SAARC & SAFTA: How can it be made successful ?

Group Members
Nimit sheth- 102 Roopesh thopate- 138 Sanjana narayan- 145 Shikha poddar- 149 Swapnil sawale- 163 Yogesh rane 179 Harshada dhage - 182

SAARC
The South Asian Association for Regional Cooperation Bangladesh An organization of South Asian Nations founded in 1985 Dedicated to Economic, Technological ,Social & Cultural India development Countries part of this : Bangladesh, Bhutan , India, Pakistan Bhutan Maldives SAARC , Nepal,Maldives and Sri Lanka Afghanistan joined in 2007 Headquartered in Kathmandu, Nepal. Sri The SAARC seeks to promote the welfare of the peoples of South Asia, strengthen collective self-reliance Nepal Cooperate with international and regional organizations.
Afghanistan * Lanka Pakistan

Objectives of SAARC
To improve the quality of life and welfare of people of the SAARC member countries To develop the region economically, socially and culturally To provide the opportunity to the people of the region to live in dignity and to exploit their potentialities To enhance the self-reliance of the member countries jointly To provide conductive climate for creating and enhancing mutual trust, understanding and application of one anothers issues To enhance the cooperation with other developing economies

Contd..
To extend cooperation to other trade blocks To have unity among member countries Promotion of active collaboration and mutual assistance in the economic, social,cultural, technical and scientific fields Strengthening of cooperation among the Member States in international forum on matters of common interest Acceleration of economic growth Social progress and cultural development in the region

SAARC Trade Agreements

At the 10th SAARC Summit held in Colombo in July 1998 The Heads of the SAARC States decided to set up a Committee of Experts (COE) for creating FTA within the region Three Agreements : Bilateral Trade Agreement SAPTA SAFTA

Bilateral Trade
Agreement provides for expansion of trade and economic cooperation Making mutually beneficial arrangement for the use of waterways, railways and roadways, passage of goods between two places in one country through the territory of the other Exchange of business and trade delegations and consultation to review the working of the Agreement at least once a year

Contd..
Indias trade with Bangladesh, Bhutan, Maldives, Nepal and Sri Lanka are governed by the bilateral treaties/agreements India-Bangladesh : October 04, 1980. Indo-Maldives : Trade Agreement signed on March 31, 1981 India and Nepal : Treaty of Trade to regulate bilateral trade, which was re-negotiated and renewed for five years with effect from March 2002 Treaty of Transit to facilitate each others trade with third countries After independence, India and Pakistan signed a standstill agreement under which goods from one country to another were exempted from customs duty Sri Lanka, having an adverse trade balance with India for the last several years, was seeking Indias support for finding ways & means to reduce the trade gap The first formal Agreement on Trade and Commerce between India and Bhutan was concluded in 1972.

Why more Trade

Four different forms of regional trading agreements,
Forming an FTA, members remove trade barriers among themselves but keep their separate national barriers against trade with outside nations. In a custom union, members not only remove trade barriers among themselves but also adopt a common set of external barriers. In a common market, members allow full freedom of factor flows (migration of labour and capital) among themselves in addition to having a common union. In an economic union, members unify all their economic policies, including monetary, fiscal and welfare policies, while retaining the features of a common market.

Cont
Trade affects growth in three primary ways:
First, trade encourages the flow of resources from the low productive sectors to high productive sectors, leading to an overall increase in output Second, With unemployed resources, an increase in export sales leads to an overall expansion in production and a fall in the unemployment rate Third, international trade also enables for the purchase of capital goods from foreign countries and exposes an economy to the technological advances of the developed countries.

Criteria for Successful FTA

As tariffs are not allowed under an FTA framework, individual Governments try to protect their respective economies by imposing non-tariff barriers (NTBs), antidumping measures, import licences and sanitary standards. Some of the factors that affect the formation of an FTA are considered below. Intra-industry trade: Trade happens in similar commodities, The likelihood that industry association will demand more protection is less in cases of intra-industry trade. Economic characteristics: Similarities are measured in terms of economic development and geographical proximities. The more similar are the economies, the greater is the likelihood of intra-industry trade. Because geographically close economies with similar levels of economic development have access to similar kinds of technology Consequently, they tend to produce more or less similar items and tend to trade in similar commodities Monopolistic Competition

Contd..
Prices: Low technology intensive items, such as leather footwear, garments, gems and jewellery and textile products, which are typical of any developing countrys export profile, they are price-elastic Should be beneficial Government policies: More liberal government policies are likely to be beneficial for an FTA. Higher trade volume, resulting from external sector liberalization, is expected to increase the likelihood of FTA formation

SAPTA
SAARC Preferential Trading Arrangement
In December 1991, the Sixth Summit held in Colombo approved the establishment of an Inter Governmental Group (IGG) to formulate an agreement to establish a SAARC Preferential Trading Arrangement (SAPTA) by 1997 The Agreement reflected the desire of the Member States to promote and sustain mutual trade and economic cooperation within the SAARC region through the exchange of concessions.

