Commentary
member states and a close approximation of that for the LDC member countries
SAFTA: Myth of Free Trade
(Table 1).
The South Asian Free Trade Agreement has begun with an even more limited approach to liberalising trade than anticipated. Nearly 53 per cent of import trade amongst south Asian countries, by value in 2004, is excluded from the liberalisation of tariffs proposed under SAFTA. The relevance of the treaty is likely to become even more diluted over time as bilateral free trade agreements in the region that are already more liberal are
implemented earlier.
DUSHNI WEERAKOON, JAYANTHI THENNAKOON
T
Sensitive Products: Key Element of SAFTA
Negotiations on a framework agreement for SAFTA was initiated and adopted in January 2004 by SAARC. Outstanding issues in key areas of the tariff liberalisation programme were completed on schedule by January 2006 to allow the implementation of SAFTA to begin in July 2006. Under the proposed tariff liberalisation programme (TLP), SAFTA will become fully effective for non-LDC member countries of SAARC by 20132 (and by 2016 for LDC member states). The approach adopted in SAFTA is a commitment towards a top-down reduction of tariffs where non-LDC member states are required to reduce existing tariffs to 20 per cent in two years of the implementation of the agreement, and thereafter to further reduce tariffs to a range of 0-5 per cent in the next five years.3 LDC member countries are required to reduce existing tariffs to 30 per cent in three years and further ensure a reduction to a range of 0-5 per cent in the next eight years.
The TLP programme, however, excludes goods placed on the sensitive list of items by each member country. It seems reasonable that each country has some sensitive industries that should not face increased competition – even from relatively less competitive neighbours. An improvement in the SAFTA framework agreement, as compared to the key bilateral FTAs in the region – the India-Sri Lanka FTA and the Pakistan-Sri Lanka FTA – was that it provided room for negotiations to ensure a maximum ceiling on the number of items that could be placed under the sensitive list by each member country. It appeared in the initial stages of negotiations that a fairly liberal approach would be adopted, perhaps limiting the sensitive list to 10 per cent of tariff lines (of a total of 2,224 tariff lines at the HS 6-digit level) but the final decision was to retain a sensitive list of 20 per cent of tariff lines for non-LDC
This means, in principle, that the actual trade coverage of the sensitive lists of each country could be quite high. Perhaps of more concern is that there is no formal and binding provision in the framework agreement requiring that sensitive lists to be pruned down over time. In contrast, the ASEAN Free Trade Agreement (AFTA) requires explicitly that its sensitive list products – the corresponding Temporary Exclusion List – be phased out in five equal instalments. The only provision that the SAFTA treaty has made is for a “review” of the sensitive list at least every four years “with a view to reducing the number of items”. The underlying intention may be to prune it – but the provision is very vague and has no teeth to require member countries to move from their current positions. Given that SAFTA has left the issue of sensitive lists fairly open ended, there is always the danger that the agreement will fall short of free trade even in the long-term. By comparison to SAFTA, the sensitive lists of existing bilateral FTAs in the region are much more limited.
In order to carry a preliminary assessment of the restrictiveness or otherwise of the negative list approach adopted under SAFTA, sensitive lists of the member countries have been mapped against their imports from other south Asia partners. Most recent trade data for the seven SAARC member states available from the World Integrated Trade Solution (WITS)4 has been used. While it is undoubtedly a static estimate, it nevertheless offers a valuable insight into the volume of regional trade that is outside the scope of SAFTA as it stands.
Table 1: Comparative Sensitive Listsacross FTAs in South Asia
| SAFTA | ISFTA | PSFTA | |
|---|---|---|---|
| Bangladesh Bhutan IndiaMaldives Nepal Pakistan Sri Lanka | 1254a 157 884 b 6 71 1310c 1183 1065 | 419 1180 | 540 697 |
Notes: a: For LDCs 1,249 items; b: For LDCs 763 items; c: For LDCs 1,301 items. Source: Respective FTA agreements.
