Chapter III – Free trade

Free trade

Free trade is the economic policy of not discriminating against imports from and exports to foreign jurisdictions.

Government follows a policy of non-interference.

Buyers and sellers from separate economies may voluntarily trade without the domestic government applying tariffs, quotas subsidies or prohibitions on their goods and services. This makes producers more competitive in foreign markets.

Free trade is the opposite of trade protectionism or economic isolationism.

Classical economists like Adam Smith and David Ricardo were in favour of free trade policy.

Politically, a free trade policy may just be the absence of any other trade policies; the government need not positively do anything to promote free trade. This is one reason it is sometimes referred to as “laissez-faire trade” or “trade liberalization.”

Governments with free trade agreements (FTAs) do not necessarily abandon all control of taxation of imports and exports.

In modern international trade, very few so-called FTAs actually fit the textbook definition of free trade.


1] Prof Adam Smith, “free trade policy is that system of commercial policy which draws no distinction between domestic and foreign commodities and, therefore neither impose additional burdens on the latter, nor grants any special favours to the former”.

Features of free trade

1] Trade of goods without taxes [including tariffs] or other trade barriers [eg quotas on imports or subsidies for producers]

2] Trade in services without taxes or other barriers.

3] The absence of trade “distortion policies” ie absence taxes, subsidies regulations etc that give some firms, households or factors of production advantage over others.

4] Unregulated access to markets.

5] Unregulated access to markets information.

6] Inability of firms to distort markets through government imposed monopoly or oligopoly power.

7] Trade agreements which encourage free trade.

Economics of Free Trade

Adam smith first referred to the concept of absolute advantage as the basis of international trade in his book wealth of nations published in 1776. According each trading country benefits as each produces the commodity to which it is best suited and exchanges it for the other,

In a free trade regime, both economies can experience faster growth rates. This is no different than voluntary trade between neighbors, towns or states. Free trade enables domestic workers to concentrate those goods and services where they have a distinct “comparative advantage” a benefit widely popularized by economist David Ricardo in his 1817 book “On the Principles of Political Economy and Taxation.” By expanding the economy’s diversity of products, knowledge and skills, free trade also encourages specialization and the division of labour.

Very few issues separate economists from the general public like free trade. As American economist Milton Friedman once explained, “the economics profession has been almost unanimous on the subject of the desirability of free trade.” Despite this, experts have largely been unsuccessful in efforts to promote free trade policies.

Advantages of Free Trade

Trade around the world is becoming increasingly barrier free, but there are still many people who think that free trade is bad for the economy. They believe that free trade hurts domestic production, while that may be true, the advantages of free trade leads to increased competition which means better quality products at a lower price for end consumers.

Essentially, free trade enables lower prices for consumers, increased exports, benefits from economies of scale and a greater choice of goods.

In more detail, the benefits of free trade include:

1] Optimum utilisation of resources ie efficiency.

With free trade, domestic firms face competition from abroad and therefore there will be more incentives to cut costs and increase efficiency. This encourages an efficient utilization of scarce resources.

Free trade also shifts workers and resources to more productive uses, allowing efficient industries to thrive, this results in higher wages, greater investment in infrastructure and creates new jobs and opportunities.

2] Enlarged market.

Free trade widens the size of market as a result of which greater specialisation and division of labour becomes. This brings about optimum production at lower cost which is favourable to the world as a whole.

3] Comparative cost advantage

therefore maximisation of production.

Free trade is the natural outcome of the comparative costs advantage, ie allocation of resources and manpower will be on the principle of comparative cost advantage.

Each country will produce goods at a lower opportunity cost [cheaper than other countries] and exchange it with other countries.

This will result in division of labour and specialisation.

Therefore economic welfare will increase.

4] Division of labour

Free trade will increase scale of production therefore the work process is divided into a number of tasks, each performed by designated people. this leads to specialization and  reduces the production time. This makes production rapid, cost efficient and will reduce price of final goods.

5] Specialization and innovation

Free trade leads to specialization, ie enables countries to produces goods that they are efficient at i.e. in which they have a lower opportunity cost. This leads to higher levels of output. This will increase in economic welfare for all countries

Division of labour leads to specialisation which in turn results in inventions and innovations.

6] Optimisation of consumption

Free trade enables an increase in consumption as countries can consume combinations of goods within the country as well as in other countries..

7] Market Power

Without trade barriers, free trade decreases market power of monopolies as they are competing at a global level. It may also prevent domestic monopolies from charging too high prices.

8] Increased competition / low price

With more trade, domestic firms will face more competition from abroad. Therefore, there will be more incentives to cut costs and increase efficiency. This is a win for consumers who can enjoy the lowest of prices.

It may prevent domestic monopolies from charging too high prices.

Free trade also ensures that producers and workers adapt to the shifting demands of the worldwide market. These adjustments are critical to remain competitive and therefore promotes  growth.

9]. Technology transfer.

Technology can cross over borders more easily with free trade, and this often accelerates improvements production.  Local companies also receive access to the latest technologies from their multinational partners. As local economies grow, so do job opportunities. Multi-national companies provide job training to local employees.

10] Economies of Scale

If countries can specialize in certain goods they can benefit from economies of scale and lower average costs, this is especially true in industries with high fixed costs. The benefits of economies of scale will ultimately lead to lower prices for consumers and greater efficiency for exporting firms.

11] Variety, quality lower price and higher PDI..

Free trade provides consumers with a greater variety of goods as they can gain access to products from different countries. This variety of choice leads to lower prices too.

This increases access to quality and lower pricd goods. eg imports from China. This will leave more income for people to spend on other products in the market.

12] Growth and development

Free trade leads to greater output as an increase in demand for local goods results in higher exports. This in turn creates more jobs for the local economy and the country enjoys higher economic growth.

Free trade reduces imported input costs, thus reducing cost of production and promotes economic growth.

13] increase in income and employment

Lower tariffs on exports will enable a higher quantity of exports boosting employment income and economic growth.

14] Make use of surplus raw materials

Middle Eastern countries such as Qatar are very rich in reserves of oil, but without trade, there would be not much benefit in having so much oil.
Japan, on the other hand, has very few raw materials; without trade, it would have low GDP.

15] More factor earnings

Due to free trade factors of production will earn more, as they will be employed for better use. Hence factor rewards ie rent, wages and interest will be higher.

16] Development of transport and communication.

Free trade ie absence of trade barriers, increase in production and increase in size of market will promote the development of transport and communication.

17] International cooperation.

Free trade leads to interdependence between countries and promotes international cooperation.

18] Free trade is advantageous to developing countries.

Free trade promotes imports of capital goods, machinery, essential raw materials and technical knowhow. This promotes development in these countries.

It also increases their income, employment, capital formation and the overall HDI of developing countries.

Disadvantages of Free Trade ?

Despite many advantages, free trade policy has never been completely adopted by all the countries of the world. Particularly after the World War II, the policy was abandoned even by those who had previously adopted it. The following arguments are given against free trade policy.

1. Unrealistic Policy:

Free trade policy is based on the assumption of laissez-faire or government non-intervention. Its success also requires the pre-condition of perfect competition, and the working of price mechanism under perfect competition.

However, such conditions are unrealistic and do not exist in the actual world.

2. Non-Cooperation of Countries:

Free trade policy works smoothly if all the countries cooperate with each other and follow this policy. If some countries decide to gain more by imposing import restrictions, the system of free trade cannot work.

3. Economic Dependence:

Free trade increases the economic dependence on other countries for certain essential products such as food, raw materials, etc. Such dependence proves harmful particularly during wartime.

4. Political Slavery:

Free trade leads to economic dependence and economic dependence leads to political slavery. For political freedom, economic independence is necessary. This requires abandonment of free trade.

5. Under development and Unbalanced/ lop-sided Development:

Failure to protect domestic industries against foreign competition may lead to under development of developing countries.

Free trade and the resultant international specialisation lead to unbalanced development of national economy. Under this system, only those sectors are developed in which the country has a comparative advantage. Other sectors remain undeveloped. This results in lop-sided development.

6. Dumping:

Free trade may lead to cutthroat competition and dumping.

Dumping occurs when a country has excess stock and so it sells below cost on global markets causing other producers to become unprofitable

Under dumping, goods arc sold at very cheap rates and even below their cost of production in order to capture the foreign markets eg China has been dumping excess supply of steel on global markets causing other firms to go out of business.

7. Harmful Products:

Under free trade the laissez-faire policy is followed. The government does not impose anf restrictions on the international movements of goods.Therefore injurious and harmful products may be produced and traded for profits. This will adversely affect the health and welfare of the country.

Trade restrictions are necessary to check the import of such products.

8. International Monopolies:

Free trade may lead to international monopolies. It encourages the estab­lishment of multinational corporations. These corporations tend to acquire monopoly position and thus harm the interest of the local people.

9. Reduction in Welfare of Certain Groups:

While free trade tends to maximize world production of goods and services, it may simultaneously hurt the welfare of certain group in every country.

Under free trade, the output of those commodities in which the country has comparative advantage tend to increase to meet the export demand, and the output of goods in which the country has comparative disadvantage contracts due to pressure from import competition. Thus, the real income of the groups engaged in the export industries will rise and real income of those engaged in the import competing industries will fall leading to inequality.

