Free trade between Bhutan and India

Question 1

Analyze the impact of free trade with India on Bhutan by describing free trades impact on agriculture.

Outline

• introduction

• definition of free trade

• agriculture as a source of income
• benefits from free trade

• income generation from the agriculture products
• growth and development of the country
• employment opportunities
• increased in production
• high living standard

• negative impact of free trade

• increased countries dependency on other country
• negative impacts on the environment
• Competition induced under free trade is unfair and unhealthy
• high cost of production
• Unfavorable balance of payments.

• conclusion

Free trade is the term given to trade between nations that takes place without the imposition of barriers in the form of tariffs, quotas or other measures by governments or international organizations. Free trade is generally considered by economists to be beneficial to international trade by encouraging competition, innovation, efficient production and consumer choice (Just $ Antle, 1990). Free trade brings positive impacts to the particular country like international community by enabling countries to specialize in certain goods and services and increase their productivity. Free trade also brings problems or negative impacts like domestic industries by increasing competition and increasing business risk. Thus free trade is Trade is an essential part of the economy with high benefits as well as negative impact to the nation. With this I will be analyzing the impact of free trade with India on Bhutan describing free trades impact on agriculture.

Agriculture has been realized as a source of livelihood of vast majority of people in developing countries, despite its declining share in many national economies during the past decades. For farmers and their families, agriculture is a source of food, medicines, housing, saving, etc. in which they can also convert farm outputs into income for their children’s education and to meet other needs (Bhandari, 2004). In social terms, agriculture can also be a source of freedom, knowledge, and social network and relationships. Therefore, unlike other sectors, agriculture is multifunctional. It is a source of income, self-employment and social safety net for rural population. It is fundamental to food security although it can be argued that not all people in food abundant countries were secured food access. In addition, the way agriculture is developed is closely linked to biodiversity, natural resources, local knowledge and cultures. The primary goals of agriculture in Bhutan are to raise the per capita income of the people living in rural areas, to enhance self-sufficiency in staple crops, and to increase the productivity per unit of farm labor and agricultural land.

For countries that have a competitive agricultural sector, the expansion of international trade in agricultural commodities can have a growth-enhancing effect and improve their trade balance. These benefits should be balanced against other potential impacts on the right to food. As Bhutan being developing country, people depends more on agricultures sectors rather than manufacturing sectors. However, free trade with India has a great advantage for Bhutan. As India [SD1]is not only Bhutan’s main development partner but also its leading trade partner. A free trade regime exists between India and Bhutan enables Bhutan to specialize in the production of those commodities in which they have a comparative advantage (Wangyal, 2000). For example, Production of cash crops such as apple, orange and cardamom have increased and have become profitable. This helps country to take advantage of efficiencies generated from economies of scale and increased output. International trade increases the size of a firm’s market, resulting in lower average costs and increased productivity, ultimately leading to increased production. It also benefits the consumers in the domestic economy as they can now obtain a greater variety of goods and services. The increased competitions ensure goods and services, as well as inputs, are supplied at the lowest prices. By concentrating on agricultures sectors, it may be possible for countries and the firms operating in their territory to build up economies of scale that lower their costs and boost productivity.

Generally, larger organizations may compete more efficiently on the international market by keeping control over their costs of production and managing their supply chain to reduce transport and inventory costs. International trade increases competition as domestic industries must compete with foreign firms in the same industry as well as other firms in their own country[SD2]. This compels domestic industries to look for ways to keep costs down by operating more efficiently. This gives them an incentive to innovate and look for improved products, processes and marketing methods (Desia.1990). This constant search for new ideas and technology enables them to compete on the international market. When Bhutan involved in free trade with India, it experience rising living standards, increased real incomes and higher rates of economic growth. Employment will increase in exporting industries and workers will be displaced as import competing industries fold in the competitive environment. With free trade many jobs have been created, which can absorb the unemployment created through restructuring as firms close down. When Bhutan sells exports overseas it receives foreign currency from the countries that is India that buys the goods. This money is then used to pay for imports such as electrical equipment and cars that are produced more cheaply overseas.

