SAFTA

1
Table of Contents
INTRODUCTION............................................................................................................................................3

RESEARCH AIM AND OBJECTIVES..........................................................................................................4

RESEARCH QUESTIONS..............................................................................................................................4

RESEARCH METHODOLOGY.....................................................................................................................4

CHAPTER 1: SOUTH ASIAN PREFERENTIAL TRADING ARRANGEMENT........................................4

CHAPTER 2: SOUTH ASIAN FREE TRADE AGREEMENT......................................................................5

CHAPTER 3: DOES SAFTA HAVE A FUTURE..........................................................................................7

CONCLUSION................................................................................................................................................9

BIBLIOGRAPHY..........................................................................................................................................10

INTRODUCTION
In the 1990s, the intertwining of national interests at the global and regional levels took on a new vigour.
The growth of regional and bilateral trade agreements among countries that decrease trade barriers on a
reciprocal and preferential basis for each other is a trend that has quickly gained traction. Over 60% of
global commerce is now handled on a preferential basis rather than on a most favoured nation (MFN) basis,
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thanks to the rise of large trading blocs like the EU and the North American Free Trade Agreement
(NAFTA) group. The resulting trade diversion and increase in intra-regional commerce has a negative
impact on the growth of regions that are not members of these trading blocs.1

“Asian countries have largely adhered to multilateralism. While the South Asian Preferential Trading
Arrangement (SAPTA) has been in place for a while, the focus has been on wider concerns of regional
cooperation rather than specific trade liberalisation measures. The position has now shifted. Regional
economic integration is being sought with vigour in geographically, socially, historically, and culturally
connected south Asia. In 2006, the South Asian Free Trade Area (SAFTA) was established.”

“For the purposes of this study, south Asia is defined as Bangladesh, Bhutan, India, Nepal, Pakistan, Sri
Lanka, and the Maldives, which are all members of the South Asian Association for Regional Cooperation
(SAARC). In terms of GNI purchasing power parity (PPP) and percent rate of growth over 2002-03, it is
clear that South Asia compares favourably to other areas. South Asia has the third largest GDP in terms of
purchasing power parity (PPP) after East Asia and Latin America, and the second greatest growth rate after
East Asia. South Asia has the potential to become a regional economic grouping, given its expanding
economic strength. However, intra-regional commerce in South Asia has been quite limited.”

“Since 1980, intra-regional trade as a percentage of total trade volume has hovered around 2%. When
evaluated as a percentage of GDP, South Asia is the least integrated of all the regions. South Asia’s intra-
regional trade accounts for only 0.8% of GDP, a fraction of east Asia’s (almost 27%) and much less than
that of Sub-Saharan Africa. South Asia’s intra-regional trade has slowed due to a combination of politics
and protectionism. When most south Asian countries were part of one governmental entity - British India -
in the late 1940s, trade between them was substantial.2”

“However, in the post-independence era, trade shares dropped due to escalating political tensions
between India and Pakistan. Furthermore, for a long time, all of the region’s countries have pursued
economic development through import substitution rather than export promotion policies, resulting in low
trade as a percentage of national production. Both of these elements are improving presently, and the
countries of South Asia are eager to expand regional cooperation. India and Pakistan are working through
diplomatic channels to resolve their concerns. All countries are allowing global trade to enter their
economy. In the 1990s, Sri Lanka was the first to abandon the import substitution approach, followed by
others.”

“In light of the region’s potential for trade and investment expansion, this article examines south Asia’s
free trade agreement (FTA) policies. The article is primarily concerned with regional agreements in South
Asia. The paper also considers the possibility of India as the anchor economy that can connect south and
1
Amita Batra, “South Asia’s Free Trade Agreement: Strategies and Options”, Economic and Political Weekly, Vol. 42 No. 38
2007, pp.3878-3879.
2
Ibid.
3
east Asia to form an Asia-wide trade bloc that can provide member countries with a greater economic and
strategic advantage than south Asia alone, based on a profile of economic asymmetry in south Asia.3”

RESEARCH AIM AND OBJECTIVES

1. To study and know about the South Asian Preferential Trading System.
2. To study and know about the South Asian Free Trade Area.
3. To know whether the SAFTA has any future ahead.

RESEARCH QUESTIONS
1. What is SAPTA and what relevance does it have with SAFTA?
2. What is South Asian Free Trade Agreement?
3. Does SAFTA have any future ahead?

