Introduction

Economic co-operation and integration have had a long history. Formal or informal trading
agreements have existed wherever people traded with one another. Regional Trade
Agreements (RTAs) are agreements between countries to reduce or eliminate trade barriers
and are a form of economic co-operation and integration. The reasons for, and benefits of,
forming RTAs have largely been defined in economic terms. Frankel (1997) identifies
traditional gains from trade, strengthening domestic policy reform, increased multilateral
bargaining power, guarantees of access, strategic linkages and multilateral and regional
interplay. Other reasons for forming RTAs may include (1) the dissatisfaction with the
multilateral approach, particularly the slow progress of the Doha Round, (2) the negotiating
skills developed during the process by less experienced countries, (3) the ‘bandwagon effect’
of smaller countries following the policies of larger countries in joining RTAs (Bhagwati
1993), and (4) fear of being left out of major RTAs. There are also benefits of credibility,
signalling, insurance, and as a mechanism for coordination (Fernandez 1997).
RTAs can fail in multiple dimensions. In economic terms, the negative results can include
trade diversion, reduction of quality, increasing consumer prices and lowering global
competitiveness for a country (Yeats, 1998). Investment, economic growth, government tax
revenue and employment may also fall. In social terms, the flow on effects may be reduced
wealth and income distribution, and living standards may fall (Woolcock, 2001). In the
political sphere, stability and co-operation may decline, and conflict may increase (World
Bank, 2000). In cultural terms, the homogenisation of culture may rapidly increase; changing
the unique culture of smaller countries, and social cohesion may diminish. In terms of
sustainability, it is not always coincident with economic expansion (Barbier, 2003).

Measurement of RTAs performance

The measurement of success or failure of RTAs has been examined in economic terms,
mainly in the form of trade diversion or trade creation, but little work has been done
examining the political, socio-cultural and other environmental dimensions (Woodcock,
2001). This paper outlines a broader model of assessment for RTAs, and suggests a strategy
to test this model. A comprehensive measurement instrument of success is required, as the
narrow economic definition of success fails to adequately capture externalities. These
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externalities may have constructive or detrimental consequences to the citizens, whether
planned, anticipated or accidental.
Not all RTAs have been successful, or endured. Some RTAs have expired, been superseded
or disbanded, while others are not successful in meeting the anticipated economic outcomes.
(E.g., BAFTA- Baltic Free trade Area ceased to exist when its members joined the EU.).
However the rapid growth of RTAs continues, suggesting varying motives behind agreements
that may not be immediately discernible.

