SAFTA

Introduction:

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ith the winds of globalization blowing all over, the phenomenon of regionalism appears to have caught up with every country, in all parts of the world, especially in the domain of trade, irrespective of the size and form of the economy. Regional Trade Agreements [RTAs] are becoming a conduit as well as national/ regional response to the forces of change and flux. As a result, more than 56 percent of international trade at present is covered under RTAs, which are becoming increasingly deep and comprehensive and are providing institutional arrangements of integration beyond the economic integration. This complex phenomenon has raised many pertinent questions not only for the future of national trade polices but also for the geo-strategic importance of trade integration in the regional context. We will see the perspective of Pakistan, a member country in SAFTA agreement.

What is SAFTA?
“The South Asian Free Trade Area or SAFTA is a pact signed in 6 January 2004 that would gradually eliminate most tariffs and other trade barriers on products and services passing between the Bangladesh, Bhutan, India, Maldives, Nepal, Pakistan, Afghanistan and Sri Lanka. The pact would effectively create a free-trade bloc among the seven countries of South Asia.” The SAFTA agreement came into force on 1 January 2006 and is operational following the ratification of the agreement by the seven governments. SAFTA requires the developing countries in South Asia (India, Pakistan and Sri Lanka) to bring their duties down to 20 percent in the first phase of the two year period ending in 2007. In the final five year phase ending 2012, the 20 percent duty will be reduced to zero in a series of annual cuts. The least developed nations in South Asia (Nepal, Bhutan, Bangladesh, Afghanistan and Maldives) have an additional three years to reduce tariffs to zero. India and Pakistan ratified the treaty in 2009, whereas Afghanistan as the 8th member state of the SAARC ratified the SAFTA protocol on the 4th of May 2011. SAFTA’s main provisions called for the gradual reduction of tariffs, customs duties, and other trade barriers between the seven members, with some tariffs being removed immediately and others over periods of several years. SAFTA ensured eventual duty-free access for a vast range of manufactured goods and commodities traded between the signatories.

History
The Agreement on SAARC Preferential Trading Arrangement (SAPTA) was signed on 11 April 1994 and entered into force on 7 December 1995, with the desire of the Member States of SAARC (India, Pakistan, Nepal, Sri Lanka, Bangladesh, Bhutan and the Maldives) to promote and

BY: Muhammad Mubasher Rafique

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SAFTA
sustain mutual trade and economic cooperation within the SAARC region through the exchange of concessions. As is known, SAARC (South Asian Association for Regional Cooperation) member countries (Bangladesh, Bhutan, India, Maldives, Nepal, Sri Lanka and Pakistan) approved SAARC Preferential Trading Arrangement (SAPTA) on 11 April 1994 and entered into force on 7 December 1995, with the desire of the Member States of SAARC to promote and sustain mutual trade and economic cooperation within the SAARC region through the exchange of concessions. In total, four rounds of trade negotiations had taken place under the aegis of the SAPTA. SAPTA graduated into South Asian Free Trade Area (SAFTA) which came into effect on 1 January 2006 with the objective of creating a FTA to include the seven South Asian countries. As per the Trade Liberalisation Plan (TLP) of SAFTA, Pakistan and India will bring down their tariff to the level of 0 – 5% by 2012 and Sri Lanka by 2013.The four South Asian LDCs, Bangladesh, Bhutan, Maldives and Nepal are to reduce their tariffs to 0-5% by 2015.It is to be noted here that according to GEP Report, SAFTA is to eventually graduate into a full-fledged South Asian Economic Union.

a

These phased tariff cuts for intra-SAFTA trade may not apply to items on each country’s ‘Sensitive Lists’ SOURCE: Reproduced from World Bank Report #29949, Trade Policies in South Asia: An Overview, 2000.

BY: Muhammad Mubasher Rafique

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SAFTA
Aims and Objectives:
In Article 2 and 3, the text lays down the aims and objectives of SAFTA. Article 2 states “The Contracting States hereby establish the South Asian Free Trade Area (SAFTA) to promote and enhance mutual trade and economic cooperation among the Contracting States, through exchanging concessions in accordance with this Agreement.” The text not only talks about objective being mutual trade development and economic growth, it also prescribes the method for the same. It intends to do so not only be eliminating trade barriers but also promoting fair trade and evolving a dispute resolution mechanism that does not cause delay. Article 2 (2) lays down the principles which would guide the working of SAFTA, it clearly lays down that least developing countries will be helped on a non reciprocal basis and for the rest of the members there will be reciprocal basis of facilitating trade.