RESEARCH METHODOLOGY
“All progress is born of inquiry. Doubt is often better than overconfidence, for it leads to inquiry, and
inquiry leads to invention is a famous Hudson Maxim in context of which the significance of research can
well be understood. Increased amounts of research make progress possible4.” Research inculcates scientific
and inductive thinking and it promotes the development of logical habits of thinking and organisation. The
topic for this research paper is “South Asian Free Trade Area”, for which doctrinal method of research is
used to ensure valid and reliable results that address research aims and objectives. The researcher took help
from various authentic articles, renowned journals and books of international politics for the purpose of this
research paper. The researcher has done a qualitative analysis of all the sources cited and relied upon for the
matter of this research topic. The researcher has tried to provide an in-depth analysis of the research topic,
addressing all relevant points relating to the research topic. Due to paucity of time the researcher has
limited the research to the doctrinal method only.

CHAPTER 1: SOUTH ASIAN PREFERENTIAL TRADING ARRANGEMENT

In April 1993, the SAPTA was signed. The agreement went into effect in 1995. The SAPTA Agreement
allowed member countries to exchange tariff preferences without committing to doing so on a large enough
scale to turn the region into a free trade zone by a certain date. As a result, the deal cannot be classified as a
South Asian free trade zone or accord. The agreement distinguished between least developed and other
developing member countries, allowed for special and differential treatment for LDC members, and
incorporated a regional “MFN” clause. The stipulations of the rules of origin (RoO) have been a source of
contention among member countries. The RoO allows for a 40 percent local content requirement for non-
LDC members and a 30 percent local content requirement for LDC members, as well as a 50 percent

3
Amita Batra, “South Asia’s Free Trade Agreement: Strategies and Options”, Economic and Political Weekly, Vol. 42 No. 38
2007, pp.3878-3879.
4
C.R. Kothari, Research Methodology Methods and Techniques, 2nd ed., New Age International (P) Limited, 2004.
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“cumulative” origin requirement. Three waves of preferential tariff reductions were adopted following the
creation of SAPTA. SAPTA-1, which was completed in 1995, covered only 6% of all traded items (226
products at HS-6-digit level). The crucial issue of non-tariff barriers has been postponed. SAPTA-2, which
ended in 1997 and covered 1,800 goods at the HS-6-digit level, was a more ambitious project. It also
included clauses aimed at lowering non-tariff obstacles.5

“SAPTA-3, which was signed in 1998 and covered 2,700 items, was the most ambitious. Because of the
political situation in Pakistan, the SAPTA-4 round was placed on hold. The agreement has remained
ineffectual despite three rounds of preference talks. SAPTA’s inability to increase intra-regional trade
volumes by significant quantities has been attributed to two key factors. These are: (a) the region was
characterised by a highly restricted economic and trading system at the time of SAPTA implementation;
and, more critically, (b) the goods for which trade preferences were offered did not comprise a significant
fraction of total goods exchanged. According to Mukherjee (2000), Pakistan had the biggest proportion of
intra-regional imports covered by the SAPTA preferences (39.6%), followed by Nepal (35.2%), India
(30%), Bhutan (17%), and Sri Lanka (17%). Bangladesh and the Maldives had only a sliver of import value
coverage. Nonetheless, the slow progress of international negotiations and the relative success of the
bilateral FTA between India and Sri Lanka have prompted a more serious assessment of the regional option
for a free trade area in south Asia, particularly by India. SAFTA, which was ratified in January 2006 and
went into effect on July 1, 2006, aspires to turn the region into a free trade zone.”

CHAPTER 2: SOUTH ASIAN FREE TRADE AGREEMENT

Tariff reductions, rules of origin, safeguards, institutional structures, and dispute resolution are all covered
within the SAFTA Agreement. Beginning in July 2006, SAFTA members have committed to a 10-year
phase-out of tariffs. The least developed members and non-least developed members will be reduced in two
stages, but at different speeds. SAFTA will take precedence over SAPTA once the trade liberalisation
process is concluded. All concessions granted under SAPTA will remain available to contracting states
until then. Quantitative restrictions (QRs) on products on the tariff liberalisation list are also to be
eliminated, according to the agreement. However, no time schedule or mechanism has been established in
this regard. While member states have been given the freedom to design a list of sensitive commodities that
will be exempt from the tariff decreases, the number of products will be reviewed every four years. The
scope of the SAFTA Agreement, however, needs to be expanded to include investment facilitation and
provisions for service liberalisation in order to achieve its stated goal of strengthening intra-SAARC
economic cooperation and realising the region’s potential for trade and development of its people.

