The ground-breaking agreement to adopt the South Asian Free Trade Area (SAFTA) has opened a new chapter in the economic relations of the South Asian nations. Despite being plagued with political and economic tensions, the leaders of the South Asian region have agreed that they must open up their economies for the betterment of the one-sixth of humanity who call this region their home. The SAFTA is expected to improve the negligible intra-regional trade and lure more investment even as challenges for weaker economies like Nepal remain. Moreover, weaker economies like Nepal will now have to girdle up its loins to take advantage, otherwise it could end up getting swamped by one-directional flow of free trade
By SANJAYA DHAKAL
Even the trade pundits and region-watchers were astonished to see the smooth adoption of the South Asian Free Trade Area (SAFTA) agreement at the 12th Summit of the South Asian Association for Regional Cooperation (SAARC) in Islamabad, Pakistan on January 6.
Only a week ago, the commerce secretaries as well as the SAARC Standing Committee had been unable to bridge the differences among various member states regarding the draft SAFTA agreement. But the Council of Ministers amicably resolved the differences and the agreement was formally adopted by the Summit. Moreover, Indian Prime Minister Atal Behari Vajpayee went a step ahead by calling for South Asia Union by 2015 as well as the common currency.
At the end of the 12th SAARC Summit, the foreign ministers of the seven member states signed a framework pact on the Free Trade area in the region paving the way for the regional integration of economies.
“We affirm our determination to create an inclusive, just and equitable partnership for peace, development and prosperity. Satisfactory progress has been made in SAPTA. The signing of the Framework Agreement on SAFTA is a major milestone. It is important to maintain this momentum and move towards further broadening of economic cooperation and to ensure equitable distribution of benefits of trade and cater to the special needs of the small and LDC Member States by providing them special and differential treatment. We reiterate our commitment made at the 11th SAARC Summit at Kathmandu in January 2002 for the creation of a South Asian Economic Union. In this context, we underline that creation of a suitable political and economic environment would be conducive to the realization of this objective,” stated the Islamabad declaration signed by regional leaders.
The agreement is to come into force from the start of 2006. The developing countries of the region – India and Pakistan – will have to bring down their custom tariffs to between zero and five percent within seven years of the start of the agreement, Sri Lanka has been given eight years for the same whereas the rest of the Least Developed Countries (LDCs) – Nepal, Bhutan, Bangladesh and Maldives – will have ten years to do that.
As such the South Asia Free Trade Area (SAFTA) treaty will come into force on January 1, 2006 and will be fully implemented by December 31, 2015.
Media reports from Islamabad stated that the council of ministers has recommended that SAFTA will enter into force on the due date upon completion of four procedural formalities: formation of sensitive lists; rules of origin, revenue loss compensation mechanism and ratification by the all member states.
In the framework treaty, it has been agreed that all the seven member states can maintain two Sensitive List of Products, in which tariff will not be reduced – one for developing countries and another for LDCs. This list will have to be finalized between now and the date it enters into force.
Likewise, the officials have also agreed that issues like imposition of anti-dumping duties, countervailing duties and safeguard measures will be dealt in accordance with the World Trade Organization (WTO) principles.
The commerce ministers of the member states will work out the details of the framework treaty. This body also known as Committee of Experts can also work as Dispute Settlement Body (DSB) – to resolve differences at times of dispute among member states. The body’s decision will be binding on all member states. The council of ministers will act as Appellate body if any member state differs with the decision of the DSB. It was also agreed that any country has the option to withdraw from the arrangement whenever it likes, the media reports added.
“The SAFTA is the historic agreement. It will contribute to the economic progress of the whole region,” said Dr. Bhekh Bahadur Thapa, ambassador-at-large. Dr. Thapa signed in the framework on behalf of His Majesty’s Government of Nepal.
Even the private sector has been surprised by the smooth adoption of SAFTA so soon. “It was felt that SAFTA would not be adopted so quickly, but this happened and this is good. Since all members of SAARC except Bhutan are members of the WTO, the regional cooperation will also be meaningful at least to consolidate market access within SAARC,” said Rajendra Khetan, an industrialist and convener –WTO Cell at the Confederation of Nepalese Industries (CNI).
Economic Potential
SAFTA had been conjured way back in early nineties. Even the introduction of South Asian Preferential Trading Arrangement (SAPTA) was portrayed as stepping stone for the free trade area.
But the apparent ineffective-ness of the SAPTA has also made experts more cautious about the success of SAFTA. “Quite clearly, the SAPTA did not work as desired by the regional countries. So, if it is does not dealt carefully, even SAFTA could end up with the same fate,” said Dr. Bishwambher Pyakuryal, noted economist and president of Nepal Economic Association.
With billion plus population, SAARC represents a huge market for the world. The way its behemoth member India is growing – last heard of growing at over 8 percent – the region could soon become an economic power to reckon with.
But the political disputes have tied down the pace of progress in the region. Take for instance the intra regional trade volume; the intra-regional trade volume among SAARC countries stand at abysmal 4.46 percent of the total trade of member states whereas the intra-EU trade is 55 percent, intra-NAFTA (North American Free Trade Area) trade stands at 61 percent and intra-ASEAN trade is 25 percent of its total trade. The total foreign direct investment in the SAARC region (2002) stood at USD 4 billion whereas the same in China only for the year 2002 was USD 53 billion.
