SOUTH ASIAN FREE TRADE AREA
By SYED M. ASLAM
Jan 19 - 25, 2004
So the winds of change have started blowing in the South Asian region with the warming of relations between the two leading states — India and Pakistan — of the seven-member South Asian Association for Regional Cooperation (SAARC). The signing of the landmark agreement to create South Asian Free Trade Area (SAFTA) and the ultimately reduction in tariff to 0.5 per cent by 2016 is expected to boast legal trade among the member states to replace the rampant informal as well as illegal trade presently.
The free trade agreement belated as is, it was expected to be in place in 2001, nevertheless is a significant development indeed if viewed in the backdrop of severely strained relationship between India and Pakistan, the nuclear powers of the organisation.
The Safta agreement would come into force on January 1, 2006 and would be fully implemented, in two phases, nine years later on December 31, 2016. The agreement signed at the beginning of the concluding session of the 3-day 12th Summit held in Islamabad early this month aims at allowing free movement of goods within the 7-member Saarc region.
The members, under the trade liberalization programme, agreed that Non-Least Developed States (NLDS) — a new phrase coined to reflect the wildly fluctuating economies within the region — including India, Pakistan and Sri Lanka will reduce their tariffs from existing levels to 20 per cent by January 1, 2008 in equal proportions annually. In case the tariffs would already be less than 20 per cent when the agreement comes into force on January 1, 2006, the NLDS should reduce the actual tariff by 10 per cent each during two years between January 1, 2006 to January 1, 2008.
It was also agreed that the four Least Developed Countries (LDCs), as defined by the UN, including Bangladesh, Nepal, the Maldives and Bhutan — will reduce their existing tariff rates to 30 per cent within two years after the agreement comes into force on January 1, 2006. If actual tariff rates in these four least developed member states are already below 30 per cent on January 1, 2006, the agreement comes into force, there will be an annual reduction of 5 per cent for each of the two years. That will be the end of phase 1.
In phase 2, the non-least-developed members, with the exception of Sri Lanka, will have to reduce their tariffs from 20 per cent or below, as may be the case, to 0.5 within five years by January 1, 2013 per cent. Sri Lanka, however, shall be given an eadditional year till January 1, 2014, to reduce tariff to prescribed level of 0.5 per cent. The 4 least-developed members, however, will be given 8 years from January 1, 2008 to reduce tariff from 30 per cent or below, as may be the case, to 0.5 per cent at par with the rest of the Saarc member states.
The schedules of tariff reductions, however, shall not prevent the member sates from immediately reducing their tariffs to 0-5 per cent or from following an accelerated schedule of tariff reduction. The number of products in the "Sensitive Lists" shall be subject to a maximum ceiling, to be mutually agreed among the states. The list shall be reviewed after every four years or earlier "as may be decided by SAFTA Ministerial Council."
What does free trade mean for Pakistan? Would it be advantageous or otherwise for it as feared by many because of industrial edge enjoyed by the biggest Saarc state — India. The local business and trade generally feel that Saarc's activation would benefit Pakistan in many ways by opening a market of over one billion people which have many economic, financial, social and cultural similarities.
Engineer M.A. Jabbar Memon, a Vice President of Federation of Pakistan Chambers of Commerce and Industry (FPCCI), said that the Safta agreement would help synchronize with the WTO. "The volume of trade among the Saarc nations stands negligible at present and the official trade between the two biggest members sharing the longest border among any of the others members. However, the proximity would offer great incentives for trade because the cost of doing business with India, and to lesser extent with other five Saarc members, would decrease to help offer substantial savings.
"The government should include machinery and captital goods in the HS Codes to facilitate import of these industrial items from India at prices which offer substantial savings. We are importing these items presently from the European Union countries and the Far East that we can get from India at much lower prices. At present we are allowed to import the capital goods and machinery from anywhere but India despite the fact that the same are available at much lower prices there. Measures should also be taken to allow the import of automobiles from India because the local auto industry has abused the envious protection accorded to it by failing to produce affordable cars.
Safta should also pave the way to include 'services' in addition to 'goods' presently to help encourage giant cooperation between India and Pakistan to help get big subcontracting particularly in the Middle East. This would not help encourage trade but also offer vast investment opportunities for the economic benefit of the peoples in two countries."
The trade liberalisation programme among the Saarc members backed up by the accord to turn the region into a free trading area is indeed welcomed in an area which houses around 23 per cent or nearly 1.4 billion people. It is all the more significant because it also houses half of the world's poor and economically marginalised.