“Liberalization of investment will enable small economies with narrow markets, such as Nepal,
Bangladesh, and Sri Lanka, to take advantage of intra-industry trade and efficiency-seeking industrial

5
Dushni Weerakoon and Jayanthi Thennakoon, “SAFTA: Myth of Free Trade”, Economic and Political Weekly, Vol. 41 No. 37
2006, pp. 3920-3923.
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relocation opportunities in the region, as well as to use the incentive of larger markets, particularly the
Indian market, to encourage investment from within and outside South Asia. In terms of the services sector,
it has grown in importance not only in terms of GDP and exports of member nations, but also in terms of
informal commerce in the region. Education, health, and tourism are just a few examples of areas where
member countries might collaborate. Health services are already being offered on a large scale in the region
under the General Agreement on Trade in Services’ mode (GATS) of service provision. In general, this
flow is one-way, especially for India. At the regional level, there are currently no widely agreed-upon rules,
regulations, or procedures for providing services under mode.”

“The progressive conclusion of mutual recognition agreements (MRAs) on standards, qualifications, and
degrees, as well as standard harmonisation, can help people move more freely in the social sector. Existing
mechanisms for cooperation among member countries in the tourism sector need to be strengthened,
including collaborative construction of tourist infrastructure and a well-coordinated plan for encouraging
cross-country tourism for special purposes such as pilgrimages. In addition to expanding the scope of the
agreement, it is critical for authorities in South Asia to put in place trade facilitation measures. A look at
trade facilitation and logistics in the region reveals that south Asian countries continue to struggle with port
and transportation infrastructure, regulatory environments, and service sector infrastructure. Delays at
seaports, for example, increase prices for exporters throughout the region due to congestion and outmoded
infrastructure. In reality, a well-thought-out and widely defined infrastructure development plan that
connects not only the region’s road, rail, and port systems, but also the region’s electricity, gas, and oil
grids will go a long way toward realising the region’s intra-regional commerce potential. This will be
boosted much more if transit rights for inter-country trade in South Asia are depoliticized and not
influenced by limited national interests.”

“Finally, it is frequently stated that the SAFTA’s success is dependent on India’s trade policies and ability
to lead the area, as has been the case for other successful regional trade agreements such as NAFTA,
Mercusor, and others that have had a single large country at their core. Taking this a step further, we argue
in this article that India has the potential to transform the SAFTA/South Asia into a full-fledged Asia-wide
FTA. The rest of the study delves deeper into this possibility for South Asia. India is the major economy in
an economically asymmetric South Asia.6 In recent years, India has also emerged as one of the world’s
most dynamic economies. Simultaneously, ASEAN has begun a phase of increased economic integration in
east Asia. In the aftermath of the 1997-98 East Asian financial crisis, ASEAN could benefit from India’s
renewed economic vigour. As things stand, trade trends show that India is becoming increasingly tied to
east Asia. Furthermore, through a market-led integration process, the ASEAN economies are de facto
integrated with the plus three economies of China, Japan, and Korea. In addition, as part of the debates of

6
Amita Batra, “South Asia's Free Trade Agreement: Strategies and Options”, Economic and Political Weekly, Vol. 42 No. 38
2007, pp. 3884.
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Asian leaders during the December 2005 East Asia Summit, an ASEAN+3+3 economic bloc, which
includes India, was envisioned along the lines of the EU.”

“Last but not least, the convergence of Asian economic policies has prompted a reconsideration of prior
strategic assumptions that encouraged the formation of specific regional groups in Asia. The new world
order opens up possibilities for future groupings to redefine their territorial compass. As a result, trade
integration between India and east Asia is a viable option that we examine in this section of the research.
The researcher believes that once the main south Asian economy is fully integrated with east Asia, smaller
south Asian economies for which India is a major trading partner may accelerate their integration with
India in order to obtain access to the larger market. It’s possible that SAFTA may be hastened and that a
South Asia-East Asia economic bloc will form.”

