Inter Press Service
16 January 2006
SOUTH ASIA: Burying Quarrels for Regional Free Trade
Paranjoy Guha Thakurta
NEW DELHI, Jan 16 (IPS) - Will economics overtake politics in South Asia? Will the seven countries of the South Asian Association for Regional Cooperation (SAARC) be able to sink some of their deep differences over political issues to enhance trade relations?
Analysts see the South Asian Free Trade Area (SAFTA) agreement among India, Pakistan, Sri Lanka, Bangladesh, Nepal, Bhutan and Maldives, effective from the beginning of this year, as having the potential to pave the path to prosperity in one of the most economically underdeveloped parts of the world.
The seven countries of SAARC — which now includes an eighth partner, Afghanistan — account for nearly one-fifth of the world’s population that resides in barely three per cent of the planet’s geographical area. These nations are home to almost 1.5 billion people, over 400 million of whom live on less than one US dollar a day, the internationally defined poverty line.
Although a trade pact among the SAARC countries was first mooted a decade ago, an agreement on the SAARC Preferential Trading Arrangement (SAPTA) was signed only in 1993 and the association agreed to formally institute a free trade arrangement at its annual summit at Islamabad in January 2004.
At the SAARC summit at Dhaka in November last year (after it was postponed twice), the member countries signed four protocol documents that eliminated most of the legal and administrative hurdles that had stood in the way of implementing the SAFTA agreement.
Many consider the SAFTA agreement to be the most significant decision taken by the SAARC since it came into existence in November 1985.
Over the last two decades, the proceedings at SAARC meetings have tended to be dominated by political wrangling between India and Pakistan over Kashmir, though relations between the two countries have improved in recent years. Some would even argue that SAARC had been held hostage to political differences between India and Pakistan.
But this may no longer hold true. "I think economic interests can take precedence over political differences in SAARC as it has in other parts of the world," says D N Rao, professor at the Centre for Economic Studies and Planning, Jawaharlal Nehru University.
India’s Commerce Minister Kamal Nath said New Delhi would cut customs duties by five per cent for goods imported from Pakistan, Sri Lanka, Bangladesh, Maldives and Nepal with the launch of the SAFTA agreement from Jan. 1. "This is the first major step towards a free trade agreement with our neighbours," he announced on Dec 29.
Under the new pact, SAARC member will cut customs tariffs to levels between zero and five per cent over the next seven to twelve years. Whereas the relatively more developed countries like India, Pakistan and Sri Lanka will cut their tariffs to these levels by 2013, the four least developed nations — Bangladesh, Nepal, Maldives and Bhutan — would reduce customs rates to between zero and five per cent by 2018.
After the first framework agreement for SAFTA was signed in Islamabad in 2004, a committee of experts was constituted. This committee met on twelve occasions over nearly two years to sort out of a host of ticklish issues.
These related to formulating rules of origin, devising a "sensitive" list of traded items, working out a mechanism to compensate the least developed countries for revenue losses and initiating a scheme for rendering technical assistance to the weaker contracting states in SAARC.
Eventually, these differences were resolved as it was acknowledged that more trade would benefit all member countries. "Given the long transition period of a decade, I think most of the disputes between and among the SAARC countries can be sorted out amicably," says Nagesh Kumar, director general, Research and Information System (RIS) for Developing Countries, a think-tank supported by the Indian government.
India’s trade with the six other SAARC countries stands at roughly 5.2 billion dollars at present, while total intra-SAARC trade is currently estimated at over seven billion dollars.
According to the Confederation of Indian Industry (CII), trade volumes could grow substantially in the coming years on account of the SAFTA agreement. A CII statement notes that "the share of intra-SAARC trade in world trade is today at 5 per cent and needs to grow to at least 10 per cent by 2008".
Rao adds that in the past there used to be intense competition among the SAARC countries to export more or less the same set of goods, mainly primary agricultural commodities like jute, tea and cotton, besides handicrafts, textiles and garments.
"In recent times, however, complementarities have grown enhancing the scope for more intra-SAARC trade, especially with India emerging as a major producer of pharmaceuticals, automotive components and information technology services," he points out.
Kumar says that though on the surface it would appear as if SAARC countries are still competing with one another, in fact "horizontal specialisation within industries have emerged" thereby increasing the potential for complementary trade
"Pakistan imports iron ore from Liberia in Africa that can be obtained from India. Electric arc furnaces located in north India import steel-making scrap from all over the world as raw material — such scrap can be easily sourced from Pakistan. India produces long-staple cotton whereas it does not have adequate supplies of medium- and short-staple cotton that is grown in Pakistan."
When India and Sri Lanka signed a free trade agreement four years ago, there were fears that tea plantations in India would be adversely impacted. Kumar says the two countries grow different varieties of tea that can be blended before being marketed. "Trade between India and Sri Lanka has grown threefold in the last four years and Sri Lanka’s trade deficit with India has come down by 50 per cent in this period," he points out.
India and Bangladesh compete with each other in exporting garments and textiles to developed countries. When the SAFTA agreement was being finalised, Bangladesh was not happy with India keeping a large number of items related to garments on its "sensitive list" thereby protecting Indian producers of these items.
Eventually, a "tariff rate quota" system — or a trading mechanism providing for application of a certain rate of customs duty to imports of a particular good up to a specified quantity and a different duty rate to imports above the quota limit — was worked out.
India’s Commerce Ministry explains that under this system, six million fabric pieces can be sourced from either India or Bangladesh while two million pieces do not carry any conditions on sourcing.
Some points of conflict have not yet been resolved. As Kumar points out, Pakistan has not explicitly granted most favoured nation (MFN) status to goods imported from India whereas the latter has given such status to imports from Pakistan.
One apprehension is that India, the largest and most economically developed of the seven SAARC nations, would tend to act as a "big brother" or worse, a "bully", with its smaller neighbours. "Big brother can instead display a grandfatherly approach," quips Rao.
Kumar adds that the success of the India-Sri Lanka free trade arrangement clearly demonstrates that a smaller partner can often hope to gain more from such trading arrangements, especially if it develops its capacities to export goods to a larger market.
"Many fears about the larger country, in this case India, gaining disproportionately from a free trade arrangement tend to be misplaced," he feels.
Rao explains that most of the SAARC countries import crude oil in large quantities and the sudden increase in international prices of petroleum products during 2005 has made it all the more important for these countries to cut transport expenses. "It makes a lot of sense to trade with your neighbours because you can cut down on freight costs," he argues.
The discovery of large reserves of natural gas in Bangladesh should spur the establishment of energy-intensive industries manufacturing steel and fertilizers and generating electricity. One of India’s largest privately owned business groups, the Tatas have announced investments worth three billion dollars in Bangladesh.
Talks are also on to build a gas pipeline grid that runs through Bangladesh, India and Myanmar. While many of these projects appear grandiose and may take quite a while to fructify, a beginning seems to have been made through the SAFTA agreement.