26 January 2004	Monday	03 Zilhaj 1424

The South Asia Free Trade Agreement (Safta) is a landmark decision taken during the Saarc summit. However, it's success is conditioned by a series of follow-up measures and adoption of multiple instruments of liberalization on preferential basis. The agreement itself does not create free trade area, rather envisages a framework for its creation and operation.

Although, a great deal of goodwill and spirit of mutual accommodation was manifested between India and Pakistan, but the latter, still, has not granted the Most Favoured Nation (MFN) status to the former. Conclusion of the agreement at a time, when intra-regional trade promotion, investment acceleration, and transfer of technology opportunities have been missed, and when the agreed tariff reduction (after a lapse of two years) are within the proximity of the existing rates is neither convincing, nor does it augur well for future. This calls for renewed efforts and added dynamism on the part of contracting states to make the entity a real success.

Pakistani entrepreneurs would like to purchase India's machinery, especially textile, at the existing rate and losses, in terms of relatively higher tariff, could be made up by the lowered freight rate. Similar would be the line of action of other contracting states, including India. As such the strategy of spreading the reduction/removal of tariff over a larger period does not seem prudent. Therefore, the granting of MFN status to India would promote the two-way trade, provided such items are not excluded under the "Sensitive Lists".

Safta, effective from January 1, 2006, envisages reduction in tariffs in two phases to 0-5 per cent. It will be fully executed and enforced by December 31, 2015. The non-least developed countries i.e., India, Pakistan and Sri Lanka, will scale-down tariff from the existing levels to 20 per cent, while the least developed countries (LDCs) Bangladesh, Nepal, Maldives and Bhutan will curtail their tariff rates to 30 per cent within two years of the coming into force of the agreement.

The second time-frame stipulates 5-8 years, respectively. The number of products in the "Sensitive Lists" which remained undefined, shall be subject to a maximum ceiling, to be mutually agreed among the states. The products, whose preferential imports, could cause serious injury to domestic industry, may fall in this list.The South Asia forum represents a contrasting scenario, which is the largest economic bloc in terms of consumers. Unlike other regional blocs, the size and pattern of the economic development of Saarc countries is not uniform and identical.

The population of the area is 1.4 billion, representing 1/5th of the world consumers. At the same time, about 40 per cent of the population lives below the poverty line, on less than one-dollar-a-day and 38 per cent of the population is illiterate. Despite abundant man and material resources, South Asia is one of the least developed areas in the world.

The average per capita income of the people is mere $460 against the world average of $7000. The aggregate trade of the area is $66 billion per annum, which is 4-5pc of the regional, and 1.3 per cent of the global trade. It is noteworthy in this context that the intra-regional trade in Nafta is 51.7 per cent, in the EU 55 per cent and Asean 25.4 per cent. The inflow of foreign direct investment (FDI) has been $374.38billion or 57 per cent in the EU, $13.98 billion or 2 per cent in Asean, and $4.58 billion or 0.70 per cent in Saarc during 2002.

The performance of Sapta concluded in 1993, contemplating slashing of tariff in phases by 10 per cent to 20 per cent will determine the future course of Safta. Total items under Sapta to be exchanged, have now risen to 5,500. Out of which Pakistan's 763 and India's 2,927 items are eligible for preferential treatment.

Pakistan is receiving concession from all members on 788 items. Pakistan was allowing concession to India on 240 items, with an addition of 223 more now thus totals 463, while India has reciprocated by giving further concession on 262 items raising the number to 632.

The insignificant progress in the intervening period in intra-regional trade from 3 per cent to now around 4-5 per cent points to the fact that Sapta has not been able to promote the trade in an impressive manner. This could partly be attributed to Saarc's failure in stimulating the regional economic resilience, particularly, on account of the estranged relations between India and Pakistan.