CHAPTER 3: DOES SAFTA HAVE A FUTURE

The history of the SAPTA discussions raises the question of whether south Asian countries are truly
dedicated to regional trade liberalisation or if it is primarily a confidence-building exercise aimed at
reducing regional political tensions. Some argue that economic cooperation will ultimately lead to stronger
political cohesion in the region, and that it should thus be pursued even if the first trade-related gains of
SAPTA prove to be relatively limited. However, the greater question is whether such an argument holds
water in South Asia, and whether economic cooperation is indeed beneficial to the region’s interests. It is
possible to infer that the political barriers to economic cooperation in South Asia are much too entrenched
to warrant the costs of negotiating, administering, and implementing a regional trade agreement. It’s
unsurprising that some political economists have come to the unavoidable conclusion that the most likely
outcome for South Asia is for it to continue in an unstable state. 7 Their reasoning is that, because the area is
Indo-centric, any change will need India becoming more accepting. India, on the other hand, may see
accommodation as superfluous because it believes it is powerful enough to deal with any tensions in the
subcontinent. “As a result of this hesitancy, anti-Indian hawks in Pakistan will gain power, and South Asia
may never benefit from a true spirit of regionalism. Furthermore, in the case of India, even a significant rise
in commerce within SAARC will not meet even a portion of the Indian economy’s needs. In the case of
Pakistan, an integration of SAARC economies with India as the dominant member could jeopardise
Pakistan’s political and strategic identity, making it too difficult to accept.” The political landscape of
South Asia mostly reflects these attitudes.

“Without a doubt, SAARC can help to reduce tensions in the area by offering a valuable forum for
bringing together the region’s important players. However, a regional trade strategy controlled by political
expediency is unlikely to deliver the benefits needed to gain support among the people of South Asia. 8 The
agenda for SAARC economic cooperation is still mostly a conversation among government officials,

7
Dushni weerakoon, “Does SAFTA Have a Future?”, Economic and Political Weekly, Vol. 36 2001, p. 3215.
8
Ibid.
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researchers, and a few private-sector actors. If economic imperatives are to exert pressure on the political
process, greater civil society and stakeholder participation is unquestionably required. But only with the
demonstrated benefits of economic cooperation - an element that has so far been absent from South Asia’s
experience with the SAPTA process. The recent experience, where the SAARC agenda has come to a
virtual halt since the outbreak of hostilities following the nuclear tests in south Asia in 1998, demonstrates
the political restrictions in economic cooperation. As a result of the standoff, the focus has shifted to
bilateral trade deals between SAARC member nations. It is not hyperbole to say that India’s hasty decision
to sign the Indo-Lanka Free Trade Agreement (ILFIA) in December 1998 was motivated by political
factors. Sri Lanka’s main motivation was to gain first-mover advantage in the Indian market. Bilateral free
trade agreements have been significantly more accommodating in allowing south Asian economies to trade
freely. While bilateral agreements have been limited to three specific trade deals so far, the practise appears
to be gaining on. Sri Lanka and Pakistan are now negotiating a bilateral free trade deal, and there is
speculation that India and Sri Lanka may contemplate a bilateral pact with Bangladesh at some point in the
future.9 What are the consequences of pursuing a mostly bilateral agenda in the context of regional
initiatives to foster economic cooperation? There is scant indication of analogous developments in other
regional groups; the vast majority of regional blocs have advanced from there, taking collective decisions
on either the speed of integration or the admission of new recruits to the bloc. In such cases, the regional
grouping’s members establish particular requirements and time frames for potential members to satisfy in
order to qualify for membership. The more successful regional groups, such as the European Union and
ASEAN member countries, have clearly followed this course. South Asia, on the other hand, is threatened
by countries inside a regional trade agreement moving forward to negotiate bilateral accords that are
considerably more liberal and substantial than anything in the regional framework.”

“For some time, the idea of some SAARC countries moving ahead with liberalisation on a fast track has
been mooted. The goal was to allow non-LDC members of SAARC, for example, to implement SAFTA at
a faster rate while giving LDC countries a longer period of adjustment. However, the conversion to bilateral
agreements, which are effectively outside the SAARC process, has now surpassed this. But, in the context
of SAFTA, where does this leave South Asia? First and foremost, bilateral agreements have the potential to
undercut broad support for SAFTA’s creation. For example, Sri Lanka’s support for SAFTA was largely
motivated by a desire to get access to the Indian market. With the ILFTA having already accomplished this,
and the possibility of striking a similar deal with Pakistan, Sri Lanka’s other major trading partner in south
Asia, there is a serious risk that SAFTA will become irrelevant to its trade interests. This isn’t just true for
Sri Lanka; as additional bilateral agreements are signed, it’s likely to be true for other south Asian
economies as well. Second, it raises the question of how these bilateral agreements should be handled in the
context of SAFTA negotiations.10 Will they be part of the SAFTA negotiations or will they be separate
bilateral trade agreements? If they are to be incorporated, they must be used as a starting point for
9
Dushni weerakoon, “Does SAFTA Have a Future?”, Economic and Political Weekly, Vol. 36 2001, p. 3216.
8
negotiations. They will exist as parallel trade agreements if they do not. The Indo-Nepal FTA, on the other
hand, is significantly more liberal than the Indo-Lanka FTA. It contains no negative list safeguards at all,
and what it does have is a very limited negative list, which is unlikely to be acceptable to the majority of
SAARC countries. The bilateral negotiation procedure has also taught us some valuable lessons. Prior to
the signing of the Indo-Lanka Free Trade Agreement, there was little discussion. This has been defended on
the grounds that if it had been made public, interest-group pressure would have resulted in lengthy talks or
opposition that would have effectively killed the accord. Despite this, it took more than a year for India and
Sri Lanka to agree on a negative list that was at least somewhat acceptable to both countries after the
agreement was signed.11 Under the ILFTA, Sri Lanka was forced to accept some type of quantitative
restrictions on its tea and textile exports to India as part of the compromise agreement.”

