Is Free Trade Agreement imminent?

Officials of the New Zealand and Indian governments completed another round of talks on Free Trade Agreement between the two countries in Wellington last week, followed by a meeting with the senior officials of the India New Zealand Business Council in Auckland.

Although there was no official word at press time, it would appear that the talks were on track with brightening prospects of a pact being signed early in 2013, if not this year, as anticipated by many.

The dynamics of free trade has changed since the world was hit by recession with many hitherto rich countries standing close to bankruptcy.

In many countries the fealty of politicians to open markets is more rhetorical than real. About three years ago, leaders of the G20 group of rich and emerging economies promised to eschew any new trade barriers for a year and to work hard for agreement on the Doha round of trade talks.

Within days, two of the G20 countries, Russia and India, raised tariffs on cars and steel respectively. Since then, there has been no breakthrough in sight.

As economies weaken, popular skepticism of open markets will surely grow.

Among rich countries, that danger is greatest in America, where grumbles were heard long before recession set in. President Barack Obama’s campaign rhetoric left an impression of a man in two minds about trade, which he has since done nothing to dispel.

Now that their exports are faltering, emerging economies too may become less keen on trade. The rules of WTO allow them plenty of scope; after two decades of unilateral tariff-cutting most of their tariffs are well below their ‘bound’ rates, the ceilings agreed in the trade club. On average, they could triple their import levies without breaking the rules.

The best insurance against protectionism, however, is macroeconomic stimulus. Boosting demand at home will reduce the temptation to divert it from abroad. By historical standards, policymakers are acting aggressively, as many central banks have begun to do in recent years.

But the effort is unevenly, and poorly, distributed.

Emerging economies from which capital is fleeing have little room to boost spending. A bigger push to boost domestic demand in creditor countries coupled with more help, through the IMF, to cushion cash-strapped emerging economies would ease the world economy’s adjustment and brighten the prospects for free trade. In the 1930s, protectionism flourished largely because of macroeconomic failures.

There are nonetheless some positive indications in the proposed Free Trade pact in the Indo-Kiwi context. India is keen to get closer to the countries in the Oceania region, seeking a more intense cooperation in South Pacific. The Indian Government sees New Zealand, though small, as a nation with considerable influence in the region.

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