Current situation
As at July 2007, there were more than 300 RTAs reported to the World Trade Organisation
(WTO), with 205 of those currently in force (WTO n.d.). According to UNCTAD, (2008)
world merchandise trade has grown twice as fast as world output over the past four years,
both in terms of volume and in dollar values. Trade under RTAs accounts for more than 50
per cent of international trade. Unfortunately, RTAs are not classified under a performance
ranking mechanism, making comparison of success problematic. Empirical work has
progressed with the gravity model being the most standard measure currently employed.
Results can change as there may be a lag before the outcomes of the RTA are realised.
Externalities to the agreements can impact on their performance (E.g. High tariffs to
nonmember
countries, complex bureaucracy making implementation of the agreement's aims
difficult, and deterioration of the global economy).
In the gravity model, trade is seen as a function of Gross Domestic Product (GDP) and
distance between countries. The inclusion of other explanatory variables such as common
borders and language, and the use of dummy variables to capture the trade diverting or
creating effect of the RTA, complete the model. Some of the results of RTAs as reported
using the gravity model include: NAFTA, MERCOSUR and CACM (Central African
Common Market) - trade diverting (Jugurnath, B. Stewart, M, and Brooks, 2007), Andean
Community and SADC (Southern African Development Community) - trade diverting
(Croce, Juan-Ramón, and Zhu, 2004), ASEAN and CER - trade creating (Jugurnath, Stewart,
and Brooks, 2007).
A variety of determinants appear to be contributing to the performance of a Trading Bloc.
These predictors can also act as a virtuous circle, being the outcomes of the successful RTA.
(E.g. a degree of security and economic prosperity are both necessary conditions to the
establishment, effectiveness and outcomes of a successful RTA). Yang and Gupta (2005),
identify the level of economic integration required for an RTA as making conflict more
economically costly, and therefore less likely, while also providing incentives for external
intervention when problems arise. The positive effects on political stability are apparent from
the formative years of the EU with regards to France and Germany. Economic integration
results in more balanced economic and social development among member states.
RTAs can have a mediating effect on extreme political governments, as the European
experience has also shown. RTAs can also provide access to a larger range of goods, services
and technology.
Some of the indicators seen as negative predictors of performance include: economic
disruption at a macro or micro level including unemployment, sectoral disruption and loss or
reduction of particular sectors of the economy. There may be increased exposure of the
economy to global fluctuations and skills shortages and loss of human capital as workers
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migrate. Specialisation may deplete non-renewable resources and inflation may be imported,
or result from the flow of resources away from domestic consumption goods and services, to
export sectors. Development of RTAs may slow multilateral agreements as countries may
benefit from maintaining an RTA, and drag-out multilateral negotiations, and tensions may
rise (Yang and Gupta 2005).
More unusual outcomes can occur. Bolton, Roland and Spolaore, (1996) identify a curious
outcome of RTAs; that due to the increased economic integration likely requiring greater
political integration to operate efficiently, this simultaneously reduces the economic cost of
separation and incentives towards political separation are increased. Alesina, Spolaore and
Wacziarg, (2000) find the trade regime influences the history of nation-state creations and
secessions, and that the economic benefits of country size are mediated by the degree of
openness to trade.
Current Australian RTAs include a general list of objectives, and a renegotiation process. For
example, the SAFTA's (Singapore-Australia Free Trade Agreement) objectives are outlined
in
Article 1, and include, strengthening bilateral relations, liberalising trade between them and
building on commitments at the WTO, improving efficiency and competitiveness,
establishing transparent trade rules and exploring newer areas of economic cooperation.
(DFAT, n.d.) A renegotiation process is required because of the situational changes that may
invalidate the original agreement. As the dynamic trading environment becomes more
complex, the contents and procedures for the renegotiation process need to be articulated
within agreements. E.g. SAFTA contains a schedule of review in Article 3: "In addition to the
provisions for consultations elsewhere in this Agreement, Ministers in charge of trade
negotiations of the Parties shall meet within a year of the date of entry into force of this
Agreement and then biennially or otherwise as appropriate to review this Agreement."
(DFAT, n.d.)

Limitations of existing literature

An existing limitation is the absence of a framework within current literature to identify the
broader success or failure of a RTA. Arguably, articulated benchmarks could determine an
expected level of performance and set the standard for measuring the success or failure of the
agreement. A change of circumstances due to the dynamic environment, within which RTAs
operate, may necessitate the renegotiation of agreements and re-signing of new objectives if
required.
The likely causes of poor performance in RTAs are numerous, but may include the
maintenance of high external tariffs (Tumbarello, 2007; Yeats, 1997). Problems with policy
coordination are likely to be common. For example, the country of origin regulations restrict
access to the EU market for developing countries in spite of the increased access given under
a different rule (Brenton and Manchin, 2003; Francois, McQueen and Wignaraja, 2005). If a
country enters a RTA with minor trading partners then the expectations must be low for
success. Under-resourcing of the coordinating body will also detract from its performance as
will the lack of political will (Yang and Gupta, 2005).
The ambiguity involved in RTAs performance evaluation and the importance of managing
the
conduct of a RTA to a successful outcome, leads to the proposed expanded model of RTAs
incorporating the key contributing factors including economic, socio-cultural, negotiation,
country objectives and review dimensions.
et/point formatting” in this section seems odd.
South Asian Regional Co operation
 SAARC was set up as a forum for regional cooperation by adoption of its
Charter in its first Summit in Dhaka in December 1985.
 SAPTA was signed in 1993 and entered into force in December 1995.
SAPTA covers areas of tariff, para tariff, non tariff and direct trade measures.