Economic and Political Weekly September 16, 2006
The restrictiveness with which the sensitive lists have been applied becomes abundantly clear by looking at a countrywise breakdown of the import trade of SAARC countries (Table 2). It becomes quite apparent that SAFTA has begun with an even more limited approach to liberalising trade in the region than anticipated. Nearly 53 per cent of import trade amongst south Asian countries, in 2004 by value, is excluded from the liberalisation of tariffs proposed under the SAFTA treaty. Paradoxically, Pakistan which has maintained the highest number of tariff lines in its negative list amongst the non-LDC member countries – a total of 1,183 tariff lines as against a list of 884 by India and 1,065 by Sri Lanka – has the lowest amount of goods by value of imports, subject to the negative list than the rest of the region. Just over 17 per cent of Pakistan’s total imports from SAFTA member countries are excluded from the tariff liberalisation process. By contrast, India and Sri Lanka have restricted up to 38 per cent and 52 per cent respectively of their total imports from the SAARC region under the sensitive list category. The LDC member countries, by and large, have protected up to 65-75 per cent of their imports from south Asia in the SAFTA tariff liberalisation process.
The degree of restrictiveness of the negative lists looked at from an export perspective confirms the nature of imbalances. Although Pakistan has restricted only 17 per cent of total imports from SAARC under its negative list, more than 34 per cent of Pakistan’s exports to the SAFTA member countries fall within the respective negative lists of its trading partners (Table 2). While India has excluded 38 per cent of its imports from SAARC countries, a slightly higher proportion of total Indian exports of around 57 per cent are excluded under the negative lists of its trading partners in SAFTA. Sri Lanka has, on the other hand, restricted around 52 per cent of imports from SAARC countries and in turn, a comparable 47 per cent of its exports to the rest of the region are subject to the negative lists of member countries where no tariff reductions will be enjoyed.
As would be expected, the LDC member countries have received better treatment, where the percentage of export trade restricted by negative lists is substantially lower than the corresponding treatment meted to imports from SAFTA non-LDC partners. Bangladesh, for example, has protected 65 per cent of its total imports from SAFTA countries under its negative share of 16.4 per cent of Pakistan’s exports list, but in turn, only 22 per cent of its to India (Table 3). The limited bilateral trade exports to the region are excluded from between the two countries has to some enjoying tariff reductions offered by other extent allowed them to treat each other in member countries. a favourable manner. India’s imports from
Bilaterally, the two major economies of Pakistan account for a mere 0.1 per cent the region – India and Pakistan – have of its total imports while the corresponding given each other relatively liberal reci-figure in terms of Pakistan’s imports from procal treatment if looked at in terms of the India stands at a slightly higher 2.5 per cent share of import trade that is restricted by of total imports (Table 4). their respective negative lists. Only 14.5 By contrast, Bangladesh has restricted per cent of Pakistan’s current imports from nearly 66 per cent of imports from India India are subject to its negative list, while under its negative list, while India has the Indian negative list excludes a similar restricted only 11 per cent of total imports
from Bangladesh under the Indian nega-
Table 2: Trade Restriction under SAFTA
tive list. However, Bangladesh’s total share
Sensitive List
(In per cent) of imports from India accounts for a significantly higher share of its total imports
Value of Imports Value of Exports
– 15.5 per cent – as against India’s imports
from SAARC to SAARC
Subject to NL Subject to NLs from Bangladesh of only 0.1 per cent of
total Indian imports. Thus, in a situation
Bangladesh 65.0 22.0 India 38.4 56.5 where significant bilateral imbalances
Maldives 74.5 57.6 pre-exist, the risks of potential revenueNepal 64.0 46.4
loss, more comprehensive import compe-
Pakistan 17.2 34.0
tition to domestic industries, etc, can be
Sri Lanka 51.7 47.0 Total 52.9 higher for some countries than for others.
In a similar vein, while nearly 80 per cent
Note: NL: negative list. Source: Calculated using WITS data. of Bangladesh’s exports to SAFTA member
Table 3: Bilateral Trade Restriction under SAFTA
Bangladesh India Maldives Nepal Pakistan Sri Lanka
Percentage 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
Note: NL: negative list. Source: Calculated using WITS data.
Table 4: Intra-SAARC Import Trade
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
Source: IMF, Direction of Trade Statistics, Yearbook 2005.
Table 5: Intra-SAARC Export Trade
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
Source: IMF, Direction of Trade Statistics, Yearbook 2005.
Economic and Political Weekly September 16, 2006 countries are free of negative list exclusion, the benefits are likely to be very limited given that only 1.8 per cent of the country’s total exports find their way to the rest of south Asia (Table 5). On the other hand, countries with higher proportion of the trade with SAFTA members are more likely to benefit. In this context, Nepal is a significant beneficiary given that nearly 40 per cent of its exports find their way to south Asian markets and over 50 per cent of its exports to other SAFTA members will be free of negative list restrictions.
