ISLAMABAD, 29 May 2006 — Pakistan-South Asian trade is set to expand, despite several hiccups between now and July 1 — its launch date. The South Asian Free Trade Area (SAFTA) was agreed Jan. 6, 2004 at Islamabad Summit of South Asian Association for Regional Cooperation (SAARC) by the region’s presidents and prime ministers — Bangladesh, Bhutan, India, Maldives, Nepal, Pakistan and Sri Lanka.
The hope is to catch up with some of the major global alliances such as EU, ASEAN, and NAFTA. This tariff-cutting and free trade agreement was to go into operation Jan. 1, 2006. But it did not happen because some countries were still to agree on what items are to be protected from ensuing competition, a mechanism to compensate for loss of customs revenues resulting from stronger member countries’ products entering the less developed nations, and elimination of non-tariff barriers (NTBs).
The region’s two key rivals — India and Pakistan — now have good political, and economic relations, improving the business environment throughout the seven-country region. The two have agreed to establish branches of their commercial banks into each other’s country to help expand trade flows, opened up shipping, ferry services between Bombay and Karachi, overland road and rail links.
Overland traffic will also help landlocked Nepal, Bhutan, and Afghanistan. Kabul is gaining entry into SAARC, and will be a major beneficiary of larger trade flows from India-Pakistan to Central Asia, via Afghanistan.
Several business issues have just been sorted out by Indian Commerce Secretary S.N. Menon and his Pakistani counterpart Asif Shah at their Islamabad meetings. Shah said, “Islamabad will treat India at par with other SAARC member nations under SAFTA, beginning July 1. This regional agreement will be fully implemented with all member states, including India.” Shah also said, “Pakistan is not satisfied with the volume of our exports to India because of New Delhi’s NTBs and high tariff rates.”
However, the two countries are moving forward to resolve these issues. Pakistani exports to India were $288 million in 2005. Indian exports were $548 million, leaving an adverse trade balance of $260 million against Pakistan. Under the existing arrangements, India can export 1,059 items and Pakistan 773 items that are on the Positive List. But the businessmen are calling for a short Negative List of items that cannot be traded, while the rest of goods and services should move freely. Their official trade crossed $ 1.0bn mark in the first eight months of fiscal 2006. The informal, or unofficial trade is estimated at around $ 2.0bn but businessmen estimate, it can go up to $ 10bn a year by 2010.
The seven have ratified the SAFTA agreement. They also have almost completed work on preparation of “Sensitive Lists” of items that each one of them wishes to protect, rules of origin of exports, setting up a mechanism to compensate the Least Developed Countries (LDCs) for their loss of revenue when tariffs under SAFTA arrangements are slashed. SAFTA originally laid down a 20 percent reduction in import duties by 2006, and between 0-5 percent by 2013. It allowed LDCs to reduce tariffs by 0-5 percent by 2016.It allows member nations to announce negative lists of items that will be exempted from concessional tariffs.
The region has one of the lowest levels of intra-regional trade anywhere in the world. The principal export destination of all South Asian countries remains North America and the EU,” says Prof. Rehman Subhan, Chairman of Bangladesh Center for Policy Dialogue.
SAFTA’s predecessor-South Asia Preferential Trade Agreement (SAPTA) had become operational in 1995, allowed tariff concessions on 4,667 out of 6,000 proposed tradable items by 2000. These included 521 concessions allowed by Bangladesh, 233 by Bhutan, 2,554 by India, 178 by Maldives, 491 each by Nepal and Pakistan and 199 by Sri Lanka. “Despite the concession for a large number of products, there has hardly been any increase in intra-regional trade in the total international trade of the region,” says Dr. A.R.Kamal, former Director of Pakistan Institute of Development Economics (PIDE), in Islamabad.
SAPTA virtually proved to be a non-starter as the tariff cuts were not enough and most of these items were not traded widely in the SAARC region. “Confining solely to tariffs, and leaving para-tariff and non-tariff measures out of the negotiations, has limited the growth of inter-regional trade,” says Kamal.
Even after implementing SAPTA concessions, intra-regional trade stayed at 4.0 percent of he total trade, since 1995. In fact, in intra-regional exports, Bangladesh share declined from 7.7 percent in 1985 to 1.6 percent in 2000, of Nepal from 38.3 to 30.0 percent, of Sri Lanka from 3.8 to 1.8 percent and of Pakistan from 5.3 to 2.9 percent. The Indian share, however, rose from 3.3 to 4.4 percent.
The intra-SAARC trade in 1985, the year SAARC was born, totaled $1.054bn, while the world trade of SAARC nations then was $44.041bn, which means a 2.4 percent share in the world trade. In 2001, intra-SAARC trade went up to $6.537bn, as world trade of SAARC countries rose to $139.585bn - or 4.7 percent of world trade.
India, Pakistan and Sri Lanka have just announced they will lower customs duties on 40 percent in 2006 for products originating from their four least developed SAFTA partners-Bangladesh, Bhutan, Nepal and the Maldives. The 40 percent duty cut by India, Pakistan and Sri Lanka will include 10 percent on July 1 — the launch date of SAFTA — and the remaining 30 percent on Dec. 31, 2006. Late, the three will additionally lower customs duties by another 30 percent in 2007, before eliminating them completely in 2008. The four least developed countries will lower the duty by five percent in 2006, another five percent in 2007. Before phasing these out completely between Dec. 31, 2008 and Dec. 31, 2015.
