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SAFTA

SAFTA

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Assignment - II

Submitted To: Dr. Mahendra P. Shrestha (Course Facilitator) Business Environmental Analysis

Submitted By: Nischal K.C. Term- VI, MBA Ace Institute of Management

and more importantly. Bhutan. India and Pakistan would be the dominant states of any formal regional integration agreements (Das. Nepal. amongst the seven countries. Considering the size of land area. the achievement has been considered very insignificant and the level of intra-regional trade among SAARC countries is still very low. On the basis of income Bhutan. while Pakistan and Bangladesh are the second and third largest country respectively. Bhutan. four economies namely Bangladesh. Driven towards integration by the pressure of economic interest of the region. . They formed the SAARC Preferential Trading Agreement (SAPTA) in 1993 and transformed it into South Asian Free Trade Area (SAFTA) in 2004 with a view to enhancing their productive capacity and the region‟s trading interests. India is by far the largest country in South Asian region. It is argued that trade liberalisation and regional economic integration can help a region increase intra-regional trade by exploring the size of the market. It is argued that. India. Maldives and Nepal are very small economies in the region. By exposure to a regional market. Maldives. However. Under the World Bank designated category. Maldives and Nepal. are least developed countries (LDCs). because of their size. This may in turn yield efficiency and bring benefits not only by exploration of economies of scale but also by dynamic and upward shifts in production function. these three economies are of crucial importance for successful regional integration and cooperation. population and economy. previously shattered domestic firms become more competitive and gain the confidence to enter into global competition. Pakistan and Sri Lanka. The important fact is that Bhutan and Nepal are land-locked while Maldives is an island.formed the South Asian Association for Regional Cooperation (SAARC) in 1985. 2008). since the emergence of SAARC. 2007. and India.Consider the new political and economic development between the members of SAARC. With the present low level of intra-regional trade and the perceived competitiveness among the SAARC countries.Bangladesh. Behera. Do you think Nepal will be able to take advantages? Interest in economic analysis of preferential trade liberalisation has increased with the rise of regionalism after the formation of World Trade Organization (WTO). seven South Asian countries. Bhutan. Pakistan Sri Lanka are considered developing countries. a question has arisen whether regionalism would benefit countries of this region. Critically examine the future of SAFTA.

improve trade facilitation and enhance cooperation in infrastructure such as energy and telecommunications as a „single undertaking‟. smooth the progress of trade and investment.e. Nepal and Pakistan are low-income countries (Das. South Asian countries would be wasting time and energy on something that is not going to bear fruit. for reducing tariff within the region. World Bank. better communication. economic sector. the main rational behind its establishment is to develop a congenial environment through summit diplomacy where all nations may interact peacefully with each other. Initially SAARC was established to retreat and up hold the peace in the South Asia region and create the opportunities of interaction between member countries. To overcome the economic and poverty problems in 1993. its member countries signed an agreement. It is due to the reason that the prospect of united economy is greatly ignored among its member states. SAARC is not that much successful in resolving economic problems or addressing political conflicts in South Asia. 2007). Unless the mandate of SAFTA is broadened to include measures to liberalise trade in services. Though the formation of SAARC is a landmark step taken by the leaders of the region. SAFTA would become an incomplete mission. increase intra-regional investments. and endorse private sector. SAFTA will remain an incomplete vehicle for regional cooperation and development. the member countries agreed to bring tariff duties down by 20% up to 2009. expand tourism. But social. If these issues are not addressed. Without considering other complementarities that can boost intra-regional trade. assistance in power and energy sector. cultivate sustainable peace and promote mutual economic well being by harnessing available resources in the region through . India. it will not help to enhance economic cooperation in South Asia. and Bangladesh. 2007. However. South Asian Free Trade Agreement (SAFTA).Maldives and Sri Lanka are lower-middle-income countries. This agreement was implemented in 2006. which are reflected by its inability to negotiate a manageable „sensitive list‟. as most of their possessions are used in screening of the power and pay less attention to the resolution of regional problems. Later on strategies were made consisting of five prime objectives i. poverty eradication and trade were major issues faced by SAARC. The prime causes are the lack of harmonize interest and the tragedy of intra-stat conflict among its member countries which stop this organization to become a rising and successful organization. technological. If it fails to understand the deeper apprehensions of members on the potential of SAFTA.