India's industrial base is quite thick and strong with diversified exports. It has an edge over other members, particularly in the engineering and automobile sector. Pakistan, initially was reluctant to this kind of arrangement, but then agreed due to the political harmony and unity. Pakistan's reliance on export persists on textile and textile-related products, whereas Sri Lanka relies on tea, and Bangladesh on jute, tea, and garments.

The other contracting states, i.e., Nepal, Bhutan and Maldives have not offered any product. They will, therefore, be more beneficiary like Spain and Portugal in the E.U. Pakistan's edge is confined in textile products, leather goods, fruits and vegetables, whereas India's supremacy lies in auto-industry, engineering, cement, pharmaceutical sector, etc.

India is well placed in more value-added and hi-tech industries, while Pakistan in low value-added and agricultural products. However, advantages could be accrued to both countries, if the two-way trade and "sensitive items" skillfully prepared and negotiated. If the product of any member country manages to capture market in India, it will have to do overtime to cater to the demand of over one billion people.

The recorded trade between India and Pakistan is not more than $200 million, but through third country and illegal channels, it is over one-billion-dollar. The free trade area would therefore, contribute towards legalizing the two-way trade and combating the menace of smuggling.

The reason for the proliferation of regional trade and bilateral economic integration agreements could be attributed to the slow pace and in-built difficulties in the multilateral trade liberalization. As the Uruguay Round demonstrated, it is not easy to ensure removal or reductions in the face of large and diverse group of countries, despite the fact that Gatt, and now the WTO are committed to multi-lateralism.

The failure of the Seattle Ministerial meeting of the WTO in 2000, as well as new round of multilateral trade negotiations recently held in Cancun, Mexico, has added to this perception. In addition to anti-globalization sentiments, attempt by some developed countries, including the US, to incorporate labour and environment standards in multilateral trade agreements, has been a major impediment in the successful conclusion of negotiations.

A trend has emerged to secure faster liberalization through bilateral and regional cooperation. It is argued that regional blocs are inward-looking and combined with bilateral FTAs, are restrictive in trade promotion and discriminatory against the non-member countries. The principle of non-discrimination in trade is laid down in the WTO's most-favoured nation (MFN) criterion.

The MFN rule requires that tariffs and trade regulations should be applied to imported goods without discrimination. However, there is a provision in the WTO for making voluntary agreements, of closer integration between the economies, through customs union.

The only safeguard is that the contracting parties shall not charge more tariff from non-members than what was prevalent, prior to the formation of union. This approach appears to be contradictory.

Meanwhile, the timings for giving effect to Safta and its complete execution appear to be, too long. The example of the European Union for taking a longer period to emerge as an integrated entity is hardly tenable, as the duration taken by the EU to attain maturity, was not venerable to fast changes. A well-defined economic order was in operation.

However, after the dismemberment of the USSR, emergence of globalization and Unipolar World, a search for an equitable and judicious world economic order continues to persist and the global economic spectrum specially, following revolution in information technology, is characterized by fast changes, of far reaching implications.

The timely and correct decision, therefore, is the only guarantee to avail the unfolding opportunities. The WTO and Brettonwoods Institutions have their own share in the liberalization of trade through tariff reduction. The Multi Fibre Agreement (MFA) would expire in 2005, by rendering the WTO regime fully operative.

Meanwhile, Pakistan is also a member of Economic Cooperation Organization (ECO), which has also stipulated tariff preferential arrangement in the region, and is destined to enter into the Free Trade Agreement (FTA) with Bangladesh and Sri Lanka. At the same time, India and Sri Lanka are already linked together with FTA.

The whole emerging scenario would indeed be more complicated and confused, and may pose formidable problems in implementation. It would, therefore, be advisable, if our government prepares an integrated policy framework, encompassing all aspects for the fguidance of business community. Unlike other successful regional blocs, Saarc has been a victim to the hostilities between India and Pakistan for almost over two decades. The sustainable progress would, therefore, be inter-linked with the political amenity between these two major contracting states.