The impact of trade and investment liberalization under the South Asia Free Trade Agreement

(Ex-Chairman SITE Association of Industry, 
Karachi, Pakistan)

June 21 - 27, 2004

Presented at the ASIA INVEST FORUM 2004 organized by The Ceylon Chamber of Commerce and Asia-Invest, held at Colombo

January 2004 would go down in history as the day when the first step towards the South Asian Renaissance was taken by seven leaders representing 1.40 billion people living in Bangladesh, Bhutan, India, Maldives, Nepal, Pakistan, and Sri Lanka. The South Asia Free Trade Agreement was finally inked and put in motion in Islamabad, Pakistan.

The agreement triggered off a lot of debate and discussion in Pakistan. The majority of businessmen are generally in favor of the agreement but there are those who are of the opinion that it would only benefit India and that many Pakistani industries would have to close down. However, delegations from Pakistan's Chambers and trade associations are making a beeline for India, meeting counterparts, government officials, politicians, and signing a host of MOUs to develop business relationships. Encouragement from the government has played a positive role in boosting the "feel good" atmosphere among the business community.

The pertinent question that everyone is debating is what SAFTA will mean to Pakistan. The points raised by various quarters bring about the view that SAFTA has its challenges and would also provide opportunities for the country. The Pakistani industrialists who harbored the notion that Indian economic supremacy would sound the death-knell for their industries have now started to strategize in a positive and optimistic mode and are now considering to enter the new trade scenario with enthusiasm and with confidence. Some term this as a win-win situation and point out to the removal of trade barriers, elimination of irritants, and above all the induction of peace in the region.

The South Asian inter-regional trade as a proportion of world trade which was as high as 20% in 1948 declined to as low as 2% after two decades. Pakistan's total trade with other SAARC countries is just a shade over US$ 500 million that is a paltry 2.6% of its global trade. Pakistan is mainly trading with Bangladesh, India, and Sri Lanka, and can now attempt to seek new markets in Bhutan, Maldives, and Nepal.

The negative sentiments on SAFTA are generally from three major sectors. The first and foremost threat is felt by the engineering industry that sees the Indian engineering juggernaut, with its vast market, its economy of scale, and its advanced technology, as overwhelming the domestic Pakistani engineering base. They are of the opinion that free trade would even destroy the automotive vendor industry that is still in a nascent stage and needs space to develop. However, it could be argued that raw material such as pig iron, steel billets, coke, etc can be imported at a reasonable price and thus costs substantially rationalized. The Pharmaceutical industry is also jittery about the future prospects, considering the fact that Indian medicines are much pocket-friendly than the products made in Pakistan. This industry would also take advantage of the cheaper raw material imports and thus would have a different cost structure for their products.

The second sector that is promoting anti-SAFTA views is the clergy and the die-hard revolutionaries. In their opinion, SAFTA means trading with India and that the increase in SAFTA activities would result in the dilution of the core issue of Kashmir. They are of the opinion that Indian goods would flood the market and that the money generated by Indian companies selling to Pakistan would be another avenue of financing the state activities in Kashmir. This myopic viewpoint gathers weight due to the oratorical skills of the proponents and the ignorance of the audience. It does affect the SAFTA process because of certain political and social compulsions. Notwithstanding this thinking, recent positive events and moves have gradually brought about a remarkable change in the mindset of many a person or organization.

Another sector too has flashed dangerous signals. These are the smugglers and those who deal in undocumented trade, who bring in goods thru mis-declaration, under-invoicing, and clandestinely. The conventional wisdom is that over US$ 2 billion worth of Indian goods are brought into Pakistan in this way. Naturally, SAFTA would definitely put a damper on their activities and this lucrative trade. At the same, time this huge undocumented trade is also proof that Pakistani industries can face the onslaught, if any, of more Indian goods entering the market. The official figures of Indo-Pak trade do not reflect tyres, fabrics, machinery, and a lot of consumer items. The "suitcase" trade figure is also missing. Livestock is another item that is blatantly smuggled into Pakistan. Millions of CDs are transported from Pakistan into India, Sri Lanka, and Bangladesh.

The Indo-China trade can be quoted as an example. The fear of Chinese goods enveloping the market has disappeared to a large extent in India, and today the Indo-China trade has jumped by leaps and bounds. Pakistan has been facing the menace of smuggling, under-invoicing, and mis-declaration for a long time and this situation has aggravated menacingly in the recent years. Therefore, this country's economy is resilient and can sustain more intra-regional trade. Of course, official trade would improve the government's revenue collection thru sales tax, some amount of import duties, and income tax on traded and manufactured goods and products.

A disturbing point is the that there is heavy taxation in Pakistan in the form of General Sales Tax, advance income tax, surcharges, and other levies. Indian industries enjoy subsidies and favorable incentives that benefit them and allow them to compete strongly in international markets. An example is the cement industry. The taxes in India are about Rs 500 per ton while in Pakistan these are over Rs 1600 per ton. Infrastructure tariffs are very high and would continue to hurt the economy, as well as the competitiveness of the Pakistani industry. The removal of subsidies, the implementation of WTO conditionalities, such as anti- dumping, safety measures, and countervailing duties, and the induction of more bilateral agreements, would address this concern in the future.

