Published on The Daily Star
Since the concept of regional trade agreements (RTAs) was perceived during the Uruguay Round, several countries have created regional trading blocs to expand their trade and investment among themselves. The agreement on South Asian Free Trade Area (Safta) has been a groundbreaking step as it opened a window of trade opportunities for the countries of the region. Among these, the most significant measure is tariff liberalisation. According to Article 7 of the Safta agreement, Saarc members have to bring down their duties by a certain timeframe as agreed by them.
After six years of the establishment of Safta, South Asia is still considered to be the least integrated among global regions. The low trade integration is because the spirit behind the creation of Safta was not upheld for a long time due to economic and political barriers. Also, due to the inherent dissimilarities of the member countries, the gains from this regional pact have not been distributed equally. The size of the economies, the level of incomes and the structure of trade and protection, all have affected the benefits to a large extent.
The issue of sensitive lists
An important factor to determine the magnitude of the effects has been the initial levels of trade protection in the region. Article 7(3)(a) of Safta states that the tariff liberalisation programme would not apply to the tariff lines included in the sensitive lists. Because of this exclusion, the benefits from the regional trade agreement have been restricted, particularly for the least developed countries (LDCs) of the region.
Recognising the trade-restricting nature of the sensitive lists, the working group of Safta proposed the reduction of tariffs on a number of products under the initial lists of sensitive goods during the second phase of tariff reduction. Saarc countries were to undertake such a measure with effect from January 1, 2012. Except for Bhutan, all other countries have reduced the number of products on their sensitive lists, both for LDCs and non-LDCs. India has reduced its sensitive list for LDCs from 480 items to 25 items and granted zero basic customs duty access on all other items. It has also reduced peak tariff rates to 8 percent for non-LDCs under Safta. Pakistan has cut its sensitive list by 20 percent, which will allow duty-free import of more than 200 products from India, Bangladesh and Sri Lanka. After the removal of 233 tariff lines, Pakistan’s sensitive list has been shortened from 1,169 to 936 tariff lines. Safta member countries have committed to further reduce their sensitive lists and progressively liberalise their trade and investment policies, so that overall trade and commerce is strengthened among them.
Reaping benefits from tariff liberalisation
Trade facilitation is a central element for the success of any regional trade agreement. The experience of regional trade agreements indicates that the expected benefits from the agreement cannot be reaped if bottlenecks are not removed through trade facilitation. Hence, the success of Safta is also contingent upon trade facilitation through the adoption of a number of measures. For example, procedures of customs clearance should be simplified. Low-risk goods can be cleared with little or no documentary verification or physical inspection through the adoption of shared risk management by customs.
Risks can be determined according to indicators of the likelihood of smuggling or fraud, or of issues relating to rules of origin and sanitary and phytosanitary standards. Banking procedures for import financing should also be simplified. There is a need for simplified and streamlined procedures for express shipments. Greater flexibility and cooperation in sharing data among trade officials are needed, and electronic data interchange systems should be established. Transit facilities for intra-SAARC trade are essential for successful trade cooperation. Such initiatives should be based on mutual understanding keeping in view the political sensitivity of each country. Barriers to intra-Saarc investments should be removed.
Effective implementation of a trade agreement also depends on other measures such as those related to intra-regional investment, finance, and trade in services. Communications systems and transport infrastructure should be developed within the region. Simplification of procedures for business visas has been a longstanding demand of Saarc businesspeople. A borderless region must be created for Saarc businesspeople by easing business visa rules, including issuance of longer-term multiple entry visas with flexibility.
Harmonisation of standards has also been on the agenda for long in order for intra-regional trade to take place smoothly. Besides, export diversification through removal of supply-side constraints within countries is also important for taking advantage of tariff liberalisation. However, the LDCs require technical assistance to diversify their export baskets. Larger non-LDC partners should come forward to help improve the supply capacity of LDCs. This is also important since the LDCs will lose out economically once tariffs are removed fully.
Reduction of tariff barriers does not necessarily bring results unless non-tariff barriers (NTBs), which range from import limits to stringent sanitary regulations, are dismantled. These NTBs are very difficult to deal with as many of them are not documented in paper and are practiced unwritten.
Additional measures like agreements on intra-regional investment, finance and services are necessary for the successful implementation of Safta. In this regard, the Saarc Agreement on Trade in Services (SATIS) can be mentioned as an example of the two-track liberalisation process, which is needed for further strengthening the cooperation among South Asian countries as agreed by the members.
Conclusion
The reduction of sensitive lists under Safta will help deepen economic partnership among South Asian countries by way of increased intra-regional trade. It will open the window for ushering more foreign direct investment into the region, which is likely to be accompanied by investment in physical infrastructure, changes in the regulatory systems and trade facilitation measures, and technical and financial assistance. Ultimately, it can also be a powerful tool for bringing economic stability in the region by way of increasing growth and reducing poverty and income inequality as it will create opportunities for employment and income generation.
Suspicion and distrust have hamstrung businesses and social development in all countries of South Asia for a long time. However, recent developments have been encouraging. For example, Pakistan granted most-favoured-nation status to India late last year and, in exchange, India agreed to examine its NTBs.
Although South Asia has been plugged into a phase of high economic growth, averaging 6 percent a year over the past 20 years, the region is home to more than 44 percent of the developing world’s poor. This has subdued several other achievements, particularly in the field of human development. What is needed in South Asia is a graduation towards a higher growth path that is more dynamic and inclusive. This, unfortunately, cannot be achieved in isolation without cooperation among nations. If Safta is implemented in its full force, economic prosperity as well as political stability will be at the doorsteps of the region, and the possibility of South Asia emerging as a powerful regional group will be real and imminent.