10] Adverse Working Conditions and low pay.

As underdeveloped countries attempt to cut costs to gain a price advantage, many workers in these countries face low pay, substandard working conditions substandard living conditions making it the,  “race to the bottom,” as critics call this drive to cut costs at the expense of human rights.

11]. Adverse effects on affects local producers and small businesses.
Critics contend that free trade is not beneficial to local businesses when it comes to profits. With reduced tariffs imposed on imported goods, foreign suppliers can easily lower their costs. When this happens, local producers have to compete with the prices, which is often hard to do. In the end, consumers will prefer imported goods and products over locally produced commodities.

Also in the short run infant [new] industries would struggle against international competition

Senile or declining and inefficient industries they may require large investment to make them efficient again to face international competition.

12] Unemployment.

May lead to unemployment especially in the developed countries as some manufacturers are encouraged to hire foreign workers for cheaper labor and even relocate their factories and plants overseas. Thus some workers are forced not to join labor unions and to accept lower wages

13]. It has an impact on culture.

This is not really an economic argument but more political and cultural. Many countries wish to protect their countries from what they see as an westernisation or commercialisation of their countries

According to critics in the importing countries, there is a possibility of losing its culture or at least be colonized due to the influx goods from exporting countries. For them, this has an effect not only in the culture of the importing country but also in politics.

eg Free trade policy adopted by the British government in India led to the destruction of Indian cottage and small scale industries

14].It has an impact on employees.
Opponents of free trade say that with the increasing competition this treaty offers, some businesses might close down or decide to do business elsewhere. When this happens, workers will be displaced. Regardless of the reduced prices, this will still have an effect on these workers because they will be unemployed or paid with lower wages.

15] It can harm the environment and add to pollution.
Some environmentalists express their views on the adverse effects of globalization, including free trade.

Critics say that free trade can harm the environment because developing counties may use up natural reserves of raw materials to export.

Also countries with strict pollution controls may find consumers import the goods from other countries where legislation is lax and pollution allowed.

Further they emphasize that this will lead some countries to disregard the environment when it comes to producing products and getting rid of waste materials just so they can compete in the industry. With more competition, others might cut their costs like proper dumping of wastes and their process of manufacturing.

16] Balance of payments.

Competition under free trade is unfair and unhealthy. The less developed countries find it difficult to compete with the economically advanced countries.

Under free trade, gains of trade are unequally distributed depending upon the level of development of different countries. The terms of trade are favourable for the developed countries, and un­favourable for the poor countries.

Less developed countries generally experience unfavourable balance of payments. The problem of un-favourable balance of payments cannot be solved under free trade policy.




General Agreement on Tariffs and Trade (GATT):


Towards the end of the Second World War a need for international cooperation was felt and the representatives of forty four countries met in Bretton Woods, New Hampshire, USA IN 1944 to discuss the international problems.

The conference led to the establishment of The International Monetary Fund [IMF], World Bank [WB] and it had envisaged the International Trade Organisation [ITO] to be the third. The ITO was expected to form rules for international trade. The ITO was never ratified and in its place The General Agreement on Tariffs and Trade, known as the GATT, was created soon after World War II to ensure a stable trade and economic world environment.

General Agreement on Tariffs and Trade (GATT) was the first multi-lateral worldwide trade agreement regulating international trade. GATT was a trade treaty implemented to boost economic recovery.

According to its preamble, its primary purpose was to increase international trade by the “substantial reduction of tariffs and other trade barriers and the elimination of preferences, on a reciprocal and mutually advantageous basis.”

The purpose of GATT therefore was to eliminate the harmful effects of trade protectionism that sent the global trsde down by 65% during the great depression.

While often referred to as an international organization, the GATT had a “de facto” role as an international organization.

GATT was signed by 23 nations in Geneva on October 30, 1947 and took effect on January 1, 1948.

The GATT completed 8 rounds of multilateral trade negotiations (MTNs).

It lasted until the signature by 123 nations in Marrakesh on April 14, 1994 of the Uruguay Round Agreements, which established the World Trade Organisation (WTO) on January 1, 1995

The original GATT text (GATT 1947) is still in effect under the WTO framework, subject to the modifications of GATT 1994.


The Basic Principles of the GATT:

1. Most-Favored-Nation (MFN) Treatment [non-discrimination]:

This is the fundamental principle of the GATT and it is not a coincidence that it appears in Article 1 of the GATT 1947. It states that each contracting party to the GATT is required to provide to all other contracting parties the same conditions of trade as the most favourable terms it extends to any one of them, i.e., each contracting party is required to treat all contracting parties in the same way that it treats its “most-favoured nation”.

That means all members must be treated equally when it comes to tariffs.

The only exceptions were the special tariffs among members of the British Commonwealth, if the tariff concession causes serious injury to domestic producers, and customs unions.

2. Reciprocity:

GATT advocates the principles of “rights” and “obligations”. Each contracting party has a right, e.g. access to markets of other trading partners on a MFN basis but also an obligation to reciprocate with trade concessions on a MFN basis. In a way, this is closely associated with the MFN principle.

3. Transparency:

Fundamental to a transparent system of trade is the need to harmonize the system of import protection, so that barriers on trade can be reduced through the process of negotiations [consultation].

The GATT therefore, limited the use of quotas, except in some specific sector such, as agriculture and advocated import regimes that are based on “tariff-only”.

In addition, the GATT and now the WTO, required many notifications from contracting parties on their agricultural and trade policies so that these can be examined by other parties to ensure that they are GATT/WTO compatible.

In addition, countries could restrict trade for reasons of national security, such as protecting patents, copyrights and public morals.

4. Tariff Binding and Reduction:

When GATT was established, tariffs were the main form of trade protection and negotiations in the early years focused primarily upon tariff binding and reduction.

The text of the 1947, GATT lays out the obligations on the contracting parties in this regard.

5. Prohibition of Quantitative Restrictions

GATT rules prohibited quantitative restrictions as far as possible.

Exceptions to the prohibition was granted to countries confronted with balance of payments crises and to developing countries.

6] Consultation

By providing a forum for continued consultation GATT sought to resolve disagreements.


General Agreement on Tariffs and Trade (GATT) brought about an orderly development of the International trade.

It established a forum for continuing consultations.

It brought to the conference table even diplomatic rupture. GATT could achieve considerable trade liberalization.

Yet certain defects of GATT were noticeable. They are listed below.

Disadvantages or Limitations of GATT

1. Only a provisional agreement

Basically GATT is a provisional agreement. GATT system allowed existing domestic legislation to continue even if it violated a GATT agreement.

GATT prescribed an international code of conduct in the sphere of trade. But there was no enforcement authority to ensure the compliance of GATT regulations by contracting parties. As a result, the impact of GATT on the orderly development of international trade was less.

2. Paltry gains to less developed countries

Less developed countries could get only little benefits from GATT. Trade liberalization was confined mostly to the developed countries. Manufactured products of interest to developed countries (textiles, clothing, footwear, etc) have been subject to increasing non-tariff barriers.

Developed countries enjoyed a more liberalized trading environment, Growing non-tariff barriers were severely affecting the exports of developing countries. Developed countries were increasing the protectionism while developing countries were liberalizing. Less developed countries could not bargain effectively and they could not reap much benefits from GATT.

3. No benefits in Commodity-wise negotiation

GATT followed the principle of commodity-based negotiations. Developing countries, mainly exporting primary products could not effectively bargain with developed countries. So, commodity-wise negotiations adversely affected the interest of developing countries. Developed countries could benefit much owing to their better bargaining power. Moreover, commodity based negotiations only resulted in prolonged deliberations at the various rounds of GATT negotiations.

4. Formation of Regional Trading Blocks undermines GATT

Formation of free trade areas and customs unions was allowed under the Article XXIV of the GATT. The emergence of the strong regional trading blocks such as European Union, North American Free Trade Association, Association of South East Asian Nations. etc., undermined the basic principle of GATT.

5. Lack of legal status

GATT had neither a legal status nor a global status. Basically, GATT is an agreement with a set of rules and procedures of a selective nature. So, GATT was less powerful. The dispute settlement system was slow and less efficient. Its ruling could be easily blocked.

6. Diverse membership

The member countries of the GATT have diverse political and economic interests. Arriving at consensus was, therefore, difficult. Formulation of general rules was fraught with difficulties owing to the diverse nature of membership.




The signing of the Uruguay Round by the member nations of GATT in April 1994 paved the way for setting up of the World Trade Organisation [WTO]

The WTO multilateral trade organization, was created on January 1, 1995, (after culmination of the Uruguay Round) as the successor to GATT and the court of final settlement in trade disputes.

The Uruguay round of GATT (1986-93) gave birth to World Trade Organization. The members of GATT singed on an agreement of Uruguay round in April 1994 in Morocco for establishing a new multilateral trade organization named WTO.

It was officially constituted on January 1, 1995 which took the place of GATT as an effective formal, organization. GATT was an informal organization which regulated world trade since 1948.

Contrary to the temporary nature of GATT, WTO is a permanent organization which has been established on the basis of an international treaty approved by participating countries.