CONCLUSION
The task of settling on a formula for negative listings when this process is multiplied to include all seven
SAARC members will necessitate lengthy negotiations. Are negative listings to be developed after the
agreement’s bare skeleton has been signed, as in the ILFTA, or will they be developed before the deal is
signed? Whatever mechanism is used, SAARC countries will be required to demonstrate a greater
commitment to opening their markets to other SAARC members than was the case under the SAPTA
process. It’s debatable whether such a commitment will be forthcoming given the political context of the
SAARC process. Alternatively, if bilateral agreements are pursued concurrently with the SAFTA process,
countries will be faced with a plethora of bilateral and regional accords, dubbed a “spaghetti bowl” of
overlapping trade agreements by some economists.12 Again, whether such arrangements will best serve
south Asian interests is debatable; they will entail increased administrative burdens and less cohesion in
promoting south Asia as a region to foreign investors. Do customs agencies have the competence to cope
with different trade agreements, or should they even be relied upon to do so? Even in the case of SAPTA
and the IITFTA, there are times when Sri Lankan exporters qualify for tariff discounts under SAPTA, yet
the same commodities come under the Indian negative list under the ILFTA. Exporters and investors alike
will be confused by many trade agreements.

“Any possible benefits of bilateral accords must be balanced against the political consequences in a larger
South Asian setting. Not only is there a real risk that bilateral agreements may undercut SAFTA
commitment, but there is also a considerably higher risk of further alienating important participants. For the
time being, it appears that both India and Pakistan want to make deals with their smaller south Asian
neighbour. The political imperatives that drive the SAARC process play a part in this. However, rather of
bridging the gap between these two crucial stakeholders, such an approach will simply help to expand it. It
10
Nisha Taneja, “An Approach to Prune India’s Sensitive Lists under SAFTA”, Economic and Political Weekly, Vol. 46, No. 11
2011, p. 18.
11
Dushni weerakoon, “Does SAFTA Have a Future?”, Economic and Political Weekly, Vol. 36 2001, p. 3214.
12
Nisha Taneja, “An Approach to Prune India’s Sensitive Lists under SAFTA”, Economic and Political Weekly, Vol. 46, No. 11
2011, pp. 15-16.
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is past time for the South Asian Association for Regional Cooperation (SAARC) to clearly define the future
route of economic integration in the region. Inaction will lead to an increase in the number of countries
seeking bilateral agreements to satisfy their own national interests. If further bilateral agreements are signed
- and all indications are that there will be a few more - the issue will become much more complicated. To
make matters even more complicated, most south Asian countries are not confined to the region. They’re
also looking to join other regional organisations and trade blocs, both inside and outside Asia. The
unavoidable conclusion is that unless SAARC takes the initiative right away, it risks being marginalised
and obsolete in the process of south Asian economic unification.”

BIBLIOGRAPHY
I. Printed Source
1. Books
 Andrew Heywood, GLOBAL POLITICS, 1st ed. 2019, Palgrave Macmillan.
 Baylis, Smith and Owens, THE GLOBALIZATION OF WORLD POLITICS: AN
INTRODUCTION TO INTERNATIONAL RELATIONS, 3rd ed. 2021, Oxford, New Delhi.
 Peter Sutch, INTERNATIONAL RELATIONS: THE BASICS, Routledge, 1st ed. 2007, New Delhi.
 V N Khanna, UNITED NATION, Vikas Publication, 5th ed. 2018, New Delhi.

II. Electronic Source

1. Webliography
 https://www.jstor.org/stable/42703985.
 https://www.jstor.org/stable/24866700.
 https://www.jstor.org/stable/40276424.
 https://www.jstor.org/stable/23255936.
 https://www.jstor.org/stable/4418692.

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