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Paper no. 1891
26.07. 2006
Pakistan and Bangladesh Delay SAFTA Take off
by Dr. Anand Kumar
The South Asian Free Trade Agreement (SAFTA), signed in January 2004 came into operation on January 1 this year, but the Tariff Liberalisation Programme (TLP) started on July 1 because the member countries were not ready. Under this agreement all member countries conduct trade with each other on all items, except those in negative list on which duties are not reduced. However, there is a significant exception to this rule that is the trade from India to Pakistan. This exception considerably lowers the effectiveness of SAFTA and raises questions about its future.
SAARC so far has poor intra-regional trade record. Trade within the region amounted to just 4.5 percent of the region's $135 billion annual trade flows. In contrast, intra-European Union trade accounted for 55 percent of its total trade, intra-NAFTA (North American Free Trade Area) trade for 61 percent and trade between states in the Association of South East Asian Nations (ASEAN) for 25 percent.
SAFTA was seen as a step taken to change this scenario. Under SAFTA, all SAARC countries were expected to revert to a small negative list of products and reduce the tariff on the rest of the items to promote regional trade. These "negative lists" which are also called 'sensitive lists' have already been announced by the member countries. According to these lists, Bangladesh will have 1,254 items, Bhutan 157, India 884, the Maldives 671, Nepal 1,310, Pakistan 1,183 and Sri Lanka 1,065. India's sensitive lists include mainly goods/products from agricultural sector, textile sector, chemicals, leather and sectors reserved for small-scale industries (SSI).
Under the TLP, in two years from July 1, 2006 non-least developed countries such as India, Pakistan and Sri Lanka would bring down tariffs to 20 per cent, while least developed countries (LDCs) would bring them down to 30 per cent. Non-LDCs will then bring down tariffs from 20 per cent to 0-5 per cent in five years (Sri Lanka six years), while LDCs like Bhutan, Bangladesh, Maldives and Nepal would do so in eight years. SAARC region wants to be a free trade area by 2016.
SAFTA and Pakistan
Pakistan ratified SAFTA in mid-February 2006. This step of Pakistan raised hopes that the trade barriers between it and India might soon come down. With SAFTA making the Most Favoured Nation treatment automatic, there were also hopes that Pakistan's refusal to give India MFN would cease to matter. India gave Pakistan the MFN status in 1995-1996. But in an interview to a newspaper soon after the February 15 ratification, Pakistan's Commerce Minister Humayun Akthar Khan said full-fledged commercial relations between the two countries would have to wait for the resolution of the Kashmir issue. Until then, bilateral trade would continue to be guided by the positive list.
Pakistan's Central Board of Revenue (CBR) has issued an order notifying the tariff concessions under the SAFTA agreement. The tariff reduction would be available on import of 4,872 products from Sri Lanka, Bangladesh, Bhutan, Nepal and Maldives. However, according to this notification, imports from India would be subject to the Pakistan import policy order of July 2005 which restricts imports of goods from India or goods of Indian origin to a positive list of only 773 items. This system would reportedly continue until the two countries resolve their political disputes.
Thus, despite the South Asian Free Trade Area (SAFTA) agreement becoming operational from July 1, Pakistan has decided not to accord the Most Favoured Nation status to India. It will also not be extending tariff concessions due under SAFTA.
India Takes up Dispute with Pakistan with SAARC Secretariat
After Islamabad formally communicated to New Delhi on July 4 that it would not undertake the first trade liberalisation programme (TLP) with India under South Asian Free Trading Area (SAFTA), India decided to take up the issue multilaterally at the SAARC Ministerial Council instead of bilaterally with Pakistan. India also accused Pakistan of acting against the very essence of SAFTA. It felt that SAFTA would become meaningless if member countries do not honour their commitments in letter and in spirit.
Indian Union Minister of Commerce and Industry, Kamal Nath in a letter to SAARC secretary general said, "I am sure you would agree with me that SAFTA has little operational meaning if Pakistan does not apply SAFTA to all items, except those tariff lines in the sensitive list, to all member countries." The letter also recalled that the Government of Pakistan had earlier ratified SAFTA without any reservation. He also urged the secretary general of SAARC to convene the SAFTA Ministerial Council Meeting for consideration of this important matter and also requested him to convey India's concerns to all SAARC member countries.