Its headquartered in Geneva, Switzerland.

GATT primarily regulated the trade of goods; the WTO regulates the trade of services, foreign investment and intellectual property as well.

GATT still exists as the WTO’s umbrella treaty for trade in goods.

The World Trade Organization (WTO) establishes rules of trade among its member nations.

To this end, the  WTO also handles trade disputes, monitors trade policies, provides technical assistance for developing countries and cooperates with other international trade organizations.

It has achieved the international status like IMF and IBRD, but it is not an agency of the United Nations Organization (UNO).

Objectives of WTO

1] To implement the new world trade system as visualised in the Agreement, ie to develop integrated and more viable and durable multilateral trading system, taking into consideration thr efforts of GATT, past trade liberalization, Uruguay round of negotiations etc.

2] To promote World Trade in a manner that benefits every country; to enter into reciprocal and mutually advantageous trade arrangements by reducing tariffs and other barriers to trade.

To ensure equitable and speedy resolution of disputes between trading partners,

3] To enlarge production and trade of goods and trade of services.

To remove all barriers to international trade in goods, services, and intellectual property,

4] To ensure that developing countries secure a better balance in the sharing of the advantages resulting from the expansion of international trade corresponding to their developmental needs;

5] To demolish all hurdles to an open world trading system and usher in international economic renaissance because the world trade is an effective instrument to foster economic growth;

6] To enhance competitiveness among all trading partners so as to benefit consumers and help in global integration;

7] To increase the level of production and productivity with a view to ensuring level of employment in the world;

8] To ensure full employment and broad increase in effective demand.

9] To ensure optimum utilization of world resources.

10] To improve the level of living for the global population and speed up economic development of the member nations.

To accept the concept of sustainable development

11] To protect the environment.12] To ensure linkage between trade, environment and development policies.

How it works (Example).

More than 140 countries belong to the WTO, and membership is voluntary. Some countries hold observer status with the WTO, which enables the country to follow discussions and matters of particular interest. Some WTO committees are for members only, however, and do not allow observers.

WTO decisions are made by consensus rather than by delegation to a board of directors or leader. The WTO’s highest authority is the Ministerial Conference, whose members meet at least once every two years. The WTO General Council, with the Dispute Settlement Body and the Trade Policy Review Body, handles the WTO’s day-to-day duties. These day-to-day entities, which are collectively referred to as the General Council, act on behalf of the Ministerial Conference and are composed of several subcouncils, including the Council for Trade in Goods, the Council for Trade in Services and the Council for Trade-Related Aspects of Intellectual Property Rights. Each subcouncil has several committees.

WTO members negotiate World Trade Agreements, which are later ratified by the participating nations’ parliaments or congresses.


WTO agreements involve five principles:

1]. With some exceptions, members must provide equal trade-agreement terms to all fellow WTO countries. This equal treatment is known as most-favored-nation status. Members also must offer “national treatment,” meaning a WTO member may not discriminate against products from other WTO countries once the products have entered the member’s market.

2]. WTO agreements must work to lower trade barriers such as customs duties, tariffs, import bans and quotas.

3]. WTO agreements must help provide a stable and predictable business environment by including commitments about future trade policies.

4]. WTO agreements must define fair and unfair trade practices.

5]. WTO agreements must consider the special needs developing countries may have in implementing WTO requirements.

Dispute settlement processes are written into WTO agreements, which are legally binding. WTO members enforce agreements according to predetermined procedures, but there is some concern that economically strong countries may be able to ignore complaints brought by poorer countries, whose sanctions or other penalties may not hurt the offending country enough to stimulate compliance.

Why it Matters.

The WTO is one of the most powerful and controversial legislative bodies in the world. Ideally, the purpose of the WTO is to facilitate free trade while helping governments meet social and environmental goals.

Whether free trade and the WTO accomplish these goals is the subject of considerable debate. Some question whether free trade benefits wealthy nations and multinational corporations rather than communities and the environment. Further, approximately two thirds of WTO members are developing countries, and some of these countries are concerned that poor domestic infrastructure, political instability, and certain tariff arrangements disproportionately inhibit their abilities to engage in profitable trade. Critics also point out that a country’s choice not to join the WTO may effectively place an embargo on the goods and services of that country.


The WTO has nearly 153 members accounting for over 97% of world trade. Around 30 others are negotiating membership. Decisions are made by the entire membership. This is typically by consensus.

A majority vote is also possible but it has never been used in the WTO and was extremely rare under the WTO’s predecessor, GATT. The WTO’s agreements have been ratified in all members’ parliaments.

Ministerial Conferences

The WTO’s top [the highest authority] level decision-making body is the Ministerial Conferences which meets at least once in every two years.

It is made up of WTO members and can take decisions on all matters under any of the multilateral trae agreements.


General Council

The second tier of the WTO is the General Council (normally ambassadors and heads of delegation in Geneva, but sometimes officials sent from members’ capitals).

It reports to the General Council.

It meets several times a year in the Geneva headquarters.

The General Council also meets as the

i) Trade Policy Review Body – to review the trade policies of individual WTO members, to increase transparency and understanding of trade policies and practices, and to evaluate WTO policies and their effects.

ii) Disputes Settlement Body

to settle all disputes among the members of the WTO.


Goods Council, Services Council and intellectual Property (TRIPs).

At the next level, the Goods Council, Services Council and Intellectual Property (TRIPs) Council report to the General Council.


Numerous specialized committees, working groups and working parties

Numerous specialized committees, working groups and working parties deal with the individual agreements and other areas such as, the environment, development, membership applications and regional trade agreements.



The WTO secretariat, based in Geneva, has around 600 staff and is headed by a Director-General.

Its annual budget is roughly 160 million Swiss Francs.

It does not have branch offices outside Geneva.

Since decisions are taken by the members themselves, the secretariat does not have the decision making role that other international bureaucracies are given.

The secretariat s main duties

to supply technical support for the various councils and committees and the ministerial conferences,

to provide technical assistance for developing countries,

to analyze world trade and

to explain WTO affairs to the public and media.

The secretariat also provides some forms of legal assistance in the dispute settlement process and advises governments wishing to become members of the WTO.


Functions of WTO

The former GATT was not really an organisation; it was merely a legal arrangement. On the other hand, the WTO is a new international organisation set up as a permanent body. It is designed to play the role of a watchdog in the spheres of trade in goods, trade in services, foreign investment, intellectual property rights, etc. Article III has set out the following five functions of WTO;

1] The WTO shall facilitate the implementation, administration and operation and further the objectives of this Agreement and of the Multilateral Trade Agreements, it shall also provide the frame work for the implementation, administration and operation of the multilateral and bilateral agreements of the world trade.

2] The WTO shall provide the forum for negotiations among its members concerning their multilateral trade relations in matters dealt with under the Agreement in the Annexes to this Agreement.

3] The WTO shall administer the Understanding on Rules and provisions related to trade policy review mechanism and procedures Governing the Settlement of Disputes.

4] The WTO shall administer Trade Policy Review Mechanism.

5] With a view to achieving greater coherence in global economic policy making, the WTO shall cooperate, as appropriate, with the international Monetary Fund (IMF) and with the International Bank for Reconstruction and Development (IBRD) and its affiliated agencies.

6] To provide a platform to member countries to decide future strategies related to trade and tariff.

7].To administers the rules and processes related to dispute settlement.

8].To ensure the optimum use of world resources.

9] To assist international organizations such as, IMF and IBRD for establishing coherence in Universal Economic Policy determination.


WTO Agreements:

The WTO’s rule and the agreements are the result of negotiations between the members.

The current sets were the outcome to the 1986-93 Uruguay Round negotiations which included a major revision of the original General Agreement on Tariffs and Trade (GATI).

GATT is now the WTO’s principal rule-book for trade in goods.

The Uruguay Round also created new rules for dealing with trade in services, relevant aspects of intellectual property, dispute settlement and trade policy reviews.

The complete set runs to some 30,000 pages consisting of about 30 agreements and separate commitments (called schedules) made by individual members in specific areas such as, lower customs duty rates and services market-opening.

Through these agreements, WTO members operate a non-discriminatory trading system that spells out their rights and their obligations.

Each country receives guarantees that its exports will be treated fairly and consistently in other countries’ markets.

Each country promises to do the same for imports into its own market.

The system also gives developing countries some flexibility in implementing their commitments.

(a) Goods:

It all began with trade in goods. From 1947 to 1994, GATT was the forum for negotiating lower customs duty rates and other trade barriers; the text of the General Agreement spelt out important, rules, particularly non-discriminations since 1995, the updated GATT has become the WTO s umbrella agreement for trade in goods.

It has annexes dealing with specific sectors such as, agriculture and textiles and with specific issues such as, state trading, product standards, subsidies and action taken against dumping.

(b) Services:

Banks, insurance firms, telecommunication companies, tour operators, hotel chains and transport companies looking to do business abroad can now enjoy the same principles of free and fair that originally only applied to trade in goods.

These principles appear in the new General Agreement on Trade in Services (GATS). WTO members have also made individual commitments under GATS stating which of their services sectors, they are willing to open for foreign competition and how open those markets are.