Assessing the impact of RTAs

Regional trade agreements imply both trade liberalisation and trade discrimination. While
there is a near-consensus among economists that trade liberalisation is desirable, the same
cannot be said of trade discrimination. Such discriminatory trade liberalisation is beneficial
when it promotes a shift of resources from inefficient domestic suppliers to more efficient
producers within the region, i.e. when there is so-called “trade creation”. In contrast, a trading
bloc is likely to be harmful if it generates a shift of resources from efficient external
producers to inefficient producers within the region, i.e. when there is so-called “trade
diversion”.
There are theoretical arguments that support the primacy of trade creation and trade diversion
under similar circumstances. Thus, which effect dominates is an empirical matter.
Unfortunately, estimating trade creation and trade diversion is no easy task – it requires
knowledge of the counterfactual, i.e. what would have happened to trade if there were no
trade agreement. As this is unknown, assumptions must be made.
A variety of approaches have been employed. While results inevitably vary depending on the
methodology, the time period, the trading bloc in question and the level of aggregation in the
data, two general messages arise from the large set of studies investigating trade creation and
trade diversion in RTAs around the world:
 First, trade creation tends to be the norm in RTAs – and trade diversion is the
exception.
 Second, when trade diversion is observed, its magnitude is normally relatively small.
Trade creation vs. trade diversion
Why is there such a dominance of trade creation? It seems that governments are choosing
their partners well. For example, variables that suggest greater gains from a bilateral deal
(such as proximity between the members, a similarity in their GDPs and a large difference in
their factor endowments) are also sharp predictors of whether the two countries actually have
a common RTA (see for example Baier and Bergstrand 2004).
Moreover, when countries form an RTA, their governments not only lower tariffs vis-à-vis
their RTA partners; they also tend to reduce tariffs on imports from countries outside the
bloc. Governments liberalise externally because they choose to – there is no reciprocity from
the non-members. Such external trade liberalisation following an RTA appears especially
important in developing countries (Estevadeordal et al. 2008 analyse Latin America in the
1990s). The lower external tariffs provide a double blessing. They imply that RTAs are
responsible for more trade liberalisation than they mandate – amplifying trade creation – and
for less trade discrimination than might be expected – limiting trade diversion.
Why voluntarily lower tariffs?
Given the political pressures, it may seem counterintuitive that governments would
voluntarily lower their external tariffs. But it makes sense. Suppose for political reasons the
government sets relatively high tariffs, which benefit the domestic import-competing
industry. If subsequently the country enters in an RTA, export-oriented firms benefit because
of the better access to foreign markets, whereas purely domestic firms suffer from the tougher
competition from the RTA partners. This weakens the import-competing firms’ stance on
protection against non-members. The reason is that the free access to the domestic market
enjoyed by the partners’ exporters lowers the market share of the domestic industry. As a
result, the RTA makes any price increase generated by a higher external tariff less valuable
for the domestic industry. Now whenever the government attempts to help domestic
producers through higher external tariffs, the partners’ producers absorb part of that surplus.
In other words, the RTA creates “leakage” in the trade-policy redistributive channel. External
protection also becomes more costly, because of the costly trade diversion that accompanies
the RTA. As a result, external tariffs tend to fall after the formation of an RTA, both because
the economic marginal cost of external protection rises and because the political-economy
marginal gain from external protection falls.
Empirical research supports this rationale for developing countries. But results for the US and
the EU indicate that they are less likely to reduce external tariffs on goods where preferences
are offered (Limao 2006). But since the tariffs of both the US and the EU are very low to start
with, and cannot be raised because of their WTO commitments, there is little room for
change anyway.
Are regional trade agreements welcome?
The benign view that trade creation dominates trade diversion does not imply that regional
trade agreements are necessarily welcome. Some commentators argue that the reason
multilateral negotiations at the WTO are stuck is because RTAs are spreading. One concern
is that if officials are busy negotiating bilateral agreements, they will be unable to focus on
more evolving multilateral negotiations. Another concern is that RTAs may create interest
groups that block further liberalisation initiatives.
There are also arguments indicating that the opposite may be true. A simple argument is that
negotiating RTAs helps officials develop the expertise to implement international trade
agreements, which could be useful at subsequent WTO negotiations. Moreover, RTAs also
destroy rents in parts of the economy. If the rent-holders who lose with RTAs were the ones
slowing down multilateral talks, then RTAs can actually provide a boost to multilateral
negotiations. As Baldwin (1994) puts it, liberalisation (regional or multilateral) begets more
liberalisation.
When faced with opposing theoretical results, the solution is typically to scrutinise the
divergent predictions empirically. The problem here is that the nature of the question –
whether regionalism helps or hinders multilateralism – does not lend itself easily to testing.
Simply put, at any point in time we observe a single realisation of WTO negotiations. Would
they have been any faster, or easier, had there been fewer (or more) RTAs? This is a very
difficult question. As a result, to date empirical scrutiny has not been able to help us
distinguish good (that is, empirically relevant) from bad (empirically inconsequential)
theories.
The South Asian Association for Regional Cooperation (SAARC) is an organization of South
Asian nations, founded in December 1985 and dedicated to economic, technological, social,
and cultural development emphasizing collective self-reliance. Its seven founding members
are Bangladesh, Bhutan, India, the Maldives, Nepal, Pakistan, and Sri Lanka. Afghanistan
joined the organization in 2005. Meetings of heads of state are usually scheduled annually;
meetings of foreign secretaries, twice annually. It is headquartered in Kathmandu, Nepal.
History
The concept of SAARC was first adopted by Bangladesh during 1977, under the
administration of President Ziaur Rahman. In the late 1970s, SAARC nations agreed upon the
creation of a trade bloc consisting of South Asian countries. The idea of regional cooperation
in South Asia was again mooted in May 1980. The foreign secretaries 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.[1]