Basic principles underlying SAPTA

Overall reciprocity and mutuality of advantages so as to benefit equitably all Contracting States with respect to economic and social development Negotiation of tariff reform step by step, improved and extended in successive stages through periodic reviews Recognition of the special needs of the Least Developed Contracting States and agreement on concrete preferential measures in their favour Inclusion of all products, manufactures and commodities in their raw, semi-processed and processed forms. Four rounds of trade negotiations have been concluded under SAPTA covering over 5000 commodities..

SAFTA
The objectives of SAFTA are to promote and enhance mutual trade and economic cooperation among the 'Contracting States' by interalia: Eliminating barriers to trade in, and facilitating the cross-border movement of goods between the territories of the Contracting States. Promoting conditions of fair competition in the free trade area, and ensuring equitable benefits to all Contracting States, taking into account their respective levels and pattern of economic development. Creating effective mechanism for the implementation and application of this Agreement, for its joint administration and for the resolution of disputes; and Establishing a framework for further regional cooperation to expand and enhance the mutual benefits of this Agreement.

Indias Bilateral FTAs with SAARC Members and SAFTA: A Comparison

Indias FTAs Commitments: A Comparison Country Size of Indias Sensitive List SAFTA Bilater al Nil Timefram e (05% level) SAFTA Timefra me (zero duty) Bilateral Rules of Origin

SAFT A CTH+ 30% CTH+ 30%

Bilateral

Bhutan

744

01.01.2009*

Already granted Already granted Already granted

Mnftrs of Bhutan CTH+ 30%

Nepal

744

01.01.2009*

Sri Lanka

865

429

01.01.2011

CTH+3 CTH+35% 5%

Tariff Reduction Programme

The Agreement provides for Special and Differential Treatment (S&DT) for the LDCs in various forms - Revenue Compensation Mechanism The mechanism for Compensation of Revenue Loss (MCRL) for the SAARC LDCs prescribes: The compensation to LDCs would be available for four years. However, for Maldives it would be available for six years. The compensation would be in the form of grant in US dollar. The compensation shall be subject to a cap of 1, 1, 5 and 3 percent of customs revenue collected on non sensitive items under bilateral trade in the base year, i.e., average of 2004 and 2005. The compensation shall be administered by the COE.

 Maintain sensitive lists, consisting of items which are not subject to tariff reduction. Only three countries namely Bangladesh, India and Nepal maintain different sensitive lists for LDCs and NonLDCs

SAFTA Framework Agreement refers to such measures as

Harmonisation of standards, reciprocal recognition of tests and accreditation; Harmonisation of customs clearance and customs These measures indicate elimination of noncooperation;

tariff barriers (NTBs) will be a major trade task Transit facilities, particularly for land-locked contracting in order to enhance intra-regional trade in states; South Asia.
Removal of barriers to intra-SAARC investments; Development of communication system and transport infrastructure; Rules of fair competition and promotion of venture capital, simplification of procedure for business visas

Challenges
Determine the impact of SAFTA on SAARC countries. The political economy of the selection of excluded sectors and rules of origin. The "behind-the-border" restrictions. The coverage of SAFTA. The cross border investment. Finally the benefits of SAFTA should be seen to be equitably shared.

Business opportunities
South Asia remains one of the least integrated regions in the world The FTA is very less among the union countries as compared to other countries SAFTA is also a vehicle of promoting better political ties among neighbours SAFTA will help to bring about greater trade diversification.

NTBs: A Major Concern Worldwide

It is found that market access barriers faced by developing country exporters are not decreasing under the liberalised trade regime for some of their most important export sectors. LDCs are especially at risk. Recent research by ITC based on Market Access Map shows that three hardles are blocking the track to better market access. First, specific tariffs are widespread. They are less transparent than ordinary (ad valorem) tariffs and they tend to discriminate against the developing countries. Second, commodity prices have plummeted. If tariffs were ad valorem, the duties actually paid would have declined with the prices. Since specific tariffs are so importantespecially for commodities in practice, developing countries and LDCs are witnessing an effective rise in protection. Third, non-tariff barriers (food safety standards, environmental certification etc.) are growing in case of LDCs, they are particularly dramatic. A staggering 40% of LDC exports are subject to non-tariff barriers. For developing and transition economies and developed countries, the figure is only 15%.