Speaking to media Minister of State for Commerce Jairam Ramesh also expressed his disappointment over the Pakistani decision. He pointed out that under the pact all members - India, Pakistan, Bhutan, Nepal, Bangladesh, Sri Lanka and Maldives - were allowed to keep only negative lists of items. Ramesh also recalled that the Foreign Minister of Pakistan and the Prime Minister of Pakistan had stated in September 2004 and February 2005, respectively, that the issue of MFN (most favoured nation) status for India would be resolved with the implementation of SAFTA and it would amount to MFA plus. Hence, he said, this is in violation of what the Foreign Minister and the Prime Minster of Pakistan themselves had committed. He regretted that on both the counts, Islamabad has failed, thereby rendering SAFTA with "little operational meaning".
However, Pakistan says that the SAFTA agreement does not contain any provision that trade relations between the two countries would function on Most Favoured Nation (MFN) basis with the ratification of the agreement and that the grant of MFN treatment to India is an issue of the General Agreement on Trade and Tariffs, 1994 (GATT 1994). So, while Pakistan has notified tariff concessions on import of 4,872 items for imports from SAARC countries, imports from India would be restricted to only 773 items.
Increase in Bilateral Indo-Pak trade
The thaw in Indo-Pakistan relations has increased the volume of bilateral trade to $ 835 million in 2004-05 from $ 476 million in 2003-04. However, the trade between these two countries through third country or illegal channels is still much bigger and is estimated to at $ 3 billion annually. This suggests that if both these countries eliminate non-tariff barriers and reduce customs tariff, there would be manifold increase in legal trade. A press release of Karachi Chamber of Commerce and Industry (KCCI) on June 14 said, “India and Pakistan are the biggest economies in South Asian region, but unfortunately, the vast bilateral trade potential could not be actualized, which is benefiting the third countries and vested interest”.
But instead of removing hurdles, it appears Pakistan wants to create them. If Pakistan does not come up with a negative list and if it does not extend MFN status to India, SAFTA would continue to operate without Pakistan. India, however, is not keen on raking up this issue in WTO as it still hopes that Islamabad will respond favourably. India also does not to want to vitiate the current bonhomie in the Indo-Pak relations. Besides, some experts feel that if India raises the trade issue in an international forum like WTO, Pakistan will bring up the Kashmir issue before such a forum to counter this move. The dispute settlement mechanism of SAFTA is expected to be operational only in another 7-8 months.
Though Pakistan has ratified SAFTA there is no significant change in its trade relations with India. Unless this change takes place SAFTA would not be able to achieve much. Pakistan links full implementation of SAFTA with the resolution of the Kashmir issue. But everyone knows resolving it to the satisfaction of all parties would not be so easy.
The terrorists active from Pakistan have also intensified their operation against India with or without the sanction of the government of Pakistan. This policy is again not going to help the cause of free trade in south Asia. If SAFTA has to be successful Pakistan will have to dissociate itself with these terrorist elements. Their continuous operation from the Pakistani territory can any time change the complexion of political and security scenario in south Asia. In fact, the decision of Pakistan to trade with India on the basis of a positive list is meant to please the very strong Islamist constituency there.
The problems under SAFTA is not limited only Indo-Pakistan bilateral trade. India’s trade with Bangladesh is also not trouble free. Though India has tried to please Bangladesh by offering several concessions, they have failed in their objective due to the hostile attitude of India’s eastern neighbour.
Special Concessions to Bangladesh
India has announced special concessions to Bangladesh under SAFTA. Union Minister of State for Commerce Jairam Ramesh said on June 19 that India has decided to bring down duty level to zero per cent on 4,200 items from Bangladesh in three years from the current level of 12 to 20 per cent as a special gesture. Speaking to media in Petrapole on the Indo-Bangladesh border he said, "As per SAFTA, the duty structure was to be brought down to five per cent in three years, but as a special gesture, India has decided to bring it down to zero level by 2008." Petrapole is the border on the Indian side in West Bengal and is the main trade route by road between India and Bangladesh. Ramesh said that Bangladesh would be able to make 75 per cent of its exports to India duty free.