(c) Intellectual Property:

The WTO’s intellectual property agreement amounts to rules for trade and investment in ideas and creativity. The rules state how copyrights, patents, trademarks, geographical names used to identify products, industrial designs, integrated circuit layout designs and undisclosed information such as trade secrets “intellectual property” should be protected when trade is involved.

(d) Dispute Settlement:

The WTO’s procedure for resolving trade quarrels under the Dispute Settlement Understanding is vital for enforcing the rules and therefore, for ensuring that trade flows smoothly.

Countries bring disputes to the WTO if they think their rights under the agreements are being infringed. Judgments by specially appointed independent experts are based on interpretations of the agreements and individual countries’ commitments.

The system encourages countries to settle their differences through consultation. Failing that, they can follow a carefully mapped out, stage-by-stage procedure that includes the possibility of the ruling by a panel of experts and the chance to appeal the ruling on legal grounds.

Confidence in the system is bourne out by the number of cases brought to the WTO, around 300 cases in eight years compared to the 300 disputes dealt with during the entire life of GATT (1947-94).

(e) Policy Review:

The Trade Policy Review Mechanism’s purpose is to improve transparency, to create a greater understanding of the policies that countries are adopting and to assess their impact. Many members also see the reviews as constructive feedback on their policies.

All WTO members must undergo periodic scrutiny, each review containing reports by the country concerned and the WTO Secretariat.


Advantages of WTO

1] Lower prices for consumers. Removing tariffs enables us to buy cheaper imports

2] Free trade encourages greater competitiveness. Firms face a higher incentive to cut costs. For example, a domestic monopoly may now face competition from foreign firms.

3] Law of comparative advantage states that free trade will enable an increase in economic welfare. This is because countries can specialise in producing goods where they have a lower opportunity cost.

4] Economies of scale. By encouraging free trade, firms can specialise and produce a higher quantity. This enables more economies of scale, this is important for industries with high fixed costs, such as car and aeroplane manufacture.

5] Free trade can help increase global economic growth.

6] Helps promote peace within nations: Peace is partly an outcome of two of the most fundamental principle of the trading system; helping trade flow smoothly and providing countries with a constructive and fair outlet for dealing with disputes over trade issues. Peace creates international confidence and cooperation that the WTO creates and reinforces.
7] Disputes are handled constructively: As trade expands in volume, in the numbers of products traded and in the number of countries and company trading, there is a greater chance that disputes will arise. WTO helps resolve these disputes peacefully and constructively. If this could be left to the member states, the dispute may lead to serious conflict, but lot of trade tension is reduced by organizations such as WTO.
8] Rules make life easier for all: WTO system is based on rules rather than power and this makes life easier for all trading nations. WTO reduces some inequalities giving smaller countries more voice, and at the same time freeing the major powers from the complexity of having to negotiate trade agreements with each of the member states.
9] Free trade cuts the cost of living: Protectionism is expensive, it raises prices, WTO lowers trade barriers through negotiation and applies the principle of non-discrimination. The result is reduced costs of production (because imports used in production are cheaper) and reduced prices of finished goods and services, and ultimately a lower cost of living.
10] It provides more choice of products and qualities: It gives consumer more choice and a broader range of qualities to choose from.
11] Trade raises income: Through WTO trade barriers are lowered and this increases imports and exports thus earning the country foreign exchange thus raising the country’s income.
12] Trade stimulates economic growth: With upward trend economic growth, jobs can be created and this can be enhanced by WTO through careful policy making and powers of freer trade.
13] Basic principles make life more efficient: The basic principles make the system economically more efficient and they cut costs. Many benefits of the trading system are as a result of essential principle at the heart of the WTO system and they make life simpler for the enterprises directly involved in international trade and for the producers of goods/services. Such principles include; non-discrimination, transparency, increased certainty about trading conditions etc. together they make trading simpler, cutting company costs and increasing confidence in the future and this in turn means more job opportunities and better goods and services for consumers.
14] Governments are shielded from lobbying: WTO system shields the government from narrow interest. Government is better placed to defend themselves against lobbying from narrow interest groups by focusing on trade-offs that are made in the interests of everyone in the economy.
15] The system encourages good governance: The WTO system encourages good government. The WTO rules discourage a range of unwise policies and the commitment made to liberalize a sector of trade becomes difficult to reverse. These rules reduce opportunities for corruption.






A trade bloc is a type of intergovernmental agreement often part of a regional intergovernmental organisation, where regional barriers to trade, [tariffs and non-tariff] are reduced or eliminated among the participating states.

Historic economic blocs include

the Hanseatic League, a trading alliance in northern Europe in existence between the 12th and 17th centuries and

The German Customs Union [Zollvrein] initiated in 1835, formed on the basis of the German Confederation and subsequently German Empire from 1871

Surges of trade bloc formation were seen in the 1960s and 1970s, as well as in the 1990s after the collapse of communism.

By 1997, more than 50% of all world commerce was conducted within regional trade blocs.


Economist Jeffrey J. Scott of the notes that members of successful trade blocs usually share four common traits:

Similar levels of per capita GNP.

Geographic proximity,

Similar or compatible trading regimes, and

Political commitment to regional organizations.


Advocates of worldwide free trade are generally opposed to trading blocs, which, they argue, encourage regional as opposed to global free trade. Whereas other economists believe that free trade is in the interest of every country, because it would create more feasible opportunities by turning indigenous resources into goods and services that are both currently in demand and will be in demand in the future by consumers.

Scholars and economists continue to debate whether regional trade blocs are leading to a more fragmented world economy or encouraging the extension of the existing global multilateral trading system.


Trade blocs can be stand-alone agreements between several states such as or part of a regional organisation

The North American Free Trade Agreement [NAFTA]

The European Union [EU].

Association of South East Asian Nations [ASEAN].

South Asian Association for Regional Cooperation [SAARC].

European Free Trade Association [EFTA] etc.


Depending on the level of economic integration trade blocs can fall into different categories, such as: preferential trading areas, free trade areas, customs union, common markets and economic and monetary unions.

Features of trade blocs

1] Special trade agreements that promotes and facilitates trade within the member countries.

2] Trade liberalisation with the objective of encouraging free trade area, custom union or common market.

3] Strives to reach common policy with other countries or other trading blocs.

4] Attempts to coordinate national economic policies of member nations.

Objectives of trade blocs

1] to obtain comparative cost advantage.

2] to strength political and economic ties with other nations.

3] to ensure market access over large areas.

4] to obtain benefits of economies of large scale.

5] to improve the bargaining power of member nations in international trade agreements.

6] to utilise the resources of member nations in an optimum manner.

7] to promote foreign trade.

8] to promote cooperation among member nations.

The Role and Importance of Trading Blocs are as follows:

Trading blocs have played a positive role in the development of international trade. This can be explained with the help of following points:

1. Economic integration:

Trading blocs have resulted in economic integration. It represents various forms of economic integration in a region like SAARC, OPEC, ASEAN, EU etc. Trading blocs unifies different independent economies and bring the nations closer.

Trading blocs helps in enhancing degree of regional co-operation and interrelationship. It brings the nation closer by unifying independent economies and facilitates economic cooperation among the members of the group.

2. Free transfer of resources:

Trading blocs helps in elimination of tariff, and non-tariff barriers and facilitates free transfer of resources across the border of member countries. This help in optimum utilisation of available resources.

This is because no country in the world is self-sufficient and they need to depend upon one another for the fulfillment of their requirement.

3. Increase in Trade:

Free transfer of resources helps in increasing the productivity of member nations. They eliminate trade barriers and encourage free trade. This increase import and export activities of member nations, which results into increase in trade revenues.

Trading blocs are sound and efficient to create sustainable economic growth. Trading blocs are created to encourage trading partners to buy and sell goods already made in their home countries. It also encourages economies of scale.

4. Employment opportunities:

Large-scale production and distribution leads to an increase in employment opportunities directly and indirectly. This results into increase in income level of the people, which enhances the standard of living of the economy.

Trading blocs tend to increase in income and employment level of the member countries. Capital is required to generate more and more employment opportunities. Trading blocs lead to free transfer of resources viz natural, human and capital resources, which are optimally utilised for creating employment opportunities.

5. Benefit to the consumers:

Formation of trading blocs enables transfer of technologies across borders resulting into improvement in productivity and quality of goods and services ultimately benefiting the consumers to a greater extent.

Removal of trade barriers and free transfer of resources have resulted into mass production and distribution. This facilitates provision of quality product in competitive prices to the consumers.

6. Cooperative spirit:

Trading blocs leads to economic, political and cultural integration of member -countries. This develops a spirit of cooperation and coordination among member nations. This helps in maintaining good relations among the member nations.

7. Competition:

Trading blocs has resulted into increase in competition between companies of entire region. It also facilitates to face competition effectively. Trading blocs gives competitive advantage not only to large establish firms but also to the newly emerging firm.

8. Development of region:

Trading bloc plays an important role in contributing the development, industrialisation and economic growth of whole region. Trading blocs are a sound and efficient way to create sustainable economic growth.

Liberal policies and removal of trade barriers has resulted in the growth of industries in those regions. This in turn increased the production and distribution activities leading to economic growth of those regions.

Types of Trade Blocs.

