Use trade as tool to create peace and friendship

EXIM MATTERS

Last week, leaders of eight Latin American countries got together to set up a "South American Community of Nations" with a vision to work towards free movement of goods, services, people, and capital besides, in due course, towards a Customs union, single currency and even a common Parliament that will unite the 360 million people in 12 South American countries.

The leaders feel that the new entity will help them to confront the challenges of globalisation and make it fairer and more equitable. They expect unity to help increase their political clout and give greater weight in negotiations in international forums.

Inspiration for the idea for South American Union is the European Union, but whether the South American countries will give up sovereignty selectively and how long they will take to do so is a matter of conjecture.

Already initiatives have been taken to build bridges, roads and energy network across the countries and to integrate five more countries with Mercosur""the free-trade agreement between Brazil, Argentina, Uruguay and Paraguay.

In trying to follow the example of Europe, the South American leaders will take note that European Union is a remarkable achievement but far from perfect.

The initial momentum for integration in Europe was driven by fear of another devastating war but later on, ambition took over as the driving force.

The European Union has not only delivered peace and to quite an extent, prosperity but now speaks in one voice on most political and economic matters in international forums.

The key reason for success of European Union is the willingness of the members to give up their sovereignty in economic policy making and to quite an extent giving up individual identity and pride of a nation state.

South Americans are far from a homogenous people. Moreover, the countries are not all that prosperous.The generosity that richer European countries show to other members may be difficult to emulate. Yet, the very idea of South America trying to replicate the European Union model is exciting enough.

For India, it is time to sit up and take notice. South Asia has been torn with conflicts and mutual distrust. There is enough scope to use trade as a tool to create a vested interest for peace and friendship with the neighbours.

A Customs union of about 1.4 billion people can be an effective negotiating block. But, it must be recognised that the vision as to be a Customs union, even if in the short-run free-trade agreements or preferential trade agreements look more practical.

Customs unions put in place a common external tariff, whereas free-trade agreements allow each country to maintain different tariffs. Free-trade agreements are prone to more distortions and cause more heartburn because one member can always lower input tariffs in select commodities to boost its competitiveness vis-a-vis the other.

The World Bank, in its "Global Economic Prospects for 2005" says economic benefits from free-trade agreements are far from proven and that in recent times, most tariff cuts have been unilateral or through multilateral negotiations.

Economists are rather unanimous that multilateral trade agreements bring greater benefits whereas bilateral or regional trade agreements bring smaller benefits and cause more trade diversion and irritants like messy "rules of origin". These are points to ponder for the commerce ministry.

tncr@sify.com