The industrialists of both Pakistan and India pushed for SAFTA this time around. While the Pakistani side was encouraged by a recent report from Pakistan Institute for Development Economics – a think tank – which had stated that SAFTA would not hurt its trade and commerce interest, the Indian side hinged their hopes to grow cross border trade with Pakistan. At present, while the official trade figure between India and Pakistan stand at USD 262 million, the illegal trade is said to be worth anything between USD 1.5 to 2 billion.
Jamil Mahboob Magoon, the Vice President of the SAARC Chamber of Commerce and Industry (SCCI) told the media that the Chamber will urge the member countries to relax visa restriction for businessmen, form commercial arbitration council, harmonize standards and enter a multi-motor vehicular agreement following the SAFTA agreement.
Unclear Issues
Since, not everything about the agreed text of the SAFTA has been made public, experts are still unclear how the regional leaders sorted out the four major areas of discord, which was seen earlier.
The contentious issues like Rules of Origin, Sensitive List, Trade Remedy Measures (anti-dumping duty, countervailing duty, safeguards etc) and Balance of Payment Measures had obstructed the SAFTA sail in past negotiations. Bangladesh had been clamoring for Trade Remedy Measure like anti-dumping duty and had asked for other concessions from the developing countries of the SAARC.
“I have not been able to find out what came out of these debates – whether Bangladesh’s concerns was addressed or not. It would be of utmost significance to analyze these issues before venturing into the success or failure of free trade regime,” said Ratnakar Adhikari, an economist and editor at the South Asian Watch on Trade, Economics and Environment (SAWTEE).
Nepal’s Lack of Homework
Even as Nepal has been actively advocating for the SAFTA, it is yet to carry out an extensive study regarding its implications in its own economy. For a weak economy like Nepal, free trade could also mean erosion in revenue and collapse of its weak industrial base.
Noted economist Dr. Bishwambher Pyakuryal grimly points to trade deficit. “At present, we have trade deficit with almost all SAARC countries. With India we have a serious deficit between Rs 20-25 billion. In such a situation, we have to be very careful lest this deficit surges beyond control once free trade takes effect,” he said.
The revenue Nepal would lose could be around half a dozen billion annually (compared to present statistics). “The government would need to explore new avenues to fill this gap. Perhaps increasing the VAT rate, say by two percent, could lead to additional Rs 2 billion as revenue. Then, there are possibilities of bringing presently untouched sectors into the institutional net of the tax and so on,” said Dr. Pyakuryal.
His views are also shared by Dr. Ram Sharan Mahat, former Finance Minister, who says, “As a weak economy, we could end up losing our revenue base if alternates are not explored.”
Another economist Ratnakar Adhikari, however, does not see much damage due to loss in revenue. “What we lose as revenue could be adequately, if not more, compensated by the increase in economic activities because consumption would also rise if prices fall. And, of course, we already have VAT, which is a very secular mode of taxation,” said Adhikari.
Another problematic issue for Nepal could be its weak industrial base. When goods and services from SAARC flow into the country, it could sweep away what little industrial base we have. “There is an urgent need to restructure our economy and identify the key areas where we have comparative and competitive edge. We have been given around ten years by which time we must develop our strong competitive edge to survive in the ocean of free trade,” said Dr. Narayan Khadka, former vice chairman of the National Planning Commission (NPC).
However, industrialist Rajendra Khetan does not seem much scared. “We are confident that we can compete at the SAARC level. Even now many of our products are being imported by India and other countries,” said Khetan.
“The SAFTA will create a regional understanding on free trade of goods and services with a liberal market philosophy. Obviously the trade and market for SAARC member states would be free. Hence the free opening of SAARC market would be of great importance for Nepal since our market and economy both are small,” added Khetan. “Besides, SAARC as a regional single market should negotiate trade with global economies. In this case small countries like Nepal can again benefit. In WTO regime specially because of MFN status the market access has become more important. So both government and private sector should come closer in identifying opportunities and threats so that our trade policy can ensure that Nepal enjoys SAFTA benefits.”
But Dr. Pyakuryal adds another caveat. “I am not sure that there will be trade complementarities within the SAFTA because the nature of products and production structure in all of the SAARC countries are similar.” According to him, due to lack of such complimenting trade products, the regional integration could face difficulties.
Positive Note
Despite many anomalies and possible problems, SAFTA has been generally welcomed by all and sundry. “SAFTA is our necessity. It is good that an agreement has reached even though belatedly. This will make our region economically integrated and mutually dependable,” said Dr. Narayan Khadka.
Dr. Mahat also says that economic cooperation is a must for the regional cooperation. “Since Nepal had already committed for SAFTA a couple of years ago, it must now work towards benefiting from it.”
So is Nepal ready for free trade, then? Adhikari sees no reason to worry about it “Nepal is already on the path of unilateral liberalization. It is one of the most liberalized economy in South Asia,” he said.
He even quotes Sachs and Warner, renowned economists, who have stated that open economies tend to grow 1.5 times faster than the closed ones.
“In the long run, Nepal will reap benefit. The short-term problems like temporal high costs, adjustment costs and protection of vulnerable communities are what we have to overcome. Once we tide over these problems, there will be a smooth sail ahead,” Adhikari noted.
As such, since SAFTA is now agreed upon, there is no option than to deal with it headlong. Nepal could stand to benefit only if it realizes its advantage and acts accordingly. Otherwise, it could be staring at a gigantic tide that could sweep its whole economy away.
At a time when regional leaders are calling for South Asia Union and common currency, Nepalese leaders will now have to speed up the country’s preparations to be able to become useful member of the Union – whenever, if at all, it happens.