South Asian Association for Regional Cooperation [SAARC].

South Asian Association for Regional Cooperation [SAARC] comprises of Bangladesh, Bhutan, india, the Maldives, Nepal, Pakistan and Sri Lanka.

SAARC is the manifestation of the determination of the people of South East Asia to work together towards finding solutions to their common problems in a spirit of friendship, trust and understanding and to create an order based on mutual respect, equality and shared benefits. The main goal of SAARC is to accelerate the process of economic and social development in member states through joint actions in the agreed areas of cooperation.

Association of South East Asian Nations [ASEAN]

Association of South East Asian Nations [ASEAN] comprises of Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar, the Philippines, Singapore, Thailand and Vietnam.

Association of South East Asian Nations [ASEAN] is an alliance promoting economic and political cooperation by fostering dialog among its ten members.

ASEAN is becoming a major economic powerhouse in the region.

Its aims include accelerating economic growth, social progress and cultural development among its members. To discuss differences peacefully.

Protection of reginal peace and stability and

Opportunities for member countries

The North American Free Trade Agreement [NAFTA]

The North American Free Trade Agreement [NAFTA] is a trilateral trade agreement between the US, Canada and mexico.

The purpose of NAFTA is to eliminate trade barriers, facilitate cross-border movement of goods and services, increase investment opportunities, promote fair competition and enforce intellectual property rights in each party’s territory.

NAFTA was ment to create a trilateral trade bloc in North America.



Foreign direct investment.

An increase in foreign direct investment results from trade blocs and benefits the economies of participating nations. Larger markets are created, resulting in lower costs to manufacture products locally.

Economies of Scale.

The larger markets created via trading blocs permit economies of scale. The average cost of production is decreased because mass production is allowed and lowers prices for consumers.


Trade blocs bring manufacturers in numerous countries closer together, resulting in greater competition. Accordingly, the increased competition promotes greater efficiency within firms.

Trade effects.

Trade blocs eliminate tariffs,thus driving the cost of imports down. As a result, demand changes and consumers make purchases based on the lowest prices, allowing firms with a competitive advantage in production to thrive.

Market efficiency.

The increased consumption experienced with changes in demand combines with a greater amount of products being manufactured to result in an efficient market.

Free trade within the bloc

Knowing that they have free access to each other’s markets, members are encouraged to specialise. This means that, at the regional level, there is a wider application of the principle of comparative advantage.

Market access and trade creation

Easier access to each other’s markets means that trade between members is likely to increase.

Trade creation exists when free trade enables high cost domestic producers to be replaced by lower cost, and more efficient imports. Because low cost imports lead to lower priced imports, there is a ‘consumption effect’, with increased demand resulting from lower prices.


Jobs may be created as a consequence of increased trade between member economies.


Firms inside the bloc are protected from cheaper imports from outside, such as the protection of the EU shoe industry from cheap imports from China and Vietnam.


It’s been long believed by economists and some scholars that the disadvantages of trading blocs outweigh the advantages..

Regionalism vs. Multinationalism.

Trading blocs bear an inherent bias in favor of their participating countries. For example, NAFTA, a free trade agreement between the United States, Canada and Mexico, has contributed to an increased flow of trade among these three countries. Trade among NAFTA partners has risen to more than 80 percent of Mexican and Canadian trade and more than a third of U.S. trade, according to a 2009 report by the Council of Foreign Relations. However, regional economies establish tariffs and quotas that protect intra-regional trade from outside forces, according to the University of California Atlas of Global Inequality. Rather than pursuing a global trading regime within the World Trade Organisation, which includes the majority of the world’s countries, regional trade bloc countries contribute to regionalism rather than global integration.

Loss of Sovereignty.

A trading bloc, particularly when it is coupled with a political union, is likely to lead to at least partial loss of sovereignty for its participants. For example, the European Union, started as a trading bloc in 1957 by the Treaty of Rome, has transformed itself into a far-reaching political organization that deals not only with trade matters, but also with human rights, consumer protection, greenhouse gas emissions and other issues only marginally related.


No country wants to let foreign firms gain domestic market share at the expense of local companies without getting something in return. Any country that wants to join a trading bloc must be prepared to make concessions. For example, in trading blocs that involve developed and developing countries, such as bilateral agreements between the U.S. or the EU and relatively poor Asian, Latin American or African countries, the latter may have to allow  multinational corporations to enter their home markets, making some local firms uncompetitive.


Because trading blocs increase trade among participating countries, the countries become increasingly dependent on each other. A disruption of trade within a trading bloc as a result of a natural disaster, conflict or revolution may have severe consequences for the economies of all participating countries.

Harmful to economic welfare

Here is a simplified example of one disadvantage of a trading bloc: If a country is able to manufacture and produce goods at a price that is far cheaper than your local regional manufacturers can create the same goods and the government sets up a trading bloc with that country, then it becomes cheaper for retailers to import those goods from overseas.
While this might seem like a great idea on the surface, the disadvantages include economic difficulties for the local manufacturers and producers. This can increase the pressure on local suppliers and can also affect unemployment rates negatively.

The old saying ‘buy local’ seems to have some merit in this example, even if the product may be a little more expensive.

Exclusion of various other countries

It excludes various other countries that might not offer similar benefits for intra-industry trade. Regional businesses that rely on exporting to other countries to secure their profits may also be disadvantaged if their own local government has not secured a free trade agreement with the governments of other countries. This is because the tariffs and taxes on exporting their goods can be higher, which increases the prices. The importing country then feels compelled to import from other suppliers.

This kind of disadvantage with trading blocs has been seen recently with the agreement set in place between Europe, Australia and New Zealand. Once a large importer and exporter of some American cars (GM being the most notable), Australia now has agreements in place to import and export to Europe at a much lower cost. Australia also exports grain, sheep, beef and wool to Europe at a reduced tariff cost.
An agreement such as this excludes other countries outside the trading bloc, which can damage the economic vitality and efficiency of local exporters attempting to enter those regions.

Purchase of foreign currencies.

However, it’s not just exporting manufacturers of goods that are disadvantaged in trading blocs. Countries frequently buy and sell foreign currencies in order to do business with the governments of other countries.

An example of this is Britain exchanging Pounds Sterling with Europe for Euros. The trade agreement between European countries actually strengthened the value of the Euro, but it has a disadvantage on countries outside that agreement.
As an example, the primary disadvantage with a strengthening foreign currency would mean deflating the value of the American dollar by comparison, which can create higher inflation levels in the long run.

Loss of benefits

The benefits of free trade between countries in different blocs is lost.

Distortion of trade

Trading blocs are likely to distort world trade, and reduce the beneficial effects of specialisation and the exploitation of comparative advantage.

Inefficiencies and trade diversion

Inefficient producers within the bloc can be protected from more efficient ones outside the bloc. For example, inefficient European farmers may be protected from low-cost imports from developing countries.

Trade diversion arises when trade is diverted away from efficient producers who are based outside the trading area.


The development of one regional trading bloc is likely to stimulate the development of others. This can lead to trade disputes, such as those between the EU and NAFTA, including the recent Boeing (US)/Airbus (EU) dispute. The EU and US have a long history of trade disputes, including the dispute over US steel tariffs, which were declared illegal by the WTO in 2005. In addition, there are the so-called beef wars with the US applying £60m tariffs on EU beef in response to the EU’s ban on US beef treated with hormones; and complaints to the WTO of each other’s generous agricultural support.

During the 1970s many former UK colonies formed their own trading blocs in reaction to the UK joining the European common market.






South Asian Association for Regional Cooperation [SAARC].

The South Asian Association for Regional Cooperation (SAARC) is the regional intergovernmental organisation and geopolitical union in South Asia.

Its member states include Afghanistan, Bangladesh, Bhutan, India, Nepal, the Maldives, , Pakistan and Sri Lanka. SAARC comprises 3% of the world’s area, 21% of the world’s population and 3.8% (US$ 2.9 trillion) of the global economy, as of 2015.

SAARC was founded in Dhaka on 8th December, 1985.  Its secretariat is based in Kathmandu, Nepal. The organization promotes development of economic and regional integration. It launched the South Asia Free Trade in 2006. SAARC maintains permanent diplomatic relations at the Unite Nations as an observer and has developed links with multilateral entities, including the European union.



The first concrete proposal for establishing a framework for regional cooperation in South Asia was made by the late president of Bangladesh, Ziaur Rahman, on May 2, 1980. Prior to this, the idea of regional cooperation in South Asia was discussed in at least three conferences:

the Asian Relations Conference in New Delhi in April 1947,

the Baguio Conference in the Phillippines in May 1950, and

the Colombo Powers Conference in Sri Lanka in April 1954.

In the late 1970s, the seven inner SAARC nations agreed upon the creation of a trade bloc consisting of South Asian countries, to provide a platform for the people of South Asia to work together in a spirit of friendship, trust, and understanding.

The idea of regional cooperation in South Asia was again mooted in May 1980. The foreign ministers of the seven countries met for the first time in Colombo in April 1981. The Committee of the Whole, which met in Colombo in August 1985, identified five broad areas for regional cooperation. New areas of cooperation were added in the following years.

