The South Asian Free Trade Area (SAFTA) is yet to gather pace. In a meeting in Dhaka last week, SAFTA committee of experts decided to form a sub-committee to identify non-tariff and para-tariff barriers to trade among the member countries. They also decided a 'road map' to liberalise trade in the SAARC (South Asian Association for Regional Cooperation) region under the SAFTA agreement.
Although regional cooperation in trade began in South Asia back in 1995 with the launching of South Asia Preferential Trading Arrangement (SAPTA), the volume of intra-SAARC trade did not grow much despite the arrangement. Trade flow among South Asian countries accounts for only 4.0 per cent of the region's total trade.
According to what was agreed upon in Dhaka, the developing members are expected to lower their import duty by 40 per cent during the current calendar year, 30 per cent more next year and the remaining 30 per cent in 2008 for products originating from the least developed countries (LDCs) in the region -- Bangladesh, Bhutan, the Maldives and Nepal. The least developed members are required to eliminate duty on imports from the relatively affluent SAFTA member nations by 2015. The SAFTA Ministerial Council also agreed to include trade in services in the SAFTA and a committee has been formed on the issue.
A report published in the FE this week said that surprisingly, the ministerial council could do nothing except deciding on the formation of a committee to eliminate the non- and para-tariff barriers for the promotion of balanced and fair trade among the regional countries. There are reasons to be deeply frustrated for Bangladesh over the outcome of the meeting. The Bangladesh Commerce Minister, who has just been withdrawn from the ministry, said that duty reduction would not help the countries like Bangladesh to boost trade with developing member states, particularly India, unless and until non-tariff barriers (NTBs) and para-tariff barriers (PTBs) were removed. India, the most dominating player in South Asian trade, did not appear to be that much enthusiastic about dealing with the issues relating to NTBs and PTBs.
Going back to history, Bangladesh unilaterally implemented the SAPTA agreement by drastically reducing the import tariffs and waiving restrictions on imports in the early nineties. This gesture was not duly reciprocated by others. Rather, new NTBs were imposed, mainly by India, on the Bangladesh products such as batteries, garments, tableware, etc.
According to the SAPTA, 40 per cent local value addition was needed to get preferential market access, which was next to impossible for Bangladesh and other LDCs of the region. After long bargaining, the share of local value addition needed for preferential access was reduced to 30 per cent in 1999. However, things have not improved that much after that.
Interestingly, without any mentionable progress on economic cooperation through the SAPTA, the member countries agreed on the formation of the SAFTA in 1995 and set 2005 deadline to give it a final shape.
It is observed from the growth process of other regional trading blocs that intensification is accompanied by growing intra-regional trade. Such kind of trade was only 7.0 per cent in the Association of South-East Asian Nations (ASEAN) region before grouping came into being, but it shot up to 49 per cent in 2004. In North American Free Trade Area (NAFTA) it was only 12 per cent before grouping, but was 44 per cent in 2004, and in EU, it was 23 per cent in the early eighties and 67 per cent in 2004.
It may be hypothetically acceptable that after the formation of the SAFTA, intra-regional trade will increase significantly. However, will it be true for Bangladesh's export? History does bode well on this count. NTBs and hassles at customs points have jeopardised positive approaches. The very limited trade complementarities should be used thoroughly, as most of the member countries have similar comparative advantages on products like textile materials and products, leather and leather products, agricultural products, fresh fish, etc., precluding the possibility of intra-regional trade in these products.
Past experiences show that regional economic integration can be successful only if the countries concerned establish a commonality of political purpose. France and Germany fought three big wars between 1871 and 1945, and one major driving force behind the European Economic Council (EEC) was a determination to forge closer links between France and Germany to prevent the occurrence of another world war. Besides, a basic EEC rule was that only democracies could become members. This drives home the point that political harmonisation must precede economic harmonisation.
The same pattern was evident in ASEAN that was formed as a political grouping opposed to the threat of Communist expansion from Vietnam and China. This helped bind together the ASEAN member-countries that were otherwise dogged by political disputes.
What is the situation in South Asia? According to an Indian analyst, India finds itself regarded as a hegemonic 'Big Brother' by the other six, and bilateral disputes are especially acute with Pakistan, Bangladesh and Nepal. Indeed, the smaller six see SAARC as a forum for ganging up to withstand Indian hegemonic pressure.
India had a trade surplus with every country of the region, something the other six resent. Trade liberalisation will widen such surplus, and resentment. That is why the list of trade items on tariff preferences under the SAPTA offered by each member is small.
Besides, the preferences are so modest that they make little difference anyway. Trade among the SAARC member-countries under the SAPTA amounts to only 4.0 per cent of their total global trade, and this will rise to just 4.4 per cent even if the SAFTA boosts trade by one-tenth. In the long-term, the outcome may be better. In the foreseeable future, however, it hardly gives reason for much optimism.
There is a world of difference between a preferential trade and a free trade one. In a preferential agreement, each country still retains sovereignty over its import controls, and merely grants a few concessions. But a free trade area implies dismantling customs barriers, which means all SAARC members will have to agree to a common import policy, formally or informally.
Unless countries of a region enjoy considerable political harmony, they cannot possibly agree to surrender sovereignty over their import policy, especially in South Asia where the giant Indian economy still tends to dominate the outcomes.
Though economic integration is desirable, the nations will first have to create a politically harmonious subcontinent, and that is a formidable task. The ball is now in India's court. It must take serious efforts to wipe out elements of mistrust, shun 'big brotherly' attitude and help restore confidence in its neighbours. Once this is done, things will move in the right direction paving the way for successful implementation of the SAFTA.