SAFTA: Negotiating status and EvaluationDeshal de Mel

IPS, Colombo, Sri Lanka

Introduction

SAFTA was signed in 2004 in Islamabad Tariff liberalisation implemented on July 1st

2006 Several issues remain which threaten the

success of the agreement: Sensitive lists, NTBs, TLP, BTAs.

Table 1: Intra-SAARC Import Trade

Source: IMF, Direction of Trade Statistics, Yearbook 2005.

Bangladesh India Maldives Nepal Pakistan Sri Lanka

Bangladesh 0.1 0.0 0.3 0.3 0.1

India 15.5 10.2 42.0 2.5 18.1

Maldives 0.0 0.0 0.0 0.0 0.3

Nepal 0.0 0.3 0.0 0.0 0.0

Pakistan 1.1 0.1 0.3 0.2 1.4

Sri Lanka 0.1 0.3 10.6 0.0 0.3

Total 16.7 0.8 21.1 42.4 3.1 25.9

Table 2: Intra-SAARC Export Trade

Source: IMF, Direction of Trade Statistics, Yearbook 2005.

Bangladesh India Maldives Nepal Pakistan Sri Lanka

Bangladesh 0.0 2.3 0.0 0.3 1.5 0.2

India 1.0 0.0 0.4 39.2 1.2 6.8

Maldives 0.0 0.1 0.0 0.0 0.0 1.1

Nepal 0.1 1.0 0.0 0.0 0.0 0.0

Pakistan 0.6 0.6 0.0 0.5 0.0 0.7

Sri Lanka 0.2 1.9 12.3 0.0 1.0 0.0

Total 1.8 5.8 12.7 40.0 3.7 8.8

Tariff Liberalisation Program

The TLP stipulates 0-5% tariffs for Non-LDCs by 2013 (SL 2014), LDCs 2016

Danger of SAFTA losing relevance due to competing RTA/BTAs

Article 7.2 allows countries wishing to move faster to do so unilaterally

Better approach to include fast track for heavily traded goods in SAARC

TLPCountries Existing Tariff

RatesTariff rates proposed under

saftaYear to be completed

First Phase India, Pakistan & Sri Lanka20% & above 20% (Max) 2008

Below 20% Annual reduction of 10% 2008

Bangladesh, Bhutan, Maldives & Nepal 30% & above 30% (Max) 2008

Below 30% Annual reduction of 5% 2008

Second Phase

India & Pakistan20% or below 0-5% 2013

Sri Lanka20% or below 0-5% 2014

Bangladesh, Bhutan, Maldives & Nepal 30% or below 0-5% 2016

India and Pakistan

Pakistan trade with India based on a specified positive list

Economic and political reasons for concerns about altering the status quo

India feels +ve list is against the spirit of the agreement

Potential for improvement in political relations through SAFTA

Sensitive Lists

Article 7.3(b) recommends that the sensitive list be reviewed every 4 years

This time frame possibly too long given the size of SLs in SAFTA

Should adopt progressive reduction of SL a la ASEAN FTA

Table 5: Trade Restriction under SAFTA

Value of Imports from SAARC Subject to NL (%)

Value of Exports to SAARCSubjects to NLs (%)

Bangladesh 65.0 22.0

India 38.4 56.6

Maldives 74.5 57.6

Nepal 64.0 46.4

Pakistan 17.2 34.0

Sri Lanka 51.7 47.0

Total 52.9

Source: Calculated using WITS data.

Table 4: Bilateral Trade Restriction under SAFTA

Bangladesh India Maldives Nepal Pakistan Sri Lanka

% of imports under NL

Bangladesh 11.2 0.0 29.7 31.3 45.2

Bhutan 69.4 36.8 0.0 15.0 50.4 0.0

India 66.0 65.2 64.2 14.5 53.5

Maldives 72.9 3.6 0.0 0.0 59.2

Nepal 87.8 46.2 0.0 25.4 17.6

Pakistan 54.5 16.4 15.5 30.0 28.4

Sri Lanka 66.6 41.5 85.4 37.6 29.7

Source: Calculated using WITS data.

Non-tariff Barriers

Increasingly important as tariffs fall Over-regulation – safety standards, other safeguards Entry point restrictions Bureaucratic processes Customs procedures Delays in transit due to border issues No mechanism to reduce NTBs – recent discussion to

include notification

Transaction Costs

South Asia plagued by transaction costs Trade facilitation increasingly important for

modern trade, benefits resonate beyond SAFTA SAFTA agreement has extensive list of TF

measures without binding commitments TF measures have high fixed costs, benefits felt

in medium-long run, thus little political will to implement

Trade Facilitation

More prudent to identify few key measures producing tangible benefits in SR

Simplify and harmonize customs operation Transit simplification Standards Harmonization Binding commitments for implementation and

S&DT for LDCs required. Additional measures to be progressive

Dispute Settlement Mechanism

Yet to determine operationalisation of DSM SAFTA DSM too long, 330 days. ASEAN 290,

MERCOSUR 265, NAFTA 310 Excess time in 1st stage, accused can delay

consultations by a month Time allowed for compliance 90 days in SAFTA.

30 days in ASEAN, MERCOSUR

DSM

Length of DSM attributed to LDC requirements. Better to use differentiated time periods for

LDCs and Non-LDCs Voting on consensus basis, problematic

considering heterogeneity of interests Consensus to block or simple majority system

are alternatives to consensus basis

Inclusion of Services

Contribution of services’ value added to GDP is 40 % in South Asia

Important to ensure this sector does not forego benefits of liberalisation

Identify complementarities and liberalise Telecom & IT Aviation Medical services Education

Inclusion of Services

Tourism Couple services with economic cooperation to

extend benefits to LDCs Possible 3+x formula, Lessons from CEPA, progressive, sequential

liberalisation. Building services database. Study on inclusion of services in SAFTA is

ongoing.

Table 7: Volume of Intra-SAARC Trade (2004)

Share of SAARC Trade in Total Trade of

Country

Share of Trade with India in Total Trade of

Country

Bangladesh 11.2 10.1

India 3.0 -

Maldives 19.8 8.7

Nepal 41.7 41.2

Pakistan 3.3 2.0

Sri Lanka 15.1 13.3

Source: IMF, Direction of Trade Statistics, Yearbook, 2005.

Positives

Extent of informal trade in South Asia Potential for +ve political spillovers Potential for attracting FDI Impact on poverty – needs steps to

improve access to markets for the poor Consumers – competition, falling prices

and increased variety

Conclusion

Negotiations have made progress since Islamabad 2004

But key areas left unaddressed or under-addressed Importance of SAFTA given stalling of the Doha

round Parallel importance of superseding competing

RTA/BTAs Supply capacities – TA “best endeavours”