President of Bangladesh, Ziaur Rahman, later addressed official letters to the leaders of the countries of the South Asia, presenting his vision for the future of the region and the compelling arguments for region. During his visit to India in December 1977, Rahman discussed the issue of regional cooperation with the Indian Prime Minster, Morarji Desai.

In the inaugural speech to the Colombo Plan Consultative Committee which met in Kathmandu also in 1977, King Birendra of Nepal gave a call for close regional cooperation among South Asian countries in sharing river waters.After the USSR;s intervention in Afghanastan, the efforts to established the union was accelerated in 1979 and the resulting rapid det erioration of South Asian security situation.

Responding to Rahman and Birendra’s convention, the officials of the foreign ministries of seven countries met for the first time in Colombo in April 1981.  The Bangladeshi proposal was promptly endorsed by Bhutan, Nepal, Sri Lanka and the Maldives but India and Pakistan were sceptical initially.

The Indian concern was the proposal’s reference to the security matters in South Asia and feared that Rahman’s proposal for a regional organisation might provide an opportunity for new smaller neighbours to renationalise all bilateral issues and to join with each other to form an opposition against India.

Pakistan assumed that it might be an Indian strategy to organise the other South Asian countries against Pakistan and ensure a regional market for Indian products, thereby consolidating and further strengthening India’s economic dominance in the region.

However, after a series of quiet diplomatic consultations between South Asian foreign ministers at the U.N. headquarters in New York from August to September 1980, it was agreed that Bangladesh would prepare the draft of a working paper for discussion among the foreign secretaries of South Asian countries.The foreign secretaries of the inner seven countries again delegated a Committee of the Whole in Colombo on September 1981, which identified five broad areas for regional cooperation. New areas of co-operation were added in the following years.

In 1983, the international conference held by Indian Minister of External Affairs, P,V,Narasimha Rao. in New Delhi, the foreign ministers of the inner seven countries adopted the Declaration on South Asian Association Regional Cooperation (SAARC) and formally launched the Integrated Programme of Action (IPA) initially in five agreed areas of cooperation namely, Agriculture; Rural Development; Telecommunications; Meteorology; and Health and Population Activities.

Officially, the union was established in Dhaka with Kathmandu being union’s secretariat-general.

The first SAARC summit was held in Dhaka on 7–8 December 1985 and hosted by the President of Bangladesh Hussain Ershad, The declaration signed by

King of Bhutan Jigme Singye Wangchuk,

President of Pakistan Zia-ul-haq.

Prime Minister of India Rajiv Gandhi

King of Nepal Birendra Shah.

President of Sri Lanka, J.R.Javewardene.

President of Maldives, Maumoon Gavoom.


The member states are Afghanistan, Bangladesh, Bhutan, India, Nepal, the Maldives, , Pakistan and Sri Lanka.

SAARC was founded by seven states in 1985. In 2005, Afghanistan began negotiating their accession to SAARC and formally applied for membership on the same year. The issue of Afghanistan joining SAARC generated a great deal of debate in each member state, including concerns about the definition of South Asian identity because Afghanistan is a Central Asian country

The SAARC member states imposed a stipulation for Afghanistan to hold a general election. The non-partisan elections were held in late 2005. Despite initial reluctance and internal debates, Afghanistan joined SAARC as its eighth member state in April 2007.



States with observer status include Australia, C hina, the European Union, Iran, Japan, Mauritius, South Korea and the United States.

On 2 August 2006, the foreign ministers of the SAARC countries agreed in principle to grant observer status to three applicants; the US and South Korea (both made requests in April 2006), as well as the European Union (requested in July 2006). On 4 March 2007, Iran requested observer status, followed shortly by Mauritius.


Potential future members

Myanmar has expressed interest in upgrading its status from an observer to a full member of SAARC.

Russia has applied for observer status membership of SAARC.

Turkey applied for observer status membership of SAARC in 2012

South Africa has participated in meetings.


Goals and Objectives of South Asian Association for Regional Cooperation (SAARC)

The member countries of South Asian Association for Regional Cooperation (SAARC) are India, Pakistan, Bangladesh, Sri Lanka, Nepal, Bhutan and Maldives, SAARC started functioning from 1985.

The guiding principles of SAARC are:

1. Respect the principles of sovereign equality, territorial integrity, political independence, non-interference in internal affairs of other States and mutual benefit.

2. It is no substitute for bilateral and multilateral cooperation but complements them.

3. Its obligation shall not be inconsistent with bilateral and multilateral obligation; the charter excluded bilateral and contentious issues from its deliberations.

Its Goals / Objectives / Need / Functions:

1] To accelerate economic growth, social progress and cultural development in the region.

2] To develop the welfare, and to promote their quality of life of the people of South Asia.

3] To strengthen collective self-reliance

4] It encourages active participation, collaboration and mutual assistance in economic, social, cultural, technical and scientific fields

5] To promote towards mutual trust, understanding and appreciation of the problems of one another.

6] To promote self reliance among the countries of South Asia

7] It aims at increasing people to people contact and sharing of information among the SAARC members

As Sri Rajiv Gandhi said, it concerns itself with the problems of self-reliance, eradication of poverty, illiteracy, malnutrition and disease in the area

8] to promote strong cooperation among themselves in international forums in matters of common interests.

9] To develop free regional trade and stimulate investment flows to accelerate economic development.

The major objective of SAARC is to make the SAARC as a Free Trade Zone and eliminate poverty from this region.

SAARC is th8e common platform for all the member countries to work together in a goal to achieve friendship, trust, and understanding. All the member’s countries put forward their problems and try to find out the solutions.


Among the seven member States, India is in a pre-eminent position in terms of area, population and military strength. India is the only country in the region that has common land or maritime borders with all countries of SAARC. Pakistan was a part of British India till 1947; Bangladesh was a part of Pakistan till 1971. All countries except Nepal and Bhutan were under British colonial rule till they got Independence. Sri Lanka is only 30 miles away from the Indian shores. Nepal is geographically, historically and culturally lined with India. Bhutan is guided by India in its foreign policy since 1949; Maldives is a tiny island with a population of 2 lakhs. All the SAARC countries are linked together geographically, historically and culturally.

SAARC has a four tiered structure

(i) the annual summit where heads of governments of member States meet

(ii) Council of Ministers which meets once in six months

(iii) Standing Committees of the Secretaries and

(iv) Technical Committees of officials and experts.

The first summit was held in December in Bangladesh in 1985. T

he second summit met in New Delhi (India) in 1986.

The third meeting was at Kathmandu (Nepal) in 1987.

The fourth summit was he4ld in Islamabad (Pakistan) in 1988.

The firth summit meet was in Lale (Maladives) in 1990.

Colombo in (Sri Lanka) was the venue for the sixth summit in 1991.

The seventh summit meet was held in Dacca (Bangladesh) in 1993.

While the eight summit was hosted by New Delhi (India)

in 1995 the ninth summit was held at Maldives in 1997.

SAARC has established a permanent secretariat in Kathmandu (Nepal) and it is functioning since 1987. The head of the State of the host country acts as Chairman till the next summit when the chairmanship is handed over to the next host country.


SAARC has come of age and has already reached certain notable agreements and conventions among the member States. They are:

1. Convention on food security reserve.

2. Convention on suppression of terrorism.

Sri Lanka made a proposal for the creation of a SAARC Preferential Trade Agreement (SAPTA).

The SAARC members took a historic decision to extend regional co-operation to the core economic areas. The member nations of SAARC are also interested in activities concerning mass media, bio-technology and environment. The Male Declaration wanted to make SAARC, ‘vibrant and result-oriented’. The SAARC wants to effectively check drug abuse and drug trafficking: it wants suppress terrorism and promote organized tourism. The member nations observed 1991 as, SAARC Year of Shelter, and 1992 as, ‘SAARC Year of the Disabled’. It observed the last decade of the twentieth century as ‘SAARC Decade of the Girl Child’ to prohibit discrimination against female children of the region.

SAARC has to go a long way to fulfill the aims and objectives of its charter.



Secretariat of the South Asian Association for Regional Cooperation in Kathmandu, Nepal.

The SAARC Secretariat was established in Kathmandu on 16 January 1987 and was inaugurated by Late King Birendra Bir Bikram Shah of Nepal.

Regional Centres

The SAARC Secretariat is supported by following Regional Centres established in the Member States to promote regional co-operation. These Centres are managed by Governing Boards comprising representatives from all the Member States, SAARC Secretary-General and the Ministry of Foreign/External Affairs of the Host Government. The Director of the Centre acts as Member Secretary to the Governing Board which reports to the Programming Committee.

Apex and Recognised Bodies

SAARC has six Apex Bodies, they are-

SAARC chamber of commerce and industry.[SCCI]

South Asian Association foe regional cooperation  [SAARCLAW]

South Asian Federation of Accountants, [SAFA]

South Asian Foundation [SAF]

South Asia Initiative to End Violence Against Children [SAIEVAC]

Foundation of SAARC, Writers and Literature. [FOSWAL]

Amjad Hussain B Sail is the current Secretary General of SAARC.

SAARC also has about 17 recognised bodies.


