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Can Safta lead to a South Asian economic union?

Dawn | Karachi | 19 January 2004

Can Safta lead to a South Asian economic union?

By M. Aftab

Can the South Asian Free Trade Agreement lead to an economic union? By all counts, and indications, such a union is still a distant dream. But, by signing Safta did the region’s top leadership take the first step towards it? The answer is wide open, as one looks at the region’s multifarious feuds.

Even Safta will come as a pleasant surprise to many because the region, for the last half a century, was known more for its confrontations than cooperation. Safta becomes operational on New year 2006,the date on which all seven Saarc countries cut tariffs and ease foreign trade among themselves.

The summit leaders also signed an additional protocol to Saarc’s 1987 regional convention on suppression of terrorism. The convention now conforms to the United Nations Security Council resolution 1373 of September 28,2001. It criminalizes provision, collection or funding for terrorism. The summit, above all, approved the Islamabad Declaration, unveiling future cooperation in a host of fields from human resource development to energy, and telecom to the IT. It brings forward implementation of the UN’s Millennium Development Goals from 2015 to 2010.

Despite skepticism expressed by Pakistan and other Saarc members regarding creation of an economic union and a common currency, unless "all political disputes" like Kashmir are resolved, the Islamabad Deceleration (ID) sounds upbeat. "We reiterate our commitment made at the eleventh Saarc summit at Kathmandu in January 2002, for the creation of a South Asian Economic Union (SAEU).

In this context, we underline the need that creation of a suitable political and economic environment will be conducive to the realization of this objective," said the Declaration. Vajpaee urged the South Asian leadership to work for "greater economic stakes in each other". It will naturally result in "greater sensitivity to the concerns of each other." "It will pave the way for the more ambitious - but entirely achievable - goals such as a Free Trade Area, an Economic Union, open borders, and a common currency for our region," he said.

The signing of the much-awaited Safta, described region’s leadership as "historic," is motivated "by the commitment to strengthen intra-Saarc economic cooperation to maximise the realization of the region’s potential for trade and development for the benefit of their people," it says.

The 25-article Safta agreement replaces Saarc Preferential Trading Agreement (Sapta) of 1993 for trade liberalization, on a preferential basis. Safta moves the region to higher levels of trade and economic cooperation by "removing barriers to cross-border flow of goods. It provides Bhutan, Bangladesh, Maldives, Nepal, and Sri Lanka - the Least developed countries (LDCs) - special and differential treatment "commensurate with their development needs." It bills India and Pakistan as "Non-Least Developed Countries" (NLDCs).

Safta affirms the existing rights and obligations under Marrakesh Agreement, establishing the WTO and other treaties and agreements to which Saarc members are signatories. It provides for free movement of goods in the region through elimination of tariffs, para-tariffs that include border charges and fees, and non-tariff restrictions on movement of goods and any other equivalent measures.

It entails adoption of trade facilitation and other measures, and a progressive harmonization of legislations by the member countries. Special needs of the LDCs will be accommodated by adopting concrete measures in their favour on a non-reciprocal basis.

Safta’s Trade Liberalisation Programme (TLP) includes:

 Tariff reduction by the NLDCs - primarily India and Pakistan - from the existing rates to 20 per cent. It is to be done within two years, starting January 1, 2006. "If the actual tariff rates on that date are already below 20 per cent, they will undertake an annual reduction on a Margin of Preference basis of 10 per cent on actual tariff rates for each of the two years."

 The subsequent tariff reduction by the NLDCs from 20 per cent, or below, to 0-5 per cent will be done within the next five years, starting January 1, 2008. The period of second tariff reduction by Sri Lanka will be six years.

 Tariff reduction by the LDCs from their existing rates will be to 30 per cent within two years. If the actual tariffs are below 30 per cent, there will be an annual reduction of 5 per cent "on actual tariff rates for each of the two years."