However the development of global supply chains results in an increased dependency on international trade, for both net food-exporting countries and for net food-importing countries. This may lead to a loss of export revenues for agricultural exporters when the prices of export commodities go down, as well as to threats to local producers when low priced imports arrive on the domestic markets, against which these producers are unable to compete. Conversely, when prices rise, the dependency of low income net food importing countries on the food commodities they buy on the international markets can lead to balance of payments problems against which the mechanisms currently established within the WTO have failed to protect them. The expansion of global supply chains increases the role of large transnational corporations of the agro food sector, vis-à-vis both producers and consumers. This creates a potential for abuses of market power in increasingly concentrated global food supply chains.

According to Rung (1993), the expansion of trade in agricultural commodities has potential impacts on the environment and on human health and nutrition, impacts that usually receive little attention in international trade discussions, despite their close relationship to the right to adequate food. Free trade can lead to pollution and other environmental problems as companies fail to include these costs in the price of goods in trying to compete with companies operating under weaker environmental legislation in some countries (Anderson, 1991). International markets are not a level playing field as countries with surplus products may dump them on world markets at below cost. Some efficient industries may find it difficult to compete for long periods under such conditions. Further, countries whose economies are largely agricultural face unfavorable terms of trade whereby their export income is much smaller than the import payments they make for high value added imports, leading to large CADs and subsequently large foreign debt levels. And other policy that government can adopt is to increase the import tariffs, which means charging price and imposing high taxes on import items.

Free trade is an element of expanding economic growth and opportunity, since it broadens new markets. It also includes economic interaction among different nations involving the exchange of goods and services, that is, exports and imports. Free trade has both pros and cons for the country, since it involves the transaction of goods and services between different countries. There fore free trade may bring benefits to some countries for example, developed countries can have more benefits and it has also negative impacts epically for the underdeveloped or developing countries.

Question 2

What policy should Bhutan adopt to take advantage of free trade with India?

Outline

• introduction
• trade policy

• efforts should be made to harmonize customs documentation, procedures and formalities through bilateral and regional initiatives
• increased export
• reduced import
• and high tariff on import services

• conclusion

Trade is an essential part of the economy and has great potential to create employment. The policy on trade shall focus on creating an enabling environment for more robust trade (Rostow, 1916). This will encompass simplifying administrative procedures and deregulating activities wherever feasible. The successful implementation of the free trade Policy would lead to growth in the trade sector both at the import and export fronts. This will invariably require improvement in domestic laws, rules and regulations that would boost investor confidence. The Royal Government shall facilitate trade between Bhutan and India in order to have economic development of the country and shall be the guiding document for all ministries and agencies to stimulate the economy growth and more importantly, to ensure that growth takes place in consonance with the principles of GNH. This Policy provides the basis for government intervention to enhance productivity of the economy as a whole. Wherever necessary, policies, laws, rules and regulations shall be harmonized or amended in line with the provisions of the Economic Development Policy.

The Royal Government of Bhutan to have an advantage of free trade with India, the government should have secure transit rights for traffic in transit to facilitate international trade. Transport agreements with neighboring countries to avoid transshipment at the border should be negotiated. The Royal Government should ensure the establishment of a sound distribution system in the country through a network of dealers/wholesalers and retailers with priority accorded towards ensuring the flow and availability of essential commodities and goods in all parts of the country. And also efforts should be made to harmonize customs documentation, procedures and formalities through bilateral and regional initiatives. The Royal Government shall develop the required policy framework that will encompass anti-dumping measures, anti-subsidies and safeguards legislations.

The reasons or policy to have trade advantage from India is through export of goods and services. Bhutan should use all tools of export and market promotion, including diplomacy, market studies, market information, branding, advertisements, product launches, trade fairs, expositions and trade missions to assist the private sector to establish markets for their products. Nation branding by leveraging the positive attributes of the country shall be a key instrument harnessed for creating Brand Bhutan in export markets. Exporting more goods and services helps country to generate more income and this income and revenue can be use for the growth and development of the country. The theory of comparative advantage first put forward by David Ricardo in the first part of the nineteenth century demonstrated that countries may boost their production by specializing in those industries for which their opportunity cost is lower than for their competitors. By engaging in international trade, countries may then export those goods or services that they are most efficient in producing and import the items which other countries may produce more efficiently.

