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Troubled Road to SAFTA

Captain Alok Bansal was Member, Navy at the Institute for Defence Studies and Analyses, New Delhi. Click here for detailed profile
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  • March 10, 2005

    The proposal to reconvene the 13th SAARC Summit soon has rekindled the hopes of South Asian Free Trade Area (SAFTA) coming into force on schedule on 01 Jan 2006. It is a sad commentary on the regional economic cooperation that although the South Asian Association for Regional Cooperation (SAARC) has been in existence for about 20 years, the intra regional trade is still languishing below five percent of the global trade of the member states. It is widely believed that all the seven states of the region will benefit immensely in the long run from the economic benefits of SAFTA. Removal of trade barriers and all other irritants hampering free trade in the SAARC region would result in a win-win situation for all, be it the governments, common people or businessmen.

    South Asian states have taken long to overcome their mutual suspicion and to relate to one another as a bloc. Inter-state hostility has lingered in the region while in other regions; the states have overcome far more complex hurdles to successfully activate regional trading blocs. The idea of South Asian Cooperation was mooted for the first time by then president of Bangladesh Gen Zia-ur-Rahman in May 1980. The SAARC was finally established at a summit held in Dhaka in December 1985. The first tentative steps towards economic cooperation within the region were taken in July 1991 when the Council of Ministers, in Male endorsed a Regional Study on Trade, Manufactures and Services. The SAARC Preferential Trading Arrangement (SAPTA) came into force on 7 December 1995, exactly a decade after the establishment of SAARC. In January 1996, SAARC commerce ministers reiterated commitment to accelerate the SAPTA process and set realisation of SAFTA as the goal.

    A report by a Group of Eminent Persons (EPG) titled SAARC: Vision Beyond the Year 2000 was submitted to the Tenth SAARC Summit in Colombo in 1998. The report envisaged a Free Trade Area by the year 2010, a Customs Union by 2015 and an Economic Union by 2020. However, after the Colombo Summit, the entire process came to a grinding halt mainly because of the rapid deterioration in Indo- Pak relations. It took four years to put the process back on the rails. A commitment was made at the Eleventh SAARC Summit at Kathmandu in 2002 for the creation of a South Asian Economic Union. Finally it was the Twelfth Summit at Islamabad, where the Framework Agreement for a South Asia Free Trade Area was signed.

    The agreement comes into effect on 01 January 2006 and requires all countries to reduce tariffs to 0-5%. The time schedule for reduction of tariffs is as follows :-

    1. The non-least developed states namely India, Pakistan and Sri Lanka are to reduce the existing tariff rates to 20% within two years i.e. by 01 Jan 2008.
    2. Least developed states which are designated as least developed Country by the UN namely Bangladesh, Nepal, Bhutan and Maldives are to reduce the existing tariff rates to 30% by 01 Jan 2008. Significantly the agreement classifies Maldives as a Least Developed State even though it has not been designated a least developed country by the UN.
    3. India and Pakistan are required to reduce tariffs to 5 % or below by 01 Jan 2013 and Sri Lanka by 01 Jan 2014. The reduction in tariffs should as far as possible be in equal instalments but in no case less than 15 % annually.
    4. Least Developed states are to reduce tariffs to 5% or below by 01 Jan 2016. The reduction in tariffs should be as far as possible in equal instalments but in no case less than 10 % annually.
    5. Notwithstanding the above timeframe the Non-Least Developed States shall reduce their tariff to 0-5% for the products of Least Developed Contracting States within a timeframe of three years beginning from the date of coming into force of the Agreement.

    The agreement has a provision for sensitive lists and the tariff reduction will not be applicable to the items in these lists. There will be different sensitive lists applicable to Least Developed States and other states. These will be reviewed regularly at intervals not exceeding four years to curtail them. The agreement provides for special treatment to Least Developed States and expects others to provide them with preferential tariffs during the process of Trade Liberalisation Programme (TLP). The agreement recognizes that the Least Developed States will lose customs revenue due to the implementation of the TLP and has recommended establishment of a mechanism to compensate them for the loss. This mechanism and its rules and regulations are required to be established prior to the commencement of the TLP.

    The agreement also recommends the adoption of trade facilitation and other measures to support and complement SAFTA for mutual benefit. These include harmonisation of standards, simplification of custom clearance procedures, simplification of banking procedures for import financing, transit facilities for intra-SAARC trade, removal of barriers to intra SAARC investments, development of communication systems and transport infrastructure and simplification of procedures for business visas. The treaty is however, silent on the goals of establishing a Customs Union or Economic Union in South Asia. .

    Many critics feel that the schedule for implementation of SAFTA is extremely slow and the process envisaged in the Treaty may be overtaken by events at both bilateral and global levels. Bilaterally, the conclusion of various free trade agreements (latest being the Pak –Sri Lanka FTA) might make SAFTA redundant. Similarly at the global levels the lowering of tariffs consequent to WTO negotiations may make SAFTA superfluous. However, going by the past experience, the process can be derailed by any adverse political relationships between the countries of the region. It is therefore prudent to move cautiously.

    The agreement also leaves the Services – a major component of the regional economy, outside its scope. This is a major drawback, as the Services have become major drivers of the economies of the region and account for over 50 percent of the GDP in most of the countries. The treaty is also silent on liberalisation of investment in the region. The movement of capital can compensate the trade imbalance of Least Developed States and is therefore necessary for stimulating trade.

    There is no doubt that SAFTA is in the interest of the region but the political environment in the region makes any forecast of its outcome extremely hazardous. According to studies, by completely eliminating tariffs on all the products, under the SAFTA, the likely increase in intra-regional trade of SAARC would be substantial. The simulation results show that the complete removal of tariffs would enhance intra-regional trade by 1.6 times or 160 per cent. If the political events do not derail the process and SAFTA comes into force on 01 Jan 2006 it will be a major milestone but there is a lot of ground to be covered before SAFTA comes into force, The actions that need to be taken expeditiously are as follows:-

      Promulgation of sensitive lists.
    1. Finalisation of Revenue Compensation Mechanism, before the implementation of TLP.
    2. Negotiations on Rules of Origin.
    3. Ratification of Agreement by all States before it comes into force.

    The SAFTA agreement however, is only the initial stage and the infrastructure of the region needs to be integrated to facilitate integration of trade. Cooperation in the field of Energy and strengthening of transportation, transit and communication links in the region are essential for fostering meaningful economic cooperation.