The Hindu, India

India will have to allay fears of other members about its dominance

By Abhijit Roy

30 January 2006

SAFTA is aimed at reducing existing tariffs to less than 5 per cent within a stipulated time frame to boost trade among the SAARC member countries.

THE SOUTH Asian Free Trade Agreement (SAFTA) has come into force with effect from January 1. The South Asian Association for Regional Cooperation (SAARC) which consists of seven countries, namely, Bangladesh, Bhutan, India, Maldives, Nepal, Pakistan and Sri Lanka, is expected to start implementing SAFTA from June - July this year.

A regional trade bloc among SAARC members was formed when the SAARC Preferential Trading Arrangement (SAPTA) was signed in April 1993 for giving preferential market access to exports of member countries in a limited way. The agreement to form a South Asian Free Trade Area was signed during the 12th SAARC Summit held in Islamabad in January 2004. The agreement provides for free trade in goods among SAARC member countries.

Tariff reduction

The highlights of the agreement include the following:

(a) Trade Liberalisation Programme: The agreement provides for the following schedule of tariff reductions:

(i) Non-Least Developed Country (Non-LDC) members of SAARC (India, Pakistan and Sri Lanka): These countries will reduce their existing tariffs to 20 per cent within a time frame of two years from the date the agreement comes into force. If the actual rates are below 20 per cent then there shall be an annual reduction of 10 per cent on margin of preference basis for each of the two years. The subsequent tariff reductions from 20 per cent or below to 0-5 per cent shall be done within a period of five (for Sri Lanka it is six) years, beginning from the third year from the date of coming into force of the agreement.

(ii) Least Developed Country (LDC) members of SAARC (Bangladesh, Bhutan, Maldives and Nepal): The LDC member countries will reduce their existing tariffs to 30 per cent within two years from the date the agreement comes into force. If actual tariff rates are below 30 per cent there will be an annual reduction of 5 per cent on margin of preference basis for each of the two years. The subsequent tariff reductions from 30 per cent or below to 0-5 per cent shall be done within eight years, beginning from the third year from the date of coming into force of the agreement. Notwithstanding the above provisions the Non-LDC member states shall reduce their tariffs to 0-5 per cent for the products of the LDC member states within three years beginning from the date of coming into force of the agreement.

(iii) Sensitive List: Each country will maintain a sensitive list to protect the interests of the domestic stakeholders. The Non-LDC member states will maintain smaller sensitive lists for the LDC member states. The sensitive lists are subject to review after every four years or earlier with a view to reducing the number of items.

Safeguard measures

(b). The agreement provides safeguard measures in case of a surge in imports of product(s) covered under SAFTA concessions, as well as a detailed dispute settlement mechanism.

(c). Special provisions for LDCs: The agreement also provides for compensation of revenue to LDCs which suffer from loss of customs revenue due to the implementation of the trade liberalisation programme.

Basically, SAFTA is aimed at reducing existing tariffs to less than 5 per cent within a stipulated time frame to boost trade among the SAARC member countries. All the countries have been given the option of drawing up their own negative lists. For example, sensitive products covering agricultural items, textiles, pharmaceuticals and small-scale industries will be exempt from the trade liberalisation programme initially. The aim is to achieve removal of all trade barriers among member countries by 2016.

According to the recent Hong Kong Ministerial Declaration, developed-country members as well as non-LDC developing-country members declaring themselves in a position to do so, agreed to implement duty-free and quota-free market access for products originating from LDCs. However, the arrangement will allow importing countries to make exceptions in strategically crucial products such as textiles and rice. Further, in the services negotiations, members agreed to give priority to the sectors and modes of supply of export interest to LDCs, particularly with regard to movement of service providers under Mode 4.

Future of agreement

The South Asian region, one of the poorest regions in the world, has not been able to take advantage of intra-regional trade to boost incomes and reduce poverty. Mistrust among member nations runs high. Most of India’s neighbours are suspicious of the size of economy. With India’s growth picking up in recent times, its neighbours should realise that SAFTA can enable them to grow their economies faster. On the other hand, India has to provide comfort to the smaller economies that are justifiably worried that their economies may get swamped under the onslaught of Indian corporate giants. Already India has significant balance of trade surpluses with its neighbouring countries. (Tables I & II).

Another point to keep in mind is that as per the latest understanding in WTO, substantial concessions have been extended to LDCs. As India’s importance in the world economy grows, its responsibilities also will grow commensurately. Hence, even if India wishes to deny, say, Bangladesh some concession under SAFTA by keeping some goods out of the reduction in tariffs, it may not be possible to do so under the WTO agreement. On the other hand, if Bangladesh does not suitably respond to India’s sensitivities in areas such as providing road access to northeastern States like Tripura, illegal migration and supplies of gas, then it cannot expect India to move proactively to provide trade concessions. In the case of Pakistan, Kashmir and terrorism remain complicated and unresolved issues. Pakistan does not even grant Indian goods most favoured nation (MFN) status, which is compulsory under WTO norms. Simply signing the SAFTA agreement will not get us far; there has to be genuine long term commitment to a free trade area. This obviously has political implications as well. Progress under SAFTA, juxtaposed with the developments under WTO, will have consequences not only for international and intra-regional trade in the coming years, but will also have interesting fall-outs in the domestic economic and political fields.