Types of NON TARIFF BARRIERS

Import Policy Barriers Standards, Testing, Labeling and Certification requirements Antidumping & Countervailing Measures Export Subsidies and Domestic Support Government procurement Services barriers (including those on Movement of Natural Persons) Lack of adequate protection to Intellectual Property Rights Other barriers

NTBs Facing by South Asian Countries within Region

I N D I A

Textile products

Although most importing countries accept the quality certification from ISO and Bureau Veritas, Sri Lanka asks for certification from its own agencies like Sri Lanka Standards Institution. This is a problem for Indian exporters as they have to get this certificate and incur the cost and the time even though they have an ISO certificate from a recognised agency in India. Sri Lanka does not accept products packed in straws. They demand that such products be packed in 5-ply corrugated boxes. India does not manufacture enough 5-ply corrugated boxes to meet the existing demand. The prices are too high compared to the other countries. This actually increases the costs of the packaging and affects the product pricing in the international market. Regarding the first category of barriers in Sri Lanka majority of the firms faced barriers related to product standards. In the second category of barriers majority of the firms felt there were barriers related to banks and to competition. Majority of the firms exporting to Sri Lanka disagreed that there was any kind of discrimination against them vis--vis other competitors. Majority of the firms exporting to Sri Lanka stated that they incurred expenses between 0 and 5% of total sales revenue to meet standards.

Sanitary ware

Others

Other barriers

Many buyers in Sri Lanka demand under invoicing in order to save themselves from import duties. This causes exporters undue harassment. Also Indian banks like the State Bank of India do not confirm the LC issued by Banks of Thailand and most banks of Vietnam. Due to non-confirmation of the LCs the exporters are not able to take orders. On the other hand, some of the private banks like Citibank, HSBC do confirm the Letter of Credit.

NTBs Facing by South Asian Countries within Region

I N D

Communication Problems Trade Logistics Different products Rice

Whenever there are disturbances at the Indo-Pak border, the mobile connections are not operational. While road routes for trade between India and Pakistan are non-existent, rail and air connectivity between the two countries has been erratic. Indian entrepreneurs facing NTBs of their products like electronic items, jute goods, machinery, plastic goods, textile and chemical items in Bangladesh. There are about 600 varieties of rice are grown in India. These include both basmati and non- basmati rice. Sri Lanka, accepts up to 100% broken rice (nonbasmati). In Sri Lanka, exporters require the KEMA4 certificate (ISO standards) even though the product certified by several reputed third-party inspection agencies like Crown Agents, ISO 9001:2000, Lloyds, Bureau Veritas, S.G.S. Robert, W. Hunt Company, BSI Inspectorate, Griffith UK, OMIC Japan, Tubescope Vecto GmbH Germany etc. Even though obtaining this certificate is not very complex or expensive, it demands lot of time and effort, which is an irritant to exporters. Sri Lanka specifies registration in their country even if the Indian exporter has registration in India. This registration is specific to Sri Lanka and is not a mandatory procedure for exports to other countries. Hence, this aggravates the agony of the exporter especially while exporting to Sri Lanka In case of mango pulp export to Sri Lanka, Indian exporters are required to obtain a Health certificate from the Ministry of Health of Sri Lanka. This test is conducted in order to specify the exact contents of the product. This test is conducted over a period of 2 days and costs about Rs.5000- Rs.7000 per consignment.

Transformers

I
Cosmetics

A
Mango pulp

Conclusion
India, being the largest economy in SAARC, its role is widely regarded as crucial in determining the effectiveness of SAFTA and therefore, it will have to play a proactive & leading role in drawing the future agenda or the road map of SAFTA Should cut down the size of its sensitive list initially 1200, now 744 for LDCs The issues relating to non-tariff measures should be addressed in a time bound manner providing technical assistance and building capacity for setting up the agencies/institutions Encouraging sourcing of inputs from other SAARC members Take efforts for promoting investments in other SAARC members (Maldives & Nepal) especially the LDCs so that overall economic activity is generated and greater employment opportunity are created Provide better infrastructure and support at the boarder check posts of customs

CONT
In order to promote intra SAARC trade and investment flows, the SAARC Member Countries would also need to take necessary measures. Recommendations are made : Reduction of the size of sensitive list and time frame for tariff liberalisation Duty free market access Regional cummulation Addressing nontariff barriers Expanding the scope of SAFTA Trade facilitation Customs Cooperation Cooperation in infrastructure Transit treaty