This announcement would have pleased any other country. But Bangladesh did not appear enthused because it does not have a large export basket. Bangladesh still feels happy by accusing India of restricting its trade by imposing tariff and non-tariff barrier. Inaugurating a three-day 'Indian Cotton Yarn & Fabric Show-2006' at Dhaka on July 9 Bangladesh Commerce Minister M Hafiz Uddin Ahmad stated that effectiveness of SAFTA largely depends on removal of non-tariff barriers. Talking about the increasing bilateral trade between India and Bangladesh he suggested that existing tariff, non- tariff and para-tariff barriers should be removed to address the huge trade gap. In FY05 the bilateral trade volume stood at $ 2,200 million and the negative trade balance for Bangladesh is US$ 1886 million. The minister also urged the Indian entrepreneurs to invest in fabric and yarn sector in Bangladesh taking the advantage of the country's LDC (least developed country) status. Highlighting the positive sides of the show, he suggested that India should supply fabric and yarn to Bangladesh as a next door neighbour.
The industry leaders of Bangladesh are also not very optimistic about the short-term benefit from the SAFTA. Mir Nasir Hossain, president of the Federation of Bangladesh Chambers of Commerce and Industry (FBCCI), said, "Although we consider SAFTA as a very important step forward to boosting business within the region, it won't be working as we expect." Nasir also felt that SAFTA will immediately help the export of goods such as ready-made garments, leather and leather products, jute and jute products, but non-tariff barriers will stop other major Bangladeshi exportable goods from reaching India and Pakistan.
Instead of finding fault with SAFTA Bangladesh would need to take steps to improve its economy so that they can take maximum advantage out of it. While trying to expand the export market, the nation should also concentrate on product diversification, raising quality of products through arrangements for mutual recognition of certification with other countries, increasing efficiency of ports, power and gas sectors and improvement of law and order. The country would have to improve conditions so that it can attract FDI in the industrial sector and benefit from the free trade facilities.
The country could have benefited by the $3 billion investment proposal of the Tata group. But unfortunately political environment in south Asia is such that it does not encourage too much economic cooperation. The investment of Tata group could have significantly altered the trade balance of Bangladesh with India. But this proposal so far has not been accepted due to political reasons and upcoming election.
Pakistan had initially tried to wean away Bangladesh from Safta by offering a trade agreement. But, later India also offered Bangladesh an FTA. The ball is in Bangladesh’s court now.
Though the SAFTA agreement has come into force none of the seven member countries expect any major economic benefits immediately. However, these might well come in the medium to long term. In theory, SAFTA can also pave the way for cross-border movements of labour, services and investment. But all this appear to be a distant dream keeping in view the political environment in south Asia. Today the total trade between these seven countries accounts for less than 5 per cent of their combined international trade. This is in sharp contrast to the situation in Europe, where mutual trade is about 55 per cent of the total trade of the countries in the European Union (EU). As such, even if SAFTA leads to a doubling or even tripling of intra-regional trade, its impact on the economies of these countries will remain limited.
Conclusion
SAFTA has aroused little optimism among the member nations. It is obvious from the fact that most member countries are still giving more importance to bilateral free trade than to multi-lateral free trade under SAFTA. If the member states continue to strike bilateral free-trade accords bypassing SAFTA it would seriously undermine the agreement. Free Trade Area in south Asia has little meaning unless India and Pakistan are involved in it whole heartedly. The government of Pakistan appears hesitant to take any economic decision which might anger the strong Islamist constituency in that country. The Pakistani government also does not want to fully implement SAFTA because it thinks that intensified economic relationship might reduce pressure on India to solve the Kashmir issue. What is worse, another large country of SAARC that is Bangladesh has a very small export basket. This country is dependent for most of its needs on India. As a result, Bangladesh is facing the problem of a huge trade deficit with India. But this country thinks that it can bridge this gap by just labeling unjustified allegations of tariff and non tariff barrier. Bangladesh always looks for unreasonable concessions from its major trade partner India. South Asian nations will have to overcome these problems if they want to have free trade in the region by 2016. As of now it appears that these countries are not ready for SAFTA.
(The author can be reached at anandkrai@yahoo.com)Home | Papers | Notes | Forum | Search | Feedback | Links
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