However, it begs the question whether Nepal has anything to gain from the SAFTA process per se given that it already has a free trade agreement that offers access to the Indian market and which accounts for virtually the entirety of Nepal’s exports to the SAARC region. This raises the broader issue of the co-existence of bilateral FTAs operating alongside SAFTA and the policy implications of such arrangements.
Sri Lanka, at present, has bilateral FTAs with both India and Pakistan and its SAFTA negative list was essentially an amalgamation of the negative lists of the two agreements. As such, even under the ILFTA, at the date of initiation, a comparable share of approximately 44 per cent of Indian imports to Sri Lanka (as against a current SAFTA share of 53 per cent) was restricted under the negative list [Weerakoon and Wijayasiri 2001]. However, there is a significant variation in terms of the applicability of the Indian negative list to imports from Sri Lanka. Under the ILFTA, only 13 per cent of Sri Lanka’s exports to India were subject to the Indian negative list [Weerakoon and Wijayasiri 2001]. Under the SAFTA treaty, nearly 42 per cent of Sri Lanka’s exports to India are excluded under the Indian negative list (Table 3). The multilateralisation of sensitive lists under the regional agreement has meant that India has imposed a much larger negative list under SAFTA, making the agreement of very limited relevance to Sri Lanka.
Compounding the problem is the fact that bilateral FTAs are scheduled to be fully implemented well ahead of the timeframe set under the SAFTA treaty. Thus, not only is the current value of intra-SAARC trade found to be too restrictive under the SAFTA framework, its relevance is likely to become even more diluted over time as other agreements – which are already more liberal – are implemented more quickly.
Conclusion
While at the political level ambitious goals are being expounded to expand the SAFTA treaty to include trade in services and investment as the next step – with the eventual goal of moving to a South Asian Economic Union – the much anticipated regional agreement has fallen well short of expectations. Aggregate analysis of data suggests that nearly 53 per cent of the total import trade between SAFTA members has been subject to the negative lists of the respective countries. This is a significant drawback of the entire negotiating process.
Given the existence of bilateral agreements already in place, Sri Lanka, Nepal and Bhutan have limited interest in the SAFTA process. These countries have obtained far more favourable treatment for their key markets in south Asia through the bilateral process, which will be fully implemented well ahead of SAFTA. Rapid
Economic and Political Weekly September 16, 2006
changes are already taking place across the region. India, for example, is heavily involved in many bilateral and regional trade negotiations with Singapore, ASEAN, China, etc, that is also going to lead to a preference erosion for countries in the south Asian region. The emergence of BIMSTEC (inclusive of five of the seven member countries of SAFTA) will also pose its own challenges to SAARC. BIMSTEC is scheduled to begin implementation of an FTA in 2006-07 that is generally expected to move much faster than SAFTA. The framework agreement includes provision for fast-track liberalisation as well as for the inclusion of services and investment negotiations from 2007. The significant shortcomings of the negotiated SAFTA treaty need to be addressed if it is to remain relevant as a tool of liberalising regional trade. Foremost amongst the reforms to substantially strengthen SAFTA is to introduce a formal binding mechanism for reducing sensitive lists over time.
EPWEmail: dushni@ips.lk
Notes
[The authors gratefully acknowledge the financial support extended by the UNDP Regional Centre, Colombo to carry out the study.]
1 India-Sri Lanka FTA (ISFTA) was signed in 1998 and began implementation in 2000. It is due to be fully implemented by 2008. The Pakistan-Sri Lanka FTA (PSFTA) was signed in 2002 and began implementation in 2005. It is expected to be fully implemented by 2010.
2 Non-LDC member countries of SAARC include India, Pakistan and Sri Lanka while LDC members constitute Bangladesh, Bhutan, the Maldives and Nepal.
3 Sri Lanka is given an additional one year in recognition of its status as a small vulnerable economy.
4 The WITS trade database offers the most recent cross-country data for 2004 for Bangladesh, India, the Maldives, Pakistan and Sri Lanka and 2003 data for Nepal. The latest available data for Bhutan is 1996, which does not offer a reasonable comparative data set. Bhutan will therefore be excluded from the analysis. However, other country recodes of import data from Bhutan have been used and incorporated in the respective country analyses where data is available. The data used has been at the 6-digit HS Code classification for all countries.
Reference
Weerakoon, D and J Wijayasiri (2001): ‘RegionalEconomic Cooperation in South Asia: A Sri Lankan Perspective’, International Economic Series No 6, Institute of Policy Studies, Colombo.
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