lentils. pashmina. The identified products are cardamom. handmade paper. . it does not say much about the potential to export the products with comparative advantage. dairy products and transformers. neither South Asian nations have been able to push the process of integration into full swing nor the organization itself has become viable enough to promote peace. silver jewellery. Nevertheless. education. The realization of durable peace and the future of economic integration through SAARC depend upon the ability and interest of South Asian leaders to resolve domestic as well as long-standing differences through peaceful deliberations. Just identifying markets and products does not mean much if we cannot export them with comparative advantage. harmony and economic integration or prevent conflicts in the region. noodles. and wool products in craft and industrial goods category. which identified products with “export potential” and market destinations for them. labour services. sugar. iron and steel. engineering. Nepal Trade Integration Strategy (NTIS) 2010. and tourism. five more potential export products/sectors pointed out in the report are transit trade services. IT and BPO services. But. In order to achieve the objectives the SAARC would have to evolve into a full-fledged „regional entity‟ that can cultivate peace in the region. The political tensions and conflicts surrounding the countries of a South Asia pose a question of uncertainty and challenge to the formation of South Asian Union at par with European Union that would allow free movement of people. tea. common currency and common foreign and economic policies which ultimately will sow the seeds of peace. after 27 years of establishment. and medicinal herbs/essential oils in agro-product category. and hydro-electricity in services category. cement. NTIS 2010 is probably one of the most clear-cut reports so far that delves into product level analysis to identify promising exportable products and market destinations for them. Nepal and SAFTA Recently the Ministry of Commerce and Supplies released a report.the peaceful process of economic integration. health services. ginger. Furthermore. The report identifies 19 key commodities and services with „export potentials‟ that could potentially revitalize Nepal‟s export sector. honey.

Transit and transportation time inflates the price of goods that are usually available in South Asian countries at a much cheaper price. There are problems with transit and transportation. On the other hand Nepal already has free access to the vast Indian market without having to reciprocate. For a long time Nepal‟s trade either export or import has been concentrated to India resulting to a staggering above 98%. However. Nepal will lose customs revenue. When SAFTA comes into force. Indian goods will start flowing across the border without any tariff walls. The optimist‟s argument in favour of SAFTA is that Nepal‟s export to countries other than India in the region will also grow after the full realisation of SAFTA in 2016. Lowered tariffs for imported products will mean regional foreign goods will flood the market. That will have two serious ramifications: First. the unrestricted and untaxed inflow of Indian goods means a debilitating impact on domestic industries. Local producers will suffer loss because of a decline in export and sales. landlocked Nepal's exports face a logistical problem. Nepal having no trade route . SAFTA Framework has a provision for a revenue compensation mechanism for the least developing countries in the region that is subject to tough bargain and is not going to be there forever. If not. We should also understand the fact that majority of the member countries of SAFTA have regional trade agreements with other countries as well as with WTO.Furthermore. Maybe. especially when it comes to exporting to a third country via India. Therefore Nepal must have a strategy if it is to benefit from SAFTA. In such a scenario. Very few industrialists think that they can survive the onslaught from the free import of Indian products to the domestic market. we'll lose out regionally and in the domestic market too. Second. the country will face a lose-lose situation. thanks to bilateral Nepal-India treaty. If those products are better quality and cheaper. they will wipe out domestic production. It has to be phased out after some years. that gain is likely to be too small to compensate what Nepal might have to forgo. The government will also start losing revenue. Though. These add up the cost of our exports and minimise our comparative advantage.

regional economic giants could cut into Nepal's comparative advantage. Thus. . for Nepal it is difficult to take advantages from SAFTA.either land or water to compete with other goods in the international market is a difficult task however. benefits could be achieved if we can either use economies of scale or take the comparative advantage. But this is not likely to happen because with SAFTA in place.

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