Financial Express print this

SAFTA still in turbulent waters
Shamsul Huq Zahid

In spite of the directive issued by the heads of state and government of the member states of the South Asian Association for Regional Cooperation (SAARC) at the end of their 13th Summit in Dhaka to operationalise the South Asian Free Trade Agreement (SAFTA) by the deadline -- January 01, 2006 -- it is unlikely that the deadline would be maintained.
There are still a good number of contentious issues that the officials and experts are trying hard to resolve.
If not the political leaders, business leaders are aware of the ground realities. That is why the president of the Federation of Pakistan Chamber of Commerce and Industry while speaking at the just concluded first ever SAARC Business Conclave in New Delhi expressed his doubt about the launching the SAFTA in time. "Existing impediments need to be addressed," he said.
The SAARC member countries after prolonged negotiations agreed to put into effect the South Asia Free Trade Area (SAFTA) from January 01, 2006. But the prospect of SAFTA becoming a reality on that day remains clouded. For the member nations are yet to iron out their differences on some issues including the sensitive lists, the mechanism to compensate the poorer members for possible revenue loss due to reduction in tariff and the rules of origin (ROO).
The foreign ministers and officials did not hold any major discussion on SAFTA at the 13th SAARC summit since many of the outstanding issues are to be resolved at the level of Committee of Experts (CoE).
The Committee will now be meeting in Katmandu from November 29 to December 05 next with a view to resolving the outstanding issues. The CoE has so far held 11 meetings to discuss issues relevant to SAFTA but could not reach a consensus on respective sensitive lists, ROO and mechanism for compensation on revenue losses of LDC members due to tariff concessions.
Despite the fact that the acceleration of economic growth through regional cooperation was incorporated as one of the goals of the SAARC charter adopted in the first summit meeting held in Dhaka, it was not until 1987 that an explicit commitment to economic cooperation was adopted. The South Asian leaders in the seventh SAARC summit held in Dhaka in 1993 signed the South Asian Preferential Trading Arrangements (SAPTA). The agreement provided a framework and institutional base for trade liberalisation and economic cooperation between the SAARC member countries.
The agreement included four basic approaches -- product-by-product, across-the-board, sectoral and direct trade -- to the exchange of trade preferences. The main features of the agreement included special and favourable treatment to LDC members by the non-LDC members of the regional grouping, application of a regional 'most-favoured nation' (MFN) principle with regard to SAARC members and rules of origin.
However, SAPTA could produce minimal impact on inter-regional trade in earlier years mainly because of the extreme reluctance to make any tangible concessions to each other in the maters of trade, protectionist attitude and political problems and hostilities between two major member countries -- India and Pakistan.
While negotiations on SAPTA progressed amidst intermittent hiccups, the SAARC Council of Ministers at its first meeting in 1995 decided to form SAFTA by the year 2001, but not later than year 2005.
But the reasons that impeded progress in the negotiations under the SAPTA were found to be very much active in the case of SAFTA. However, the seven member countries signed a free trade agreement at the Twelfth SAARC summit held in Islamabad on January 06, 2004 and decided to put the SAFTA into effect from January 01, 2006.
According to the provisions of the agreement, the member countries agreed to gradually harmonise and eventually bring down their import tariffs on trade with SAFTA to 0-05 range. In the first phase, the LDC members (Bangladesh, Bhutan, Nepal and the Maldives) will reduce their maximum tariff rates to 30 per cent within two years from the date of coming into force of the agreement. The non-LDC members will be required to bring down their maximum tariff rates to 20 per cent with in the same time period. In the second phase that comes into effect on January 01, 2008, the non-LDC members will have to reduce their import tariffs to the 0-05 range in 5 years while the LDC members will do the same in 8 years. However, the tariff reduction may not apply on items on the 'sensitive lists' that are to be negotiated among the signatories to the agreement.
The SAFTA agreement has both positive and negative aspects.
The signing of the SAFTA itself proved the fact that the South Asian countries were willing to foster strong economic relations that would again leave a positive impact on their political relations. Besides, an effective SAFTA is expected to strengthen the region's bargaining position in multilateral trade negotiations with regions and regional groupings.
The recent improvement in relations between two arch rivals -- India and Pakistan -- would surely lend wind to the SAFTA sail.
The long negative lists produced by the member countries have emerged as a major problem for the negotiators. The ROO and the compensation demanded by the LDC member states for revenue loss due to tariff reduction proved to be equally troublesome. But these problems are inevitable because of the traditional protectionist attitude of the member states and existence of poor and less-poor members in the same grouping.
Besides, the SAFTA itself provides for compensation to the LDC members of the South Asia grouping for their loss of revenue in view of the tariff reduction. There is no scope for the affluent SAARC members to side track the issue.
There is no denying that India stands to gain more from the tariff reduction since the LDC members, including Bangladesh, imports substantial quantities of goods and commodities from India. Further reduction of tariff is supposed to enhance the volume of imports from that country.
Import duties constitute a large part of Bangladesh's revenue earning. Any major fall in that earning would create problems for the government to meet its recurring expenditures.
In many regional groupings, all member nations, economically, do not enjoy same kind of affluence. Yet they could strike out effective trade cooperation among themselves because of the better display of sense of accommodation.