 2007. "Free Trade Areas And Rules Of Origin: Economics And Politics," Economics and Politics, Wiley Blackwell, vol. 19(2), pages 169-190, 07.
  4. Lawrence H. Summers, 1991. "Regionalism and the world trading system," Proceedings - Economic Policy Symposium - Jackson Hole, Federal Reserve Bank of Kansas City, pages 295-301.
  5. Frankel, Jeffrey & Stein, Ernesto & Wei, Shang-jin, 1995. "Trading blocs and the Americas: The natural, the unnatural, and the super-natural," Journal of Development Economics, Elsevier, vol. 47(1), pages 61-95, June.
  6. Dennis C. Mueller (ed.), 2001. "The Economics of Politics," Books, Edward Elgar, volume 0, number 2132, March.
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