KARACHI: The South Asian Free Trade Area (Safta) agreement 'rings bells of hope as well as fear' depending upon the advantages and disadvantages each sector may accrue when it comes into effect from year 2006.
As the textile is the largest industrial sector of the country it will have a major role to play within the framework of Safta with other contracting states. The main players in the textile sector of the region are going to be Pakistan, India and Bangladesh.
Pakistan's textile industry under Safta could benefit from trade rationalization and flow of raw materials. Nevertheless, the industry feels that Safta could be an opportunity as well as a possible threat. The most fearing factor would be that in case cotton crop fails in one part of the region it could have a snowball effect on the prices of other Saarc member states.
The most encouraging aspect of the situation is that the tariff structure of Pakistan had already been rationalized and is presently lower than the competitive countries of the region. Therefore, it would not be that difficult for Pakistan's business and industry to compete with the products of other Saarc member states.
Despite the fact that Pakistan will be having an advantage of local raw material i.e. cotton, but it will have to do a lot to improve its quality which will have direct implication on the final product.
From among seven members of Saarc only two - Pakistan and India - are cotton producers and will be enjoying an edge of local raw material over other countries of the region. However, it is equally encouraging that cotton yield per acre in Pakistan is double than India and with little more efforts on the part of growers and the government control over the supply of spurious fertilizer and pesticides could mean a lot for much higher production per acre.
Furthermore, raw cotton trade is free in Pakistan and all sort of subsidies are no more on this major crop of the country. There is no restriction on import or export of cotton. Against this, India has yet to move on this direction and state involvement is still there. Above all India has yet to lift subsidies on agriculture products.
The basic textile industry, that is, spinning and weaving in Pakistan is most competitive in the region and has an edge over the industry of other Saarc member states. But Pakistan needs to do a lot in the value-added textile sector.
Bangladesh is not a cotton growing country but presently earns over $3.5 billion on export of value-added textile goods, particularly garments. Now, if a country having no indigenous raw material could excel in this field then as to why Pakistan could not achieve this goal whose total export in textiles comes to around $7 billion only.
The most significant aspect of the Safta agreement is the trade liberalization envisaged under Article 7. This requires non-LDC contracting states to reduce tariffs to 20 per cent (30 per cent for LDCs) within two years from coming into effect of this agreement i.e. up to January 1, 2008.
If the actual tariff rates at that time are below 20 per cent (30 per cent for LDCs), the agreement requires an annual reduction on the basis of margin of preference of 10 per cent (five per cent for LDCs) on actual tariff rates for each of the two years. This means that a basic tariff rate of 10 per cent would be reduced to 8.1 per cent for non-LDCs and to nine per cent for LDCs over the first two years under the Safta agreement.
Further, both LDC and non-LDC contracting states are required to bring their tariff rates to 0.5 per cent within a second time frame of eight and five years, respectively, beginning from January 1, 2008.
The contracting states are encouraged to adopt these reductions in equal annual instalments of at least 15 per cent for non-LDCs and 10 per cent for LDCs. However, for products of export interest to LDCs, non-LDCs contracting states are required to bring down tariffs to 0.5 per cent within three years of coming into effect of the agreement, that is, by January 1, 2009.