How do FTAs lead to trade diversion, rather than trade creation?
Under an India South Africa FTA, for example, instead of importing steel from Europe, a producer would import it from South Africa. This does not help the Indian economy. Morevoer, as long as South Africa does not satisfy the entire Indian demand for imported steel, the price of steel in India does not fall. “Rules of origin” on which FTAs are based mean that only steel produced in South Africa can be imported under preferential tariffs – there will be zero tariff only when there is a minimum percentage of value added in South Africa. PART II: India and Regional trading agreements The importance of increasing regional trade within Asia cannot be emphasised enough. At a time when regional trading agreements, such as the EU and NAFTA have led to higher trade and investment, Asia lags behind. Trade within Asia is a miniscule proportion of world trade, even though the Association of South East Asian Nations (ASEAN) countries(Singapore, Phillipines, Thailand, Indonesia, Malaysia, Cambodia,