Political issues

Lasting peace and prosperity in the Indian subcontinent has been elusive because of the various ongoing conflicts in the region. Political dialogue is often conducted on the margins of SAARC meetings which have refrained from interfering in the internal matters of its member states. During the 12th and 13th SAARC summits, extreme emphasis was laid upon greater cooperation between the SAARC members to fight terrorism.

The 19th SAARC summit scheduled to be held in Pakistan was called off as India, Bhutan, and Afghanistan decided to boycott it. It was for the first time that four countries boycotted a SAARC summit, leading to its cancellation.


South Asian Free Trade Area


Countries under the South Asian Free Trade Area

SAFTA was envisaged primarily as the first step towards the transition to a South Asian Free Trade Area [SAFTA] leading subsequently towards a Customs Union, Common Market and the Economic Union.

In 1995, the Sixteenth session of the Council of Ministers (New Delhi, 18–19 December 1995) agreed on the need to strive for the realisation of SAFTA and to this end an Inter-Governmental Expert Group (IGEG) was set up in 1996 to identify the necessary steps for progressing to a free trade area.

The Tenth SAARC Summit [Colombo, 29–31 July 1998] decided to set up a Committee of Experts (COE) to draft a comprehensive treaty framework for creating a free trade area within the region, taking into consideration the asymmetries in development within the region and bearing in mind the need to fix realistic and achievable targets.

The SAFTA Agreement was signed on 6 January 2004 during Twelfth SAARC Summit held in Islamabad, Pakistan. The Agreement entered into force on 1 January 2006, and the Trade Liberalisation Programme commenced from 1 July 2006. Under this agreement, SAARC members will bring their duties down to 20 percent by 2009. Following the Agreement coming into force the SAFTA Ministerial Council (SMC) has been established comprising the Commerce Ministers of the Member States.[45] In 2012 the SAARC exports increased substantially to US$354.6 billion from US$206.7 billion in 2009. Imports too increased from US$330 billion to US$602 billion over the same period. But the intra-SAARC trade amounts to just a little over 1% of SAARC’s GDP. In contrast, in ASEAN [which is actually smaller than SAARC in terms of the size of the economy] the intra-bloc trade stands at 10% of its GDP.

SAFTA was envisaged to gradually move towards South Asian Economic Union, but the current intra-regional trade and investment relation are not encouraging and it may be difficult to achieve this target. The SAARC intra-regional trade stands at just five per cent on the share of intra-regional trade in overall trade in South Asia. Similarly, foreign direct investment is also dismal. The intra-regional FDI flow stands at around four per cent of the total foreign investment.

The Asian Development Bank has estimated that inter-regional trade in SAARC region possessed potential of shooting up agricultural exports by $14 billion per year from existing level of $8 billion to $22 billion.The study by Asian Development Bank states that against the potential average SAARC intra-regional trade of $22 billion per year, the actual trade in South Asia has been only around $8 billion. The uncaptured potential for intra-regional trade is therefore $14 billion per year, i.e. 68%.



Council of Minister.

the Council of Minister is represented by the foreign ministe of the member countries. The council the apex policy making body.

The Council meets twice a year and may also meet in extraordinary session by agreement of member states.


Its functions include:

  1. Formulation of policies
  2. Review of functioning
  3. Deciding new areas of cooperation
  4. Chalk our additional mechanism
  5. Decide about general issues of common of interest of the SAARC member.


Standing Committee.

It is comprised by the foreign secretarian of the member government. Its major functions are:

  1. To monitor and co-ordinate the programmes
  2. To determine inter-sectored priorities
  3. To mobilise cooperation within and outside the region
  4. To deal with the modalities of financing.


It may meet as often as deemed necessary but in practice it meets twice a year and submits its reports to the Council of Ministers.


Programming Committee.

It consist of the senior official of the member governments. Its functions include:

  1. Scrutinizing the budget of the secretarials
  2. Finalizing the annual schedule
  3. External activities assigned by the standing committee
  4. Analyses the respects of the technical committee.
  1. Takes up any other matter assigned to it by the Standing Committee.


Technical Committee: It consist of the represented of the member nations. Its function are:

  1. To formulate project and programmer
  2. To monitor and execute the projects
  3. To submit reports. to the Standing Committee

The Technical Committee convers the areas such as: Aqriculture, Communication, Environment, Rural Development, Health and Population, Science and Technology, Tourism and Transport.


The chairmanship of each Technical Committee normally rotates among member countries in alphabetical order, every two years.


Action Committees

According to the SAARC Charter, there is a provision for Action Committees comprising member states concerned with implementation of projects involving more than two, but not all member states. At present, there are no such Action Committees.



The SAARC secretarials is located in Nepal. Its fuction include:

1. Coordination, execution and monetaring of SAARC activities

2. Servicing the SAARC meetings

3. Work as communication link between the SAARC and other international forum.

The secretariat is headed by the secretary-General appointed by the Council of Ministers. These are 7 Director (One from each member nation) and the general service staff.


Other Meetings

During the first decade of SAARC, several other important meetings took place in specific contexts. A number of SAARC Ministerial Meetings have been held, to focus attention on specific areas of common concern and has become an integral part of the consultative structure.

In addition, a high level Committee on Economic Cooperation (CEC) has been established in 1991, for identifying and implementing programmes in the core area of economic and trade cooperation.
A three-tier mechanism was put in place in 1995, to follow-up on the relevant SAARC decisions on Poverty Eradication. The tiers consist of Meeting of Secretaries in-Charge of Poverty Eradication, Meeting of Finance/Planning Secretaries, and Meeting of Finance/Planning Ministers.





Association of SoUth East Asian Nations [ASEAN].


10 States ― Brunei Darussalam, Cambodia, Indonesia, Laos, Malaysia, Myanmar, Philippines, Singapore, Thailand, and Vietnam. 1 Observer – Papua New Guinea.

The ASEAN Regional Forum ( ARF )

THhe ARF is an important forum for security dialogue in Asia.

It draws together 27 members which have a bearing on the security of the Asia Pacific region


Members of ARF

27 States – Australia, Bangladesh, Brunei Darussalam, Cambodia, Canada, China, European Union, India, Indonesia, Japan, Democratic Peoples’ Republic of Korea, Republic of Korea, Laos, Malaysia, Myanmar, Mongolia, New Zealand, Pakistan, Papua New Guinea, Philippines, Russian Federation, Singapore, Sri Lanka, Thailand, Timor Leste, United States, and Vietnam.


ASEAN History


  • 1967 8th of August ASEAN is established in Bangkok at the height of the Vietnam War by the five original member countries: Indonesia, Malaysia, Philippines, Singapore, and Thailand.
  • Vietnam on 28 July 1995,
  • Laos and Myanmar on 23 July 1997, and
  • Cambodia on 30 April 1999.
  • 1976 First ASEAN Summit convenes in Bali, Indonesia.
  • 1978 First ASEAN–European Economic Community ministerial meeting held in Brussels.
  • 1984 Brunei joins ASEAN.
  • 1994 ASEAN establishes the ASEAN Regional Forum (ARF), which is focused on security interdependence in the Asia-Pacific region. Besides ASEAN member states, the present participants include Australia, Canada, China, European Union, India, Japan, South Korea, North Korea, Mongolia, New Zealand, Pakistan, Papua New Guinea, the Russian Federation and the United States.
  • 1995 Vietnam joins ASEAN.
  • 1997 First meeting of ASEAN Plus Three, comprising leaders of the 10 ASEAN members and their counterparts from East Asia – China, Japan and South Korea. Laos and Myanmar join ASEAN.
  • 1998 The two day ASEAN summit opens in Hanoi, Vietnam. Cambodia is admitted formally. The ASEAN nations approve the “Hanoi Action Plan,” a 34-point declaration that emphasized economic recovery based on free market policies.
  • 1999 Cambodia joins ASEAN.
  • 2000 The Chiang Mai Initiative (CMI) is set up to help East Asian cash strapped countries defend their currencies in times of trouble. The initiative comes in response to the 1997 East Asian financial crises. ASEAN, China, Japan, and South Korea launch the multilateral arrangement of currency swaps (CMI).
  • 2002 China and ASEAN agree to a China-ASEAN free-trade area to be implemented in stages up to 2015.
  • 2005 First meeting of ASEAN Plus Six, also called the East Asia Summit, comprising the ASEAN countries plus China, Japan, South Korea, India, Australia and New Zealand.
  • 2007 ASEAN signs charter giving its 10 member states a legal identity, a first step towards its aim of a free trade area by 2015.
  • 2008 The Association of Southeast Asian Nations moves to forge an EU-style community, signing a charter that makes the bloc a legal entity. This could pave the way for creating a single market within seven years.
  • 2010 A free-trade agreement between China and the 10 members of the Association of Southeast Asia Nations (ASEAN) comes into effect. The six richest members scrap tariffs on 90% of goods. The four poorest (Vietnam, Cambodia, Laos, Myanmar) will not need to cut tariffs to the same level until 2015.
  • 2013 ASEAN members and their trading partners (Australia, China, India, Japan, New Zealand, and South Korea) begin the first round of negotiations on establishment of the Regional Comprehensive Economic Partnership.
  • 2015 The ASEAN Economic Community (AEC) Blueprint is adopted by ASEAN leaders at the 27th ASEAN summit. This blueprint provides broad directions to achieve a highly integrated and cohesive economy; a competitive, innovative, and dynamic ASEAN; enhanced connectivity and sectoral cooperation; a resilient, inclusive, people-oriented, and people-centered ASEAN; and a global ASEAN.