Highlights of the SAFTA Agreement
According to the agreement, the South Asian Free Trade Area is meant to “act as a stimulus to the strengthening of national and SAARC economic resilience, and the development of the national economies of the Contracting States by expanding investment and production opportunities, trade and foreign exchange earnings as well as the development of economic and technological co-operation”. The objective of the agreement is to promote and enhance trade and economic co-operation by eliminating trade barriers, promoting conditions of fair competition, creating an effective mechanism for resolution of disputes, and establishing a framework for further regional economic co-operation. The following instruments are outlined for the implementation of the agreement: (1) Trade Liberalisation Programme;(2) Rules of Origin;(3) Institutional Arrangements; (4) Consultations and Dispute Settlement Procedures; (5) Safeguard Measures; (6) Any other instrument that may be agreed upon. According to trade theory, Regional Trading Agreements (RTA) can have the following benefits:       Increased trade between member countries Increased competition for producers leading to greater efficiency Greater specialisation in production and trade Lower consumer prices, and higher disposable incomes Greater market access Political stability

BY: Muhammad Mubasher Rafique

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SAFTA
SAFTA: Role in Free Trade
 SAFTA is a regional trade agreement between nations that have similar geographic, economic and socio-political setting. As mentioned earlier, RTAs give a more fair stage for countries to reach a common platform on their own accord regarding a variety of issues. SAFTA aims to create a free trade zone and tries to address the problem of loss in revenue and sensitive list.

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Mechanism for Compensation of Revenue Loss
Under the SAFTA, there are provisions for the developing nations compensating the least developed nations for the revenue loss that will take place due to removal of tariff barriers. The SAFTA does not provide this in its text originally, however, the exact mechanism was supposed to be decided later. This has now been included in the Annex III of the SAFTA which gives a detailed method to compute the compensation.However this mechanism would not last long and would be eventually phased out as the nation is more adept to handling the change.

- Sensitive List
SAFTA allows for creating sensitive list which basically consists of products and goods which are in the weak sectors and require protection. This list mainly consists of agriculture produce and small scale industries. However, this sensitive list cannot be kept for a long time and the agreement mandates that eventually, this list shall cease to exist. The point of this sensitive list is that the free trade principle would not apply to these areas. The First Meeting of the Working Group on Reduction in the Sensitive Lists under SAFTA (SAARC Secretariat, 10 February 2010) recommended that following receipt of initial Request Lists, the Member States will make their Initial Offer Lists. The Second Meeting of the Working Group was held at the SAARC Secretariat on 28-29 March 2011. After detailed bilateral negotiations, the Meeting inter-alia recommended that: (a) the Initial Offer Lists of the Member States would contain 20% of the products covered in their present Sensitive Lists taking into account the Request Lists received from other Member States as much as possible as recommended by the SAFTA Committee of Experts (SCOE); (b) The date of implementation of Trade Liberalisation Programme (TLP) for products taken out of the Sensitive Lists would be 1st January 2012 for all Member

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SAFTA
States. The delegation of Nepal requested that this date of implementation may be extended till 1 August 2012 for Nepal; (c) The phase-out period for the tariff lines taken out of the Sensitive Lists would be the same as decided by the Fifth Meeting of the SAFTA COE; (d) Tariff as existing on 1 September 2010 would be considered as the Base Rate as agreed by the Fifth Meeting of the SAFTA COE; The Second Meeting of the Working Group agreed that with effect from 1 November 2011, the number of products covered in the Sensitive Lists of Member States would be as indicated below: Proposed Number Number of Products agreed to of Products in the Number of Products be reduced during the Second Sensitive Lists in the Sensitive Lists Meeting w.e.f. at present (20% reduction) 1 November 2011 (2) – (3) (2) 1072 1233 (LDCs) 1241 (NLDCs) 150 480 (LDCs) 868 (NLDCs) 681 1257 (LDCs) 1295 (NLDCs) 1169 1042 (3) 214 246 (LDCs) 248 (NLDCs) 0 96 (LDCs) 173 (NLDCs) 136 251(LDCs) 259 (NLDCs) 233 208 (4) 858 987 (LDCs) 993 (NLDCs) 150 384 (LDCs) 695 (NLDCs) 545 1006 (LDCs) 1036 (NLDCs) 936 834

MemberState

(1) Afghanistan Bangladesh Bhutan India Maldives Nepal Pakistan Sri Lanka

While maintaining overall balance in tangible preferential market access to all Contracting States, the Member States shall reduce their Sensitive Lists by 20% of the tariff lines from existing Sensitive Lists considering the request of other Contracting States. It has also been agreed that Bhutan would not be required to reduce its Sensitive Lists but would consider requests, if any, from other Member States. The following Phase-out period for the tariff lines to be taken out of the Sensitive Lists has also been agreed to:

BY: Muhammad Mubasher Rafique

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SAFTA
Challenges for Pakistan:
It is argued that SAFTA will expand Pakistan's trade with member countries, decrease cost of production for the local industry due to availability of cheaper raw materials, intermediate and capital goods, increase industrial competitiveness and efficiency, provide greater market access to local producers, and lead to lower consumer prices and higher disposable incomes. While SAFTA is a useful vehicle for increased trade, it also faces many challenges. The critical factor in determining whether SAFTA would raise or lower the real incomes of the SAARC countries depends on whether it will be predominantly trade creating or trade diverting. 1. Tariff Preference of Free Trade: When countries are allowed to choose sectors that can be excluded from tariff preference of free trade, domestic lobbies make sure that the sectors in which they may not withstand competition from the union partner are the ones that get excluded. On the other hand, lobbies go along with free trade in the sectors in which they are competitive and the preference will threaten the imports from outside countries. In the same vein, lobbies tend to go for tight rules of origin or outright quantitative restrictions in precisely those sectors in which they fear the competition from the partner most. On the other hand, when the threat is mainly to the imports from outside countries, they are willing to accept greater liberalization. 2. Transport Costs: The "behind-the border" restrictions are another challenge SAFTA must overcome. Cross-border trade can not succeed without improved trade facilitation in South Asia. Transport costs of regional trade are high in South Asia because of high inland transport cost, inefficiencies at ports and shipping, and restrictive transport and security procedures. Trade costs are high because of customs procedures, other trade procedures (health, agriculture), banking and payment procedures, and standards. It takes more than 10 days to get customs clearance on a container in South Asia compared to less than 5 days in East Asia. New transit routes are needed to better connect the South Asia region with Central Asia, China, and India. 3. Lack of Guidance and Training: The region of South Asia has blessed with many rich resources. The people are also very industrious. The missing point is proper guidance and training. It is expected that India will gain more as compared to other South Asian countries due to low cost, better quality and efficiency. 4. Lack of Competitive Products: The big threat to trade with India is that Pakistan's exports are unlikely to find a market in India. It is feared that India on the other hand will be able to capture the Pakistani market of industrial raw materials, engineering goods, consumer goods and agricultural products, in all of which India has an exportable surplus. Pakistan's consumer and light engineering goods are uncompetitive due to high costs, poor quality, bad management practices, and unscientific market research. It is also feared that free trade will allow

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SAFTA
Multinationals to relocate their manufacturing to lower cost areas, resulting in huge employment and revenue losses for Pakistan. 5. Sectoral Unemployment: It is important to note that although India currently has a comparative advantage in many industries, increased competition can serve as a stimulant to either increase Pakistan's competitiveness in these sectors or reorient the structure of the domestic industry in favour of more efficient segments. However, if we assume that increased competition will phase out uncompetitive sectors and lead to more specialised and efficient production, we need to be prepared for the effects of sectoral unemployment (even if it is temporary), especially in the face of rising poverty and lack of social safety nets.

Opportunities for Pakistan:
Although South Asia has the potential of becoming the world’s largest free trade area through economic integration as envisaged by SAFTA, it continues to be considered as the world’s least integrated region. This fact conveys a message to the relatively developed as well as the developing economies of the region to work sincerely towards the implementation of the SAFTA and taking it out from the underdevelopment. 1. Exploitation of Natural Resources: Pakistan can enjoy lot of benefits in the context of SAFTA because of its geo-strategic importance in the region. Since ‘energy security’ commands the greatest importance for the development of any economy in present times, Pakistan, at this place, can capitalize on the basis of its proximity to the countries which have abundant energy resources. Given its vast natural resources, Pakistan can be a success story in regional settings of the free trade agreement. All of its natural resources -land, labor, rivers etc- are supportive of agriculture sector and in the atmosphere of free trade and fair competition, can significantly boost up the agricultural sector and the overall economic profile of the country. 2. Expansion of the Markets: One of the major concerns for Pakistan in present economic situation is the sustainability of its economic growth. SAFTA serves as an instrument for ensuring its sustainability by expansion of the markets and making the industries and other sectors more competitive globally. Pakistan can take leverage of the increased competition and the economic potential of the member countries. Since India and Pakistan are the major developed countries of the region, both can reap tremendous benefits of the region’s potential of free trade. 3. Dispute Settlement and Conflict Resolution: The most important aspect of the free trade arrangement is the possible prospect of dispute settlement and conflict resolution. Pakistan can take advantage of the ‘trust built-up’ during and after the SAFTA implementation in the region in connection with ‘Kashmir dispute settlement’, ‘Sir-Creak’, and ‘Sia-Chin’ conflict resolution. All of this development would go a long way in bringing peace and stability in the region and Pakistan in particular, which ultimately would result in the better economic conditions of the

