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This is an oft confused sphere of economics and often impedes with your understanding of the world affairs. We often read terms like FTA, PTA, Economic Union in articles related to WTO, bilateral talks etc etc. and breeze past them with a rough understanding or what they might mean.

• FTA (Free Trade Agreement) – Free mein trade? Possibly no money to be paid for trade barriers etc etc.
• PTA (Preferential)? Some kind of preference, maybe
• CEPA, CECA – God knows what!

This rough understanding may not be always correct. To give you an example – PTA is almost similar to FTA (every PTA eventually becomes an FTA), CECA and CEPA are quite similar.

What is economic integration & why go for it?

Economic integration refers to trade unification between different states by the partial or full abolishing of customs tariffs on trade taking place within the borders of each state.

1. The objective of this integration is to increase the combined economic productivity of the countries – easier access of goods and services
2. Other by-product of integration is competitiveness. If 4-5 countries come together to form a closely knit family (of sorts), they would create barriers to entry of an external (possibly much larger player) to disrupt the region with cheaper goods

What is a trade agreement?

A trade agreement is a contract/agreement/pact between two or more nations that outlines how they will work together to ensure mutual benefit in the field of trade and investment.

This can be bilateral (2 countries) or multilateral (2+ countries). 

Once a trade agreement is finalised, we get to read about these Trade Blocs – a type of intergovernmental agreement, where regional barriers to trade, (tariffs and non-tariff barriers) are reduced or eliminated among the participating states.

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All the gyan about FTA, PTA, CECA/PA, EU!

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#1. PTA – Preferential trade agreement

A preferential trade agreement, is a trading bloc that gives preferential access to certain products from the participating countries.

This is done by reducing tariffs but not by abolishing them completely. A PTA can be established through a trade pact. It is the first stage of economic integration. 

Some examples:

• Asia-Pacific Trade Agreement (APTA): formerly known as the Bangkok Agreement, was signed on 31st of July 1975 as an initiative of the United Nations Economic and Social Commission for Asia and the Pacific (ESCAP). ESCAP is the regional development arm of the United Nations for the Asia-Pacific region.
• India-Mercosur Preferential Trade Agreement (PTA): Mercosur is a sub-regional blogs with its member countries – full members are Argentina, Brazil, Paraguay, Uruguay and Venezuela.

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#2. FTA – Free trade agreement

A free-trade area is a trade bloc whose member countries have signed a free-trade agreement (FTA), which eliminates tariffs, import quotas, and preferences on most (if not all) goods and services traded between them.

Please note that you cannot distinct PTA and FTA by just saying that the former has fewer barriers and later has no barriers at all. FTA does not mean everything is free! PTA closely follows FTA.

• Evolution of SAPTA to SAFTA (South Asian PTA to FTA)
• ASEAN FTA (Trade agreement within the Southeast asian nations)

What would happen if countries want to move more closer (beyond material trade)?

When the countries go beyond FTA and agree for a greater degree of economic integration which includes improving the attractiveness to capital and human resources, and to expand trade and investment, it would result in CECA or CEPA.

• CEPA = Comprehensive Economic partnership Agreement
• CECA = Comprehensive Economic Cooperation Agreement

CECA and CEPA have very minor differences, if you will. While CECA comes first with elimination of tariffs, CEPA comes later including trade in services and investments. CEPA has a bit wider scope than CECA.

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#3. Customs Union

An agreement among countries to have free trade among themselves and to adopt common external barriers against any other country interested in exporting to these countries.

Some examples:

• Southern Common Market – Mercosur (Argentina; Bolivia; Brazil; Paraguay; Uruguay; and Venezuela)
• Gulf Cooperation Council (GCC) – Its member states are Bahrain, Kuwait, Oman, Qatar, Saudi Arabia, and the United Arab Emirates
• East African Community (EAC) – composed of 5 countries in the African Great Lakes region in eastern Africa: Burundi, Kenya, Rwanda, Tanzania, and Uganda

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#4. Common Market

A type of custom union where there are common policies on product regulation, and free movement of goods and services, capital and labour.

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#5. Economic Union

An economic union is a type of trade bloc which is composed of a common market with a customs union. The participant countries have both common policies on product regulation, freedom of movement of goods, services and the factors of production (capital and labour) and a common external trade policy.

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#6. Economic and monetary union

When an economic union involves unifying currency it becomes a economic and monetary union. Eg – Euro!

Economics just became a whole lot more edible this week. It all started rather unexpectedly, with a student asking the RBI governor why dosas have become more expensive despite the disinflation phenomenon in India. Pat came the answer.

It’s not the dosa, stupid. It’s the tawa! It’s the tawa that has retained its price and reluctance to change the tawa technology has cost us, dear. Pun intended. And it doesn’t quite end there, does it? The hand that rocks the cradle, rules the earth. And the hand that rules the ladle, rules the worth.

Simple! Labour prices have skyrocketed, so much so that they nullify the reductions we get from ingredients. Ahem, not that we are getting too many reductions from those ingredients there. Important to note that the dosa is primarily made from urad dal, after all.

The statement from the Guv created quite a furore. The RBI has issued a new guideline saying that all future governors should necessarily be good cooks and have to know all ingredients going into major food dishes. The Bhumata Ranragini Brigade is now actively considering marching into the inner sanctum of the RBI saying they always knew that women would make better governors.

The RBI has launched a new Big Dosa Index to counter the very popular Big Mac Index as the Indian contribution to quick-fix inflation gauges. The CSO, ruffled at being sidelined, cleverly pointed out that since dosas are only sold on retail, the BDI can only be seen to be a quick gauge of CPI movements and is hence, an incomplete index. The RBI reacted sharply by also announcing the creation of a Tawa-Index to understand wholesale price movements.

Startup India has announced a new VC funding line to whoever gets new technology for creating dosas. It’s expected that support to this line of credit will be declared in the upcoming Budget through the Tawa Hatao, Dosa Bachao Yojana.

Commercial banks now know what it takes to reduce their NPAs. Risk rating on the over-the-counter food service business units has gone down drastically since they are seen to be the only guys who can continue to charge high and make high profits, no matter what the inflation numbers. The new base rate or PLR will be termed the DLR, the Dosa Lending Rate.

On a more international front, Deutche Bank made headlines with its coco(a) bonds ratings taking a beating from S&P. “Their standard is very poor,” said an RBI spokesperson. “We always knew that this cocoa business is very risky. Had they listened properly to the Hon Governor, they would have issued Dosa bonds. That is the only way ahead.” The Chinese are also thinking of replacing Dim Sum Bonds, which have in letter and spirit become Dim Sum since the devaluation, with Dosa bonds.

In the meanwhile, the FM was fairly terrorised when he was asked to host the halwa ceremony. Despite the fact that no student interaction was allowed at all, he made sure that he knew the halwa recipe by heart before meeting the media. For good measure, he also learnt the prices of rawa, sugar and ghee, all by heart.

Rumour is that after getting to know the phenomenal prices of ghee and dry fruits, he wants to create a halwa cess to fund such colossal expense programmes. It is estimated that this single move will move the fiscal deficit from 3.9 per cent to the magic number 3.6 per cent. The RBI governor is happy. Dosas sure work!