The ASEAN Declaration states that the aims and purposes of the Association are:

(1) to accelerate the economic growth, social progress and cultural development in the region through joint endeavours in the spirit of equality and partnership in order to strengthen the foundation for a prosperous and peaceful community of Southeast Asian nations, and

(2) to promote regional peace and stability through abiding respect for justice and the rule of law in the relationship among countries in the region and adherence to the principles of the United Nations Charter. In 1995, the ASEAN Heads of State and Government re-affirmed that “Cooperative peace and shared prosperity shall be the fundamental goals of ASEAN.”

Enhance peace and stability.

Nuclear weapon free zone.

Democratic and harmonious environment.

Alleviate poverty.

Promote sustainable development.

Adopt peaceful settlement of disputes.

Develop human resource.

Increase welfare

Promote cooperation.

Strength democracy

Fundamental Principles

The Treaty of Amity and Cooperation (TAC) in Southeast Asia, signed at the First ASEAN Summit on 24 February 1976, declared that in their relations with one another, the High Contracting Parties should be guided by the following fundamental principles:


  • Mutual respect for the independence, sovereignty, equality, territorial integrity, and national identity of all nations;
  • The right of every State to lead its national existence free from external interference, subversion, or coercion;
  • Non-interference in the internal affairs of one another;
  • Settlement of differences or disputes by peaceful manner;
  • Renunciation of the threat or use of force; and aggression.
  • Effective cooperation among themselves.
  • Shared commitment and collective responsibility in enhancing regional peace, security and prosperity.
  • Respect for different cultures
  • Enhanced consultation on matters seriously affecting the common interests of ASEAN nations.

Political Cooperation

The TAC stated that ASEAN political and security dialogue and cooperation should aim to promote regional peace and stability by enhancing regional resilience. Regional resilience shall be achieved by cooperating in all fields based on the principles of self-confidence, self-reliance, mutual respect, cooperation, and solidarity, which shall constitute the foundation for a strong and viable community of nations in Southeast Asia.

Some of the major political accords of ASEAN are as follows:


  • ASEAN Declaration, Bangkok, 8 August 1967
  • Zone of Peace, Freedom and Neutrality Declaration, Kuala Lumpur, 27 November 1971
  • Declaration of ASEAN Concord, Bali, 24 February 1976
  • Treaty of Amity and Cooperation in Southeast Asia, Bali, 24 February 1976
  • ASEAN Declaration on the South China Sea, Manila, 22 July 1992
  • Treaty on the Southeast Asia Nuclear-Weapon-Free Zone, Bangkok, 15 December 1997
  • ASEAN Vision 2020, Kuala Lumpur, 15 December 1997
  • Declaration on Joint Action to Counter Terrorism, 5 November 2001
  • Declaration of ASEAN Concord II, Bali, 7 October 2003
  • ASEAN Convention on Counter Terrorism (ACCT), 11 January 2007
  • Cebu Declaration on the Acceleration of the Establishment of an ASEAN Community by 2015, 11 January 2007


Although ASEAN States cooperate mainly on economic and social issues, the organization has a security function, with a long-discussed program for confidence-building measures and for establishing a nuclear-weapon-free zone in Southeast Asia, with the objective of implementing ASEAN’s 1971 Declaration on a Zone of Peace, Freedom and Neutrality (ZOPFAN), and a Southeast Asia Nuclear Weapon-Free Zone (SEANWFZ), which would be a component of ZOPFAN.

Verification and Compliance

The ASEAN Regional Forum [ARF] is an important multilateral forum for political and security consultations and cooperation.


The ARF has begun to explore activities where there is overlap between confidence-building measures and preventive diplomacy. ASEAN Member States are urged to settle disputes through friendly negotiations applying the procedures of the Treaty of Amity and Cooperation (TAC) of 1976.


However, the Member States are not obliged to use the Treaty stipulations for the peaceful settlement of disputes. In case a State resorts to the use of force, no system of collective security is foreseen.




SAARC Preferential Trading Arrangement – (SAPTA)

The Agreement on SAARC Preferential trading Arrangement (SAPTA) which envisages the creation of a Preferential Trading Area among the seven member states of the SAARC,

On April 11, 1993, the Council of Minister signed the SAPTA in Dhaka on and It entered into force on 7 December 1995, with the desire of the Member States of SAARC (India, Pakistan, Sri Lanka, Nepal, Bangladesh, Bhutan, Afghanistan and the Maldives) to promote and sustain mutual trade and economic …


An inter-government group (IGG) formed by South Asian Association for Regional Cooperation (SAARC) members to negotiation incremental tariff reforms between member countries. The goal is to increase trade between Asian countries and to assist less economically advantaged members through preferential treatment


SAPTA would be improved gradually for the mutual benefit of all the practice in the product areas covering raw materials, semi-finished goods and finished goods for mutual convenience.


SAPTA makes provision for information, consultation and dispute settlement. Least development countries such as Bhutan and Nepal among the members are given extra concessions. Members can withdraw from SAPTA by giving a 6 month notice.

In 2005, SAARC’s 13th meeting was held at. Dhaker for obtaining consensus about the South Asian Free Trade Agreement (SAFTA) from 1, January 2006.

SAARC’s 14lh meeting was held at New Delhi in April 2007. Agreement took place above to root-out terrorism in the region.

India accorded the must favoured Nation (MFN) status to Pakistan in the trade and economic matters.

SAARC members also united to fight against biases under the WTO arrangements.

China has shown her interest in joining the SAARC and in the 14thsummit the members have supported this issue.

Iran has also shown her interest in joining the SAARC on observer category. The issue was postponed for the next meeting.

Critics have however observed that the SAPTA has not been functioning effectively due to conflict between India and Pakistan. Further, the SAARC members lack significant trade potential and enthusiasm such as in the case of ASEAN members.

SAPTA therefore is the first step towards higher levels of trade and economic co-operation in the region.

Its main objectives are:

1. Gradual liberalization of trade among the SAARC members.

2. Elimination of trade barriers among the SAARC nations. Especially, tariff reduction.

3. Promoting and sustaining trade and economic cooperation among the member nations of SAARC. Through exchange of trade concessions on para-tariff and non-tarrif measures.




The basic principles 

1] All the participating member countries will benefit equitability and on the basis of  reciprocity and mutuality of advantages

2] Step by step negotiations and periodic reviews so as to improve and extend the preferential trade arrangement, in stages

3] Inclusion of all products, manufactures and commodities.

4] Special and favourable treatment to Least Developed Contacting States by helping them to expand their export potential through technical assistance and by setting up of agricultural and industrial projects by establishing manufacturing facilities.


Four negotiating approaches

SAPTA specified four negotiating approaches namely,

product by product basis,

across the board tariff reduction,

sectoral basis and

direct trade measures.


However it was agreed that tariff concessions would initially be negotiated on a product – by- product basis.

The agreement also provides for negotiation of tariff concessions to be an ongoing process.

The SAPTA envisages that concessions on tariff para-tariff and non tariff measures will be negotiated step -buy step improved and extended in successive stages.


National Schedules of Concessions 

The process of negotiation on the schedule of concession, which forms an integral part of the Agreement, commenced in 1993.

For this purpose, the Inter Governmental Group on Trade Liberalization (IGG) was set up. The IGG met on six occasions in various capitals. At the sixth meeting held in Katmandu on 20 th and 21 st April 1995, the delegations held intensive rounds of bilateral and multilateral negotiations and agreed on the National Schedule of concessions to be granted by individual member states to other member states under the SAPTA Agreement.

Four rounds of trade negotiations were concluded under SAPTA covering over 5000 commodities. Each Round contributed to an incremental trend in the product coverage and the deepening of tariff concessions over previous Rounds.


During the first and the second rounds, trade negotiations were conducted on a product by product basis. In the third and the fourth rounds, negotiations were conducted on chapter wise.

Maintenance of SAPTA Concession 

the Agreement on the South Asian Free Trade Area (SAFTA)which was implemented with effect from 1st January 2006 will supersede the SAARC Preferential Trading Arrangement (SAPTA).

On the issue of maintaining SAPTA concessions for LDCs, the Committee agreed that once the Non-LDCs member states complete the Trade Liberalization Programme (TLP) for LDC member states, SAPTA concessions would cease for LDC member states.

However, if any item on which SAPTA concessions are available to LDC, appear in the sensitive lists of non-LDC, they shall maintain the same level of concession through derogation.

The Committee has further agreed that if the items under TLP enjoy tariff preferences under SAPTA, the Non-LDCs shall reduce their tariff on those items to a rate not higher than the rate applicable for LDCs under SAPTA on the date agreed for base rate for TLP.

It was also agreed at the first SAFTA Ministerial Council Meeting held in April that LDCs should also maintain concessions under SAPTA for Non LDCs until the completion of TLP irrespective of whether the products are in the sensitive lists or not(Please contact the Department of Commerce for further clarifications).


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