BY: Muhammad Mubasher Rafique

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SAFTA
people in the country. A related development in the country after the ‘disputes settlement’ would be the cut in the defense expenditure and diversion of the resources to more productive sectors of the economy. In short, this development is bound to create better economic and income generating activities for the people. Greater economic integration as envisaged by SAFTA has a direct bearing on the region’s total population that stands above 1.5 billion. The ultimate aim of the SAFTA is to create a ‘South Asian Economic Union’. At the moment it seems like a ‘dream’ that can only be transformed into reality if all the member countries are willing to live up to their commitments. Pakistan, being the major partner in the free trade agreement, would definitely enjoy the benefits through better investment opportunities because of its comparative advantages in several goods.

SAFTA’s Future: Some Possible Outcomes
Do conditions exist in the South Asia region for the SAFTA to succeed? What are the possible outcomes of the agreement signed at Islamabad on January 6, 2004? A great deal of empirical evidence from the successes and failures of RTAs around the world can help answer these questions. First, RTAs often follow rather than determine changes in regional trading patterns. This does not augur well for South Asia since relatively little trade exists among the countries of the region. One can argue, however, that the region’s focus on developed markets resulted from political problems that marred relations between India and Pakistan. If the recent easing of tensions between the two countries gains momentum, some trading patterns may change in favor of intraregional trade. The conclusion of free trade arrangements between Sri Lanka and India and Sri Lanka and Pakistan might have created a sense of dynamism that would move the entire region towards an RTA. Second, when implemented in highly restrictive economic and trading environment, RTAs are usually inconsequential. SAPTA did not succeed because the South Asian countries had highly protective trade regimes. This has changed; external tariffs on trade and other trade-restricting practices have been reduced considerably in all countries of the region. Third, agreements that minimize excluded products expand the scope for positive net benefits through competition and trade creation. The temptation to use lists of sensitive items is not as great when overall tariffs are low. Fourth, agreements that cover more than trade in merchandise bring more benefits to regional economies. This is particularly so if services are covered. This should certainly be the case in South Asia. India now has a highly developed information technology sector that could benefit other populous countries, such as Bangladesh and Pakistan, which also have a large number of well-educated and well-trained people. At the same time, Pakistan has made advances in commercial banking from which the regional banking industry could benefit. India, with a much larger pool of savings than other countries in

BY: Muhammad Mubasher Rafique

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SAFTA
the region and with a more developed capital market, could help fill the region’s savings and investment gap. Fifth, trade facilitation measures are critical for reducing the cost of trade. While the SAFTA declaration incorporates these measures, they have to be interpreted much more broadly than seems to be the inclination among trade officials working on the modalities of the arrangement.

Conclusion:
In light of the discussion above, it is clear that SAFTA presents both potential benefits and challenges for Pakistan. The potential benefits of SAFTA can be summarised as follows: expansion of trade with member countries; technology exchange; access to a much larger market, decrease in the cost of production; increase in industrial competitiveness; and increase in disposable incomes due to lower consumer prices. It is envisaged that SAFTA will help in evolving a horizontal specialisation across South Asia to enable the most optimal utilisation of resources in the region. The motivation for SAFTA also lies in the hope that inter-regional economic co-operation will eventually lead to better relations with India, and consequently a curbing of the defense establishment and expenditure, and reorientation of resources into more productive sectors. However, Pakistan's domestic industry may also face some serious challenges from intra-SAARC imports, especially in the short-run. It is feared that Pakistan may not be able to increase its exports to member countries, especially India, since they produce similar goods that compete for the same price in International markets. Pakistan needs to concentrate on developing policies to diversify and upgrade its export base, and creating a favourable climate for private investment. Trade liberalisation with SAARC countries may encourage policy makers as well as the private sector to increase their efforts to strengthen Pakistan's international competitiveness. However, this depends on how well Pakistan responds to the pressures of liberalisation. Trade theory argues that regional trade liberalisation will lead to a restructuring of Pakistan's economy from less to more competitive sectors, and industries that can achieve international competitiveness will grow due to greater access to a larger market. However, the arguments assume that this will occur as a natural consequence to trade liberalisation. They do not take into account other factors such as infrastructural constraints, political instability and the role of the state. These factors can play an instrumental role in defining a country's competitiveness and economic strength. It is thus imperative for the private sector as well as policy makers to understand how SAFTA will impact them and devise a constructive and practical strategy for investments in trade infrastructure.

BY: Muhammad Mubasher Rafique

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