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Agreement on South Asian Free Trade Area

Agreement on South Asian Free Trade Area (SAFTA) refers to agreement of the member states of south asian association for regional cooperation (SAARC). It was signed in Islamabad in January 2004. It was preceded by SAARC Preferential Trading Arrangement (SAPTA) which was signed by the member states in Dhaka in April 1993. SAPTA provided for adoption of various instruments of trade liberalization on a preferential basis.

The major feature of SAPTA were built on (i) inclusion of all products, manufactures and commodities, (ii) more favourable treatment of Least Developed Contracting States (LDC). The major instrument relied on were product by product approach, tariff reduction across the board, sectoral exchange of items and direct trade measures. Besides, it also includes safeguard measures against surge in imports and adverse balance of payments and Rules of Origin for preferential treatment.

SAPTA went through four rounds of concessions. Through these rounds concessions covering 226 items in the first round were increased to an impressive 1871 items in the second round with deeper tariff cuts for LDCs, withdrawal of non-tariff barriers from many items. In the third round, a product by product approach was put in place thus extending the coverage. In the fourth round in 2002, Bangladesh received preferential treatment for 258 items at concessionary terms.

Beyond the SAPTA framework, India, on bilateral basis, gave duty-free access to Bangladesh additional 79 items. Pakistan followed suit and gave, subject to certain quantitative restrictions, duty free access to the export of raw jute and tea.

The major lessons learnt from SAPTA were that (a) positive list based on product by product approach needed to be replaced by a negative list approach as the former proved to be time-consuming and cumbersome, (b) without adequate depth in tariff cuts, the desired impact flowing from regional trade cannot be achieved, (c) Non-Tariff Barriers (NTB) need to be removed totally if benefits of preferential trade are to be realised, (d) trade related capacity building is important for compliance of certification and standards set by mandatory regulations of individual countries, (e) designing Rules of Origin in a way that conduces to market access opportunities, domestic capacities to allay fears of trade diversions and for attracting intra-regional investment, (f) creating and sustaining required supply-side capacities of member-states through capacity building of exports and its diversification if full potential of regional trade is to be realized, and (g) putting in place adequate trade facilitation measures.

The South Asian Free Trade Area (SAFTA) came into force from January 1, 2006 upon completion of formalities, including ratification by all member-states and issuance of a notification by SAARC secretariat. It supercedes SAPTA.

The broad objective of SAFTA is to stimulate national and SAARC economic resiliences and the development of the national economies of the contracting states by expanding investment and production opportunities, trade and foreign exchange earnings as well as development of economic and technological cooperation. The preamble also notes that 'it is necessary to progress beyond a Preferential Trading Arrangement to move towards higher levels of trade and economic cooperation in the region by removing barriers to cross-border flow of goods'.

The Agreement consists of 25 articles. It outlines four specific objectives which are: (a) eliminating barriers to trade in, and facilitating the cross-border movement of goods between the territories of the contracting states; (b) promoting conditions of fair competition in the free trade area, and ensuring equitable benefits to all contracting states, taking into account their respective levels and pattern of economic development; (c) creating effective mechanism for the implementation and application of this Agreement, for its joint administration and for the resolution of disputes; and (d) establishing framework for further regional cooperation to expand and enhance the mutual benefits of this Agreement.

It adopts the following six principles for implementation of the Agreement: (a) SAFTA will be governed by the provisions of this Agreement and also by the rules, regulations, decisions, understandings and protocols to be agreed upon within its framework by the contracting states; (b) The contracting states affirm their existing rights and obligations with respect to each other under Marrakesh Agreement Establishing the World Trade Organisation and other treaties/agreements to which such contracting states are signatories; (c) SAFTA shall be based and applied on the principles of overall reciprocity and mutuality of advantage in such a way as to assert equitable benefit to all contracting states, taking into account their respective levels of economic and industrial development, the pattern of their external trade and tariff policies and systems; (d) SAFTA shall involve the free movements of goods, between countries through, inter alia, the elimination of tariffs, para tariffs and non-tariff restrictions on the movement of goods, and any other equivalent measures; (e) SAFTA shall entail adoption of trade facilitation and other measures, and the progressive harmonization of legislations by the contracting states in the relevant areas; and' (f) The special needs of the Least Developed Contracting States shall be clearly recognized by adopting concrete preferential measures in their favour on a nonreciprocal basis.

The SAFTA framework envisions a free trade area leading eventually to economic union. To translate this vision into reality has been and perhaps continues to be a difficult task in view of the conflicting interests of contracting countries. Many parallel complementary areas lie outside the pale of trade cooperation. Therefore, the crafting of the different areas of agreement assumes significance. Some of the critical areas have been (a) Trade Liberalisation Plan, (b) Rules of Origin and (c) a mechanism of revenue compensation.

TLP envisages preparation of a (i) negative (sometimes described as sensitive) list to which duty will not be applicable, (ii) a positive list to which total elimination of duties or insignificant rate of duty will be applicable and (iii) a residual list to which tariff reduction in a way will be applicable.

For preparation of a negative list, the key issue was how to balance between a short or long negative list as the latter would not conduce to a free trade concept. During the process of negotiations, some factors reflecting conflicting interests and concerns of member-states had to be considered. These included (a) revenue loss consideration, (b) protection of key domestic industries, (c) avoiding trade diversion, (d) interest of farm sector and large scale industries, (e) consumer interests and (f) stage of production.

In arriving at a consensus of Rules of Origin, the key issue was how to reconcile the conflicting demands and concerns of the member-states. The LDCs wanted to have a flexible list. It was in the interest of the developing countries like Pakistan and India to have a rather stringent Rules of Origin. The other vexing issue related to RLP mechanism.

After lengthy negotiations, agreement was reached and SAFTA was given final shape. Analytical research on SAFTA tends to confirm the view that at the end SAFTA as yet has not resulted in expanded economic cooperation among the SAARC countries. It seems limited to trade liberalisation plan. It has not led to substantial increase in the volume of trade. The 'move towards Free Trade Area is to be complemented by initiatives to promote cooperation in the area of investment, removal of all types of NTBs, trade and custom facilities, and cooperation in the area of trade related capacity building. [AMM Shawkat Ali]

Bibliography Mustafizur Rahman, SAFTA Accord: Salient Features, And Challenges of Realising the Potentials in Regional Cooperation in South Asia. A Review of Bangladesh's Development, Centre for Policy Dialogue (2006), The University Press Ltd, Dhaka pp 213-246; 'Mustafizur Rahman, Trade and Transit in South Asian Growth Quadrangle, Framework of Multifaceted Cooperation, 1999, McMillan Publications.