The North American Free Trade Agreement (NAFTA) with a population of 360 million and a GDP of 6.4 trillion was established on January 1, 1994. Its members include the USA, Canada and Mexico. The USA is the largest trading partner, accounting for 70 per cent of their global trade. For the USA, Canada and Mexico not only constitute the largest regional trading partners, but also occupy significant places in its global trade. Japan is the USA's second largest global trading partner and has a disparate share in the US total trade. The unbalanced nature of the US trade with Japan and Asian countries is one of the reasons for the USA to form a regional bloc as a strategy to increase its bargaining power in Asia and with EU.The NAFTA agreement is based on agenda of specific trade policies on which three countries have mutually agreed. NAFTA goes much beyond regional trade and eveninvestment agreement. Besides tariff and non-tariff barriers, it includes issues like rules of origin, government procurement, IPRS, TRIMS and trade in services. All restrictions on trade and investment between Canada, Mexico and the USA are to be abolished over a period of 15 years. Mexico is to open its financial sector to US and Canadian investment and remove all restrictions in this context by 2007. Barriers to investment have been removed in most of the sectors with exemptions for petroleum in Mexico, culture in Canada and airlines and radio communications in the USA. Mexico is to liberalise government procurement, remove preferential treatment for domestic companies over a ten year period. The three countries are expected to benefit from reduced costs, competitive prices and greater economic power, though the nature and level of benefit for partners will be different. From the USA's perspective, Mexico's growing economy together with NAFTA will provide benefits in terms of enlarged and growing markets,increased competitiveness in world markets, more investment opportunities to US firms. The tariff levels in the USA are extremely low and their complete elimination for its free trade partners is not going to make any major impact on the pattern of the US trade with the rest of the world.However, the same cannot be said about trade liberalisation in areas which come under the US import quota regulations, namely textiles and apparel, steel, automobile and automobile parts,s machine tools, sugar, dairy products and meat. The US industries such as citrus, auto parts may lose business in the USA to Mexico. The non-member countries, which are exporting these products to the US-Canada markets, will also face increased competition and loss of exports due to preferential treatment to Mexican products.

Benefits

It will now be desirable to discuss some of the benefits of trading blocs. These institutions help the bloc members to achieve economics of scale through structural adjustment. They lead to increasein GDP and employment opportunities. For instance, the Ceccihini and Emerson reports suggest an increase in GDP by 4.5 to 7 per cent and 2.5 million new jobs in the case of EC. Similarly, the institute for international Economies' predicts an increase of GDP by $6 trillion for United States, Canada and Mexico as a result of bloc formation. Further, the United States and Mexico will have additional jobs of 0.13 million and 0.61 million respectively. Any increase in GDP will lead to increased import demand from the rest of the world. This is called trade creating effect of block formation. Trade creation generated by income and efficiency effects and third country import substitution results in large inter-regional trade. These blocs can also result in investment creating effect. Increased GDP generates more resources and some of these could be invested in the rest of the world. Rise in employment may lead to less protectionist pressures at home and this could make trade blocs more open in trade with the restof the world. The bloc formation can also result in lower prices for outsiders. This is possible through lower cost of production achieved via economies of scale. At times, these blocs work as a cartel for negotiations with non-members or other groups. Trading blocs give leverage to counter the dominance of super powers in international negotiations,. This also encourages specialisation which promotes economic efficiency and growth. Opening of domestic economy to competition from the member countries has a number of benefits in terms of quality improvement, cost reduction and availability of new products.

Negative aspect

The trading blocs have a negative aspect also. For instance, these institutions may lead to diversion of trade. Instead of imports taking place from a more efficient non-member, they might take place from a less efficient member country giving negative welfare effect. Similarly, investments may be diverted to Spain, Portugal and Greece rather than developing countries in the restof the world. There could be additional employment in the long run but the structural adjustments may create frictional unemployment in the short period. This situation might pressurise the bloc to be less open with the rest of the world and it may become a fortress. Structural adjustments lead to mergers and acquisitions and in the process many companies close their shutters. A country outside the trading bloc is just isolated and has serious problems of market entry. Permission to constitute a trading bloc by Gatt is a dangerous precedent for further special deals and fragmentation of the trading system. This is damaging to the trade interests of the non-participants. The main objective of this principle is to generate more trade rather than cause any diversion. There is, however, no evidence to vindicate this focus of the Gatt rule. WTO members have different perceptions regarding the effects of preferential arrangement and most of them are a part of one or more of such groupings.

Nothealthy

International trade is now differently understood. Several new elements have come up which are more important for sustainable economic growth. Further, a number of developing countries are in the process of structural economic adjustment. Trade liberalisation is no longer confined to reduction of tariffs. The focus is on export promotion and outward orientation as distinct from import substitution and inward orientation. This requires continued existence of multilateral trading system. Considered against this background, proliferation of trading blocs is not a healthy sign. This erodes multilateral trading system which is extremely important for overall growth in world trade. It also affects national sovereignty and can replace it by a supra-national authority. This is exactly what happened when EU banned the import of British beef.

Further, the trade creation aspect of this system does not have much of sanctity. The preferential arrangement does affect the trading capacity of outsiders. Theextent to which the trade is affected, however, depends on the nature of goods that are traded. If a particular country has a unique product or its comparative advantage is so strong that it can still penetrate the trading block then the formation of a trading bloc will not affect such an item. In the case of competitive goods, even a few percentage points in tariff can make the situation unfavaourable. With the establishment of a trading bloc, it becomes necessary for the companies to make commercial presence within the bloc to exploit the opportunities.

Options

If we look at the issue from the Indian point of view, multilateral system is the best. The logic is that we are not members of any major bloc. NAFTA is more interested in Latin American countries and we have yet to wait a little more to become acceptable in the APEC. With EU, we could establish only bilateral trade relations. Our association with SAARC and other developing countries has been useful to us only for achieving a consensusfor discussions at the international trade fora. We should see that SAPTA comes into existence as schedule. Further we should be equally serious about Ocean Rim initiative. The issue of trading blocs can also be raised at multilateral fora but this will not cut any ice. All these options prove our bargaining power. To be effective, we need clout and this can be developed by strengthening our economic position. The best way, therefore, is to hasten the economic reforms and put out house in order.