Longing for modest gains from SAFTA

Financial Express, Dhaka

Editorial

Longing for modest gains from SAFTA

Shahiduzzaman Khan

6/26/2005

THE ninth expert-level meeting of the South Asian Association for Regional Cooperation (SAARC) is likely to resume in Kathmandu on July 19 this year. Earlier, it was scheduled to be held on June 28 in the same venue.

The upcoming expert level negotiation is crucial as two major countries of the South Asian Free Trade Agreement (SAFTA) are likely to confirm their position on the issues like the rules of origin (RoO).

According to reports, Bangladesh has expressed its willingness to shorten its sensitive list of products for trading if the response from other South Asian countries becomes positive. The country will propose to India, Sri Lanka and Nepal to delist 381, 144 and 393 products respectively against their demands to shorten their respective lists to 324, 37 and 119 products correspondingly.

Bangladesh’s position on some of the technical issues of the agreement will again be examined in another inter-ministerial meeting soon. The SAFTA is due to come into force in January, 2006 as per declaration of the last SAARC summit.

Through the SAARC, regional countries tend to accelerate their economic integration by grabbing opportunities and exploring potentialities therein.

Before talking about SAFTA, let’s take a look at the South Asian
Preferential Trading Arrangement (SAPTA) that was signed in 1993 and came into effect in 1995, a decade after the formation of SAARC. Bangladesh was sincere enough to implementing the agreement by abruptly and drastically reducing the import tariffs and waiving restrictions on imports in the early nineties. This charity was not duly reciprocated.

Rather, new non-tariff barriers (NTBs) and quantitative restrictions (QRs) have been imposed on Bangladesh products such as batteries, garments, tableware, etc. According to SAPTA, 40 per cent local value addition was needed to get preferential market access, which was next to impossible for Bangladesh and other LDCs of the SAARC. After long bargaining, the share of local value addition needed for preferential access was reduced to 30 per cent in 1999. However, things did not improve that much.

However, intra-regional trade has been rallying 3.5 per cent to 4.0 per cent of the total regional trade since the formation of the SAPTA.
Interestingly, without any mentionable progress on economic cooperation through SAPTA, the member countries agreed on the formation of SAFTA in 1995 and set 2005 deadline to give it a final shape. In 1997, the date for achieving SAFTA was brought forward to 2001, but was later postponed indefinitely due to the Kargil war. Maybe the urge towards forging SAFTA came partly from the fact that South Asia had been largely by-passed by the recent rapid growth of world trade including in neighbouring ASEAN countries.

Anyway, SAFTA agreement allows the four LDCs of the group 10 years to reduce import tariff to 5.0 per cent or below while the other three developing countries will reduce their import tariff to 5.0 per cent or below for the four LDCs’ products within three years of the implementation of the agreement. In the decision-making process, the issues of trade creation and diversion should be counted mainly by the weaker economies.

Trade creation negatively affects local production and employment as demand is shifted from higher-cost local production to lower-cost Preferential Trade Agreement (PTA) or Free Trade Agreement (FTA) member countries.

However, it affects consumers positively as they get goods with lower price. Again, the trade diversion negatively affects the welfare of the importing country. Therefore, the net benefit of the trading arrangement would depend on the trade-off between the trade creation and trade diversion effects.

It is observed from the growth process of other regional trading blocs that intensification of regional integration is often accompanied by growing intra-regional trade. Such kind of trade was only 7.0 per cent in the ASEAN region before grouping, but it shot up to 43 per cent in 1995 and to 49 per cent in 2003. In NAFTA it was only 12 per cent before grouping, but was 44 per cent in 2003, and in EU, it was 23 per cent in the early eighties and 67 per cent in 2003.

It may be hypothetically true that after the formation of SAFTA, intra-regional trade will increase significantly. However, will it be true for Bangladesh’s export? History does bode well on this count. NTBs, QRs and hassles at customs points have jeopardised a few positive approaches. The very limited trade complementarities should be dealt with thoroughly, as most of the member countries have comparative advantages on similar products like textile materials and products, leather and leather products, agricultural products, fresh fish, etc.

Lack of confidence and conflicts amongst the SAARC member countries should be resolved to gear up meaningful economic cooperation. Above all, unilateral free trade facilities to LDCs by SAARC stronger economies and cooperation in the area of investment, technology transfer, technical assistance, and trade promotion of the LDCs should be taken immediately to level up the current inequalities. Once greater equality and equilibrium is established, SAFTA would be the immediate means to strengthen regional trade cooperation.

What is the situation in South Asia? According to an Indian analyst, India finds itself regarded as a hegemonic Big Brother by the other six, and bilateral disputes are especially acute with Pakistan, Bangladesh and Nepal. Indeed, the other six see SAARC as a forum for ganging up, the better to withstand Indian hegemonic pressure.
India had a trade surplus with every country of the region, something the other six resent. Trade liberalisation will widen such surplus, and resentment. That is why the list of items on which preferences are being offered is small, he said.

Besides, the preferences are so modest that they make little difference anyway. Trade between SAARC countries amounts to only 3.0 per cent of their total trade, and this will rise to just 3.3 per cent even if SAPTA boosts trade by one-tenth. In the long-term, that is still a desirable outcome. In the foreseeable future, however, it hardly matters.

There is a world of difference between a preferential trade and a free trade one. In a preferential agreement, each country still retains sovereignty over its import controls, and merely grants a few concessions.

But a free trade area implies dismantling customs barriers, which means all SAARC members will have to agree to a common import policy, formally or informally.

Unless countries of a region enjoy considerable political harmony, they cannot possibly agree to surrender sovereignty over their import policy, especially in South Asia where the giant Indian economy will tend to dominate outcomes.

So, much though economic integration is desirable, the nations will first have to create a politically harmonious subcontinent, and that is a formidable task. The ball is now in India’s court. It must take frantic efforts to wipe out elements of mistrust, shun big brotherly attitude and help restore confidence among its neighbours. Once this is established, things will move in the right direction paving the way for successful implementation of SAFTA.