SAFTA →Current Position & Issues

Discuss the role of SAFTA in regional trade cooperation. What are the issues & hurdles for its full Operationalisation?

SAFTA refers to the “Agreement on South Asian Free Trade Area (SAFTA)”. This agreement was reached in 2004 in the 12th SAARC summit at Islamabad. The objective was to create a free trade area comprising Bangladesh, Bhutan, India, Maldives, Nepal, Pakistan and Sri Lanka. The seven foreign ministers of the region signed a framework agreement on SAFTA to reduce customs duties of all traded goods to zero by the year 2016.

This agreement came into force in 2006 and is currently NOT fully operational.

Members:

The member states are divided into least developed countries (LDCs) (Bangladesh, Bhutan, Maldives and Nepal) and Non-LDCs (India, Pakistan and Sri Lanka). The SAFTA envisages tariff reduction to 0-5 per cent in two instalments. While NLDCs are required to reduce existing tariffs to 20 per cent in two years from the date of entry into force of the agreement, the LDCs will bring down the tariff level to 30 per cent during the same time frame. In the second instalment, the NLDCs will take another five years (except Sri Lanka, which has six years) to dismantle the tariff to 0-5 per cent, while the LDCs will have eight years for the same purpose. Therefore, the SAFTA will be fully operational only in 2016. This mandatory tariff reduction, however, is not applicable to products under the ‘Sensitive List’, which comes under review not more than every four years. South Asia is the most populous region in the world, housing 23 per cent of the world’s population. So if SAFTA is fully operational, it can be the largest Free Trade Area (population wise).

Position of India and Pakistan

Please note that Both India and Pakistan have ratified SAFTA. India Ratified SAFTA in January 2006, while Pakistan ratified SAFTA on 15 February 15 2006. This step by Pakistan raised hopes that the trade barriers between it and India might soon come down. With SAFTA making the Most Favoured Nation (MFN) treatment automatic, there were also hopes that Pakistan’s refusal to give India MFN status would cease to matter. India gave Pakistan the MFN status in 1995. But, in an interview to a newspaper soon after the 15 February ratification Pakistan’s then commerce minister Humayun Akthar Khan said that 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.

Currently, there is a change in tone of Pakistan and the commerce relations seem to improve as Pakistan recently gave MFN status to India.

Recently, the commerce ministry of India said that India will meet its commitment of reducing tariffs under the sensitive list by 20% for all SAFTA members by next month. The Government makes clear that peak tarffi will be 8% by January 2012. India’s trade with SAARC stands at a mere $13 billion while New Delhi’s global trade has expanded to cross $600 billion.

Importance of SAFTA:

We all know that the Free Trade Areas are Free Trade Areas are a basic step towards a greater economic interaction and integration among countries usually situated in a given geographical region. The next level is the Customs Union where the region as a whole has a common external trade policy with non-members. It follows to a Common Market that allows free movement of goods, labour and capital across borders, but within the region. The highest level of integration comes the Monetary Union where the region as a whole has a common currency and monetary policy. So, SAFTA can be seen as first step towards the greater economic interaction and integration among SAARC countries.

Problems:

  • Irritants in bilateral relations of the countries of the region, as SAARC have been especially hostage to “love-hate relations” between India and Pakistan.
  • Pakistan has enlisted 1,880 items under sensitive list as against India’s 884. The long sensitive list declared by all countries gives indication of no seriousness of all members.
  • Professor Jagdish Bhagwati argued that a FTA in South Asia, due to its inherent characteristic of ‘trade diversion’ instead of ‘trade creation’, would in the long run hamper liberalization of trade at the global level. So, there is a need to concentrate in ‘trade creation’, apart from increasing overall quality of goods to global standards.

This implies that the region needs infrastructure linking to facilitate easy flow of goods and making South Asia as transit point between East and the West. (741 words)

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