The subsequent tariff reduction by the LDCs from 30 per cent, or below, to 0-5 per cent will be done within a second time frame of eight years beginning January 1, 2008. But the LDCs are encouraged to adopt reduction in equal annual instalments, no less than 10 per cent annually. The above schedules of tariff cuts will not prevent member countries from immediately reducing their tariffs to 0-5 per cent, or from following an accelerated timeframe of tariff reduction. The LDCs and the NLDCs can have separate "Sensitive Lists." Higher tariffs, agreed between member countries, to protect their domestic products, will apply to these items.

The Safta Ministerial Council will review continuation, or otherwise, of "Sensitive Lists" after every four years, or earlier, to reduce the number of these items. Each member country will accord "national treatment" to the products of other members in accordance with the provisions of Article III of Gatt 1994. The LDCs will receive special considerations before any anti-dumping or countervailing measures are to be applied against them.

The NLDCs’ importers will favourably consider accepting price undertakings offered by the exporters from the LDCs. There will be a greater flexibility in continuation of quantitative or other restrictions, by the LDCs on imports from other member countries. The NLDCs will also consider enhancing sustainable exports from the LDCs, such as long and medium-term import contracts and supply commitments for specific products, buy-back arrangements, state trading, and government procurement.

The LDCs can incur loss of customs revenue due to implementation of Safta’s Trade Liberalisation Programme (TLP). The NLDCs will compensate the LDCs until they find alternative domestic resources.

Safeguards, on account of balance of payments measures, serious injury to producers, maintenance of the value of concessions, rules of origin,and dispute settlement are also provided.

Safta also provides for simplification and harmonization of standards, customs clearance, import licensing, import financing by banks, transit facilities especially for landlocked countries, promoting intra-Saarc investments, development of communications and transport, and speedy grant of business visas.

What is Safta shooting for? The intra-Saarc trade, at present, is a tiny 3.8 per cent of the region’s total trade. Can its members push it to 25 per cent which is still small compared to other regional groupings? And, if yes, in how many years? The trade between Saarc’s Big Two, India and Pakistan, through official channels, is $200 million a year. But, the overall trade via third countries like Singapore and Dubai, is estimated at $1.5 billion a year. Itshows the potential for Safta.

Prime Minister Jamali who was elected as Chairman of Saarc, said the alliance "must move forward expeditiously towards the establishment of a South Asia Development Bank which can underwrite important, region-oriented mega-projects of mutual benefit to Saarc members." He also urged speedy action on: poverty alleviation, South Asian Development Fund, cooperation in the field of energy, trans-regional oil and gas pipelines, and telecom, the IT and transportation in the region and Central and West Asia.

Prime Minister Khaleda Zia, whose husband and the then President of Bangladesh Ziaur Rahman had originally proposed formation of Saarc, founded in 1985, said, "trade promotion critically calls for reducing tariffs, dismantling non-tariff barriers and impediments of an institutional and attitudinal nature affecting exports from smaller to larger Saarc countries."

President Chandrika Bandaranaike Kumaratunga of Sri Lanka, said, "despite our geographic proximity and certain similarities of economic infrastructure, intra-Saarc trade still remains at an extremely unsatisfactory 5 percent, compared with 38 per cent within Asean. We conclude the Safta arrangement at a moment when the world has realised disadvantages of the present multilateral trade processes,such as the WTO. This situation has given a new relevance to regional cooperation. We believe that Saarc can provide valuable options for South Asia," she said.

Nepalese Prime Minister Surya Bahadur Thapa, said, "we should transform South Asia into a region in which peoples, goods, services and technology move freely across the borders, the motor and railways systems are integrated, and pipelines, transmission lines and telephone lines are connected in a grid. We should respond to the world’s problems such as the challenges and opportunities of globalization as a united bloc."

President Pervez Musharraf said, "we must expand Saarc charter to discuss bilateral issues at regional level. We must put behind us the tarnished legacy of mistrust, bitterness and tension. We feel there is a need to constitute a mechanism to even discuss bilateral issue at regional level. There can be no development in the absence of peace. There can be no peace, so long as political issues and disputes continue to fester." Can anyone swing things towards that?

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