Incase of Bhutan, the major items of exports from Bhutan to India are electricity (from Tala, Chukha and Kurichhu Hydroelectric Projects), base metals and articles, minerals, vegetable fat and oils, alcoholic beverages, chemicals, cement, timber and wood products, cardamom, fruit products, potatoes, oranges and apples, raw silk, plastic and rubber products Gyeltshen, ( 1998). So in this case Bhutan can specialize on those product which has comparative advantage cost. The Agreement on Trade and Commerce also provides for duty free transit of Bhutanese merchandise for trade with third countries. According to Anderson & Tyers (1991), the entry and exit point for bilateral trade is given in the Trade Agreement. There fore government should encourage country to exports more of goods as it is the source income. Exports of goods and services to other countries, helps in providing foreign currency which help in importing the advanced technologies for the benefits of the country. So royal government should develop and adopt the export promotion strategy to have an advantage of free trade with India.

Free trade involves exchange of goods and services that is exports and imports of goods. Exporting more goods is helpful for the country but importing more goods is not goods. This is because when Bhutan imports more goods and services from India, our country may become too dependent, this leaves the economy vulnerable to fluctuations in the price of that commodity. A particular industry in a country can fall into decline, resulting in factory closures and unemployment. The labor market is not fully flexible, and workers may have difficulty retraining for other industries or moving to other locations to find work. Structural unemployment may therefore cause problems for a country’s economy (Huntington, 1968). There fore Bhutan should adopt a policy known as import restriction to reduce the number of imports from India and other countries. Import restriction helps in specialization of goods in the particular country. Major exports from India to Bhutan are high speed diesel, ferrous products, motor spirit including aviation spirit (petrol), rice, ferrous waste and scraps, wood charcoal, hydraulic turbines, coal, briquette and similar solid fuel of coal, coke and semi coke of coal, bar and rods of iron and non alloy steels, corrugated iron and non alloy steel sheet, soybean oil, milk powder etc. So imports should reduce imports by import substitution and import restriction policy.

The main purpose of Bhutan keeping relation with India through free trade is to promote economic development of the country. To have economic growth and development in the country, Bhutan should frame certain policy which helps in taking free trade advantage from other countries. Lack of policy may has a negative effects to country as Bhutan being a developing nation, there is chances of domination, loss of countries sovereignty, unemployment’s, inequalities and many problems. So overcome those problems in the country, governments should frame and adopt different policies in taking advantage from India through free trade.

Reference

Anderson, K. & Tyers, R. (1991). Global Effects of Liberalizing Trade in Farm Products. New York: Harvester Wheat sheaf.pp.113

Anderson, K. (1991). Agricultural trade liberalization and the environment: A global perspective. The World Economy, Vol. 15, pp. 153-171.

Bhandari, S., (2004). TRIPS Related Legislation Multilateral Trade Integration. Human Development in Nepal” prepared for Multilateral Trade Integration.

Desia, G. (1990). Fertilizer policy issues and sustainable agricultural growth in developing countries. IFPRI Policy Briefs. Washington.

Gyeltshen, T. (1998). India-Bhutan Trade Relation. Economics Association Papers and Proceedings, Vol. 80, No. 20, pp. 197-202.

Huntington, S.P (1968). Political Order in Changing Societies. New Haven: Yale University Press.

Just, R. & J. Antile. (1990). Interactions between agricultural and environmental policies: A conceptual framework. American Economics Association Papers and Proceedings, Vol. 80, No. 20, pp. 197-202.

Rostow, W. W. (1916). The World free trade; History and prospect. United States of America; London.

Rung, C.F. (1993). Trade liberalization and environmental quality in agriculture.International Environ-mental Affairs, Vol. 5, No. 2, pp. 95-128.

Wangyal, T., (2003). Reconciling Rhetoric and Reality: An Assessment of the Impact of WTO.pp.112

[SD1]http://library.fes.de/pdf-files/bueros/genf/06819.pdf

[SD2]http://www.brighthub.com/office/finance/articles/122806.aspx