The advent of SAFTA would also provide the denizens of this region the hope that economic prosperity would reduce poverty, improve quality of life, and usher in an era of peace and tranquility. The opportunities resulting from SAFTA would be monumental and substantially change the region's future. For Pakistan, these are opportunities galore.

Primarily, the removal of shackles in the intra-regional trade process would enable the business and industrial community of Pakistan to re-profile its priorities in conducting global business. The first and foremost step to undertake is to lobby strongly for initiating a jumpstart of the SAFTA process. Pakistani businessmen should convince the government to grant preferential treatment to those imports from SAARC that are beneficial to the country's economy. It is not advisable to wait for 2006 and beyond to get things in motion. There are many items, such as machinery, dyes and chemicals, software, processes technology, woolen cloth, pharmaceuticals, raw material, tea, etc that can be imported at a much preferred rate from India,, etc instead of other countries. Why outlay high financial resources for machinery and material from European and American companies when comparable products are available next door, at a cheaper rate, at a faster delivery schedule, and at zero or low import duties.

The industrialists can refer the rates of tariff, duties, subsidies, levies, and other taxes prevalent in other SAARC countries to convince the government to keep these rates in view before formulating budgetary policies so that a level playing field is ensured. This approach would have a two-fold advantage for the business community. One, it allows them to be competitive, and two, to achieve their objective of lower tariffs and rates for their businesses. The proliferation of trade under SAFTA would provide the required impetus for the government to adopt this route so that the local industry is protected and is able to compete profitably.

The textile sector, which is about 67% of external trade, is destined to prosper under SAFTA. This scenario is envisaged because of certain advantageous criteria. Firstly, Pakistan has an edge in many textile products such as bedwear, knitwear, and in certain cotton fabrics. Secondly, yarn and fabric can be exported in large quantities to other SAARC countries. Pakistan has a formidable denim production base, and apparel manufacturers in Sri Lanka, Bangladesh, and Nepal can source Pakistani denim for their exports and also domestic production. Secondly, Pakistan can take advantage of the developed skills of workers in Sri Lanka to boost productivity and introduce quality enhancement processes for the garment and knitwear industry. Pakistan can also learn from the improvements made in the textile field in Indian industries. Thirdly, joint ventures could be established with entrepreneurs in other SAARC countries. A pragmatic example could be the setting up of apparel industries in Sri Lanka using Pakistani fabrics and utilizing Sri Lankan production expertise. Moreover, pooling of resources could also be considered. Joint export orders, joint raw material procurements, and joint marketing strategies, could be adopted favorably and profitably. This micro-regional cooperation could, in the long run, enable the companies to survive the tough competition in textiles.

The above factors would prove beneficial in many ways. The possibility of equal access to regional economic blocks, the elimination of tariff escalations in SAARC, the survival under free market regime, the protection from anti-dumping and countervailing measures, the support against undue imposition of unfair application of standards, the availability of technical support, and more importantly, the formulation of joint and common strategies for international trade, are some of the more pronounced advantages and gains ensuing from this manner.

Another significant opportunity is the probability of investment in Pakistan. There has been cheerful news from many major Indian conglomerates that have floated the idea of investment in strategic sectors such as power, automotive, steel, information technology, textiles, consumer items, etc. This is propitious for Pakistan in many aspects. At the outset, this enables the country to achieve more market access since the marketing network of the Indian conglomerates is well entrenched. Then, this entails inflow of finances, technology, and ideas. Furthermore, employment is generated and skills developed. Moreover, the practical utilization of the pool of unemployed or under-employed university graduates, certified technicians, and low-skilled workers is achievable. Furthermore, this foreign investment would produce a peace dividend since the stakes would be higher and more vulnerable if jingoism is not discouraged. At the same time, the notion of SAFTA being a Troian Horse would surely be dissipated.

Overall, the closer economic ties under SAFTA and the resultant better peaceful environment would also ensure that there is strong coordination among the states, there in more transparency in intratrade, there is the recourse to judicial, fiscal, and infrastructure reforms, there is greater movement of people with advantages to the tourism, cultural, and sports sectors, and there is commonality of views towards determining strategies to tackle corruption, to enforce good governance, and to strive for protection of human rights.

The businessmen of SAARC countries must have a common purpose and must remove cobwebs from their minds when talking about business. The imposition of non-tariff barriers on goods and services produced in this region, the welfare of the teeming millions of citizens, and the challenges of global terrorism, should all be most important in the minds of the businessmen. They must play a determined role in impressing upon their respective governments that the sure way towards economic prosperity is the successful implementation of SAFTA and the formidable adherence to the principles of SAARC.

President Pervez Musharraf of Pakistan rightly stated," we must expand SAARC Charter to discuss bilateral issues at regional level. We must put behind us the tarnished legacy of mistrust, bitterness, and tension. We feel there is a need to constitute a mechanism to even discuss bilateral issue at regional level. There can be no development in the absence of peace. There can be no peace, so long as political issues and disputes continue to fester."

T. B. Macaulay very aptly put it, "Free trade, one of the greatest blessings which a government can confer on a people, is in almost every country unpopular". The time to make SAFTA an accepted part of the lives of every one of the 1.40 billion citizens of SAARC is now.