OBJECTIVES
The objectives of the Association as defined in the Charter are:[2]
 to promote the welfare of the people of South Asia and to improve their quality of
life;
 to accelerate economic growth, social progress and cultural development in the region
and to provide all individuals the opportunity to live in dignity and to realize their full
potential;
 to promote and strengthen collective self-reliance among the countries of South Asia;
 to contribute to mutual trust, understanding and appreciation of one another's
problems;
 to promote active collaboration and mutual assistance in the economic, social,
cultural, technical and scientific fields;
 to strengthen cooperation with other developing countries;
 to strengthen cooperation among themselves in international forums on matters of
common interest; and
 to cooperate with international and regional organisations with similar aims and
purposes.
Afghanistan was added to the regional grouping on 13 November 2005,[3] With the addition
of Afghanistan, the total number of member states were raised to eight (8). In April 2006, the
United States of America and South Korea made formal requests to be granted observer
status. The European Union has also indicated interest in being given observer status, and
made a formal request for the same to the SAARC Council of Ministers meeting in July
2006.[4][5] On 2 August 2006 the foreign ministers of the SAARC countries agreed in principle
to grant observer status to the US, South Korea and the European Union.[5] On 4 March 2008,
Iran requested observer status.[6] Followed shortly by the entrance of Mauritius.
[edit] Secretariat
The SAARC Secretariat was established in Kathmandu on 16 January 1987 and was
inaugurated by Late King Birendra Bir Bikram Shah of Nepal.
It is headed by a Secretary General appointed by the Council of Ministers from Member
Countries in alphabetical order for a three-year term. He is assisted by the Professional and
the General Services Staff, and also an appropriate number of functional units called
Divisions assigned to Directors on deputation from Member States.[7] The Secretariat
coordinates and monitors implementation of activities, prepares for and services meetings,
and serves as a channel of communication between the Association and its Member States as
well as other regional organizations.[7]
The Memorandum of Understanding on the establishment of the Secretariat[7] which was
signed by Foreign Ministers of member countries on 17 November 1986 at Bangalore, India
contains various clauses concerning the role, structure and administration of the SAARC
Secretariat as well as the powers of the Secretary-General.
In several recent meetings the heads of state or government of member states of SAARC
have taken some important decisions and bold initiatives to strengthen the organisation and to
widen and deepen regional co-operation.
The SAARC Secretariat and Member States observe 8 December as the SAARC Charter
Day1.
Regional Centres
The SAARC Secretariat has established 13 regional centres in member states. The 13th being
SAARC Arbitration Council established at Islamabad in 2010. Each regional centre is
managed by a governing board (GB). The GB comprises of representatives of each of the
member state and SAARC Secretariat.
Political issues
SAARC has intentionally laid more stress on "core issues" mentioned above rather than more
decisive political issues like the Kashmir dispute and the Sri Lankan civil war. However,
political dialogue is often conducted on the margins of SAARC meetings. SAARC has also
refrained itself 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.
Free trade agreement
Over the years, the SAARC members have expressed their unwillingness on signing a free
trade agreement. Though India has several trade pacts with Maldives, Nepal, Bhutan and Sri
Lanka, similar trade agreements with Pakistan and Bangladesh have been stalled due to
political and economic concerns on both sides. India has been constructing a barrier across its
borders with Bangladesh and Pakistan. In 1993, SAARC countries signed an agreement to
gradually lower tariffs within the region, in Dhaka. Eleven years later, at the 12th SAARC
Summit at Islamabad, SAARC countries devised the South Asia Free Trade Agreement
which created a framework for the establishment of a free trade area covering 1.6 billion
people. This agreement went into force on January 1, 2008. Under this agreement, SAARC
members will bring their duties down to 20 per cent by 2009.