Agreement on South Asian Free Trade Area

Agreement on South Asian Free Trade Area (SAFTA) refers to the regional agreement of the member countries of south asian association for regional cooperation (SAARC) aimed at deepening cooperation in trade-related areas. The SAFTA Framework Agreement was signed in Islamabad in January 2004 but the SAFTA Agreement formally came into force in 2006. SAFTA started with seven countries; however, with Afghanistan joining the group in 2011 the number of member countries currently stands at 8. It is worth mentioning in this connection that in the preamble establishing the SAARC in 1985 the idea of taking initiatives towards closer economic cooperation was mentioned as one of the key objectives of this regional grouping.

As may be recalled, SAFTA was preceded by the SAARC Preferential Trading Arrangement (SAPTA) which was signed by the member states in Dhaka in April 1993. SAPTA’s objective was to deepen intra-regional trade among the SAARC countries through exchange of market access preferences. Fostering and promoting economic and technological cooperation were also set as SAPTA objectives. The preamble of the SAPTA 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'. Major features of SAPTA included the followings: (i) positive list of items for which member countries were to provide preferential market access (zero or reduced duties) to partner countries; (ii) more favourable treatment for the Least Developed Country (LDC) members of the SAARC, primarily through deeper duty reduction and flexible rules of origin; and (iii) gradually shift to a free trade area by increasingly liberalising intra-regional trade and eliminating non-tariff barriers. Major instruments to realise the SAPTA included a product by product approach, exchange of items for tariff reduction (zero or reduced duty) and direct trade measures. SAPTA also put in place safeguard measures against surge in imports and adverse balance of payments.

SAPTA went through four rounds of exchange of concessions. The coverage of concessional items was increased from 226 in the first round to an impressive 1871 items in the second round, with deeper tariff cuts for the LDCs and withdrawal of non-tariff barriers to trade concerning a large number of items. In the third round, a product-by-product approach was put in place and the coverage was further expanded. In the fourth round in 2002, Bangladesh was accorded preferential treatment for 258 items on concessional terms. Going beyond the SAPTA framework, India, on bilateral basis, provided duty-free access to Bangladesh for an additional 79 items. Pakistan followed suit and offered, subject to certain quantitative restrictions, duty free access to export of raw jute and tea from Bangladesh.

However, SAPTA was not able to contribute significantly to raising intra-regional trade and deepening trade cooperation among the member states. Major lessons gleaned from the SAPTA experience were the followings: (a) the positive list approach based on product-by-product exchange of preferential access was not very effective. This was needed to be replaced by a negative list approach as the former proved to be time-consuming, cumbersome and of limited value in stimulating trade; (b) without adequate depth in tariff cuts, the desired impact on regional trade was difficult to achieve; (c) the non-tariff barriers in place needed to be removed at a fast pace if benefits of preferential trade were to be realised on the ground; (d) trade-related capacity building was important in areas such as compliance assurance with certification and standards to be set under mandatory regulations of individual countries; (e) Rules of Origin have to be designed in a way that facilitated market access opportunities, and were aligned with domestic capacities of member states and took care of trade diversion; (f) additional steps were called for to attract intra-regional investment to create supply-side capacities that enabled export diversification; and (g) putting in place adequate trade facilitation measures was important to realise the potential benefits of preferential market access.

SAFTA came into force on 1 January, 2006 on completion of the needed formalities, including ratification by all member-states and issuance of a notification by the SAARC secretariat. With this the SAPTA came to an end. SAFTA has tried to build on the lessons learned from the SAPTA experience. The broad objective of SAFTA is to deepen intra-regional cooperation, stimulate national and regional economic resiliences and stimulate development of the national economies of the contracting states by expanding opportunities of trade and investment, building production and supply-side capacities, stimulating foreign exchange earnings and facilitating overall economic development of member states.

The SAFTA Agreement includes 25 articles which outline four specific objectives: (a) eliminating barriers to trade and facilitating 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 levels and pattern of economic development of particular contracting member state; (c) creating effective mechanisms for proper implementation of the Agreement, for its joint administration and for resolution of disputes; and (d) establishing framework for further regional cooperation to expand and enhance mutual benefits of the Agreement.

SAFTA adopted following six principles which would guide implementation of the Agreement: (a) SAFTA will be governed by the provisions of the Agreement and also by the rules, regulations, decisions, understandings and protocols to be agreed upon by the contracting states; (b) The contracting states affirm their existing rights and obligations with respect to each other under the 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 advantages in such a way as to ensure equitable benefit to all contracting states, taking into account their respective levels of economic and industrial development and the pattern of their external trade and tariff policies and systems; (d) SAFTA shall involve free movements of goods between countries through, inter alia, elimination of tariffs, para tariffs and non-tariff restrictions on movement of goods, and any other equivalent measures; (e) SAFTA shall entail adoption of trade facilitation and other measures, and the progressive harmonisation of legislations by the contracting states in relevant areas; and (f) The special needs of the Least Developed Contracting States shall be clearly recognised by adopting concrete preferential measures in their favour on a non-reciprocal basis.

The SAFTA accord envisions a free trade area leading eventually to an economic union in the region. SAFTA was to be implemented through (a) Trade Liberalisation Plan (TLP), (b) Rules of Origin and (c) Mechanism for revenue compensation.

The TLP envisages preparation of a (i) negative (sometimes described as sensitive) list of items for which duties will not be reduced, (ii) a positive list of items for which duties will be reduced to 0-5 per cent (by 2013 for developing countries and by 2016 for the 4 LDCs); and (iii) a residual list for which tariff reduction will be decided based on consultation.

For preparation of the negative list, the key issue to be considered entailed balancing the short, medium and long term interests of a country. During the process of negotiations, a number of factors reflecting conflicting interests and concerns of member-states had to be taken into cognisance. These included (a) revenue loss consideration, (b) protection of key domestic industries, (c) avoiding trade diversion, (d) interest of farm sector and import-substituting industries, (e) consumer interests and (f) stages of production of tradable items.

Translating SAFTA’s vision into reality has proved to be a difficult task though. Analytical research on efficacy of SAFTA tends to confirm the view that SAFTA has not been able to realise its ambition of deepening regional economic cooperation and integration to any significant extent. To recall, the trade conditions between India and Pakistan are yet to align with the SAFTA provisions. SAFTA is still primarily limited to trade liberalisation and has not led to any substantial increase in the volume of trade. Intra-regional trade remains at about 6 per cent of global trade of SAARC countries. However, in a welcome move, in 2011, India had offered duty-free, quota-free market access to all four LDCs of SAARC (Bangladesh, Bhutan, Nepal and Afghanistan) for all items (excepting 25 that include arms, liqour, drugs etc.). This has allowed the LDCs to reap some benefit. Bangladesh’s export to India has risen notably in recent past and crossed US$1.25 billion. However, the bilateral trade deficit remains very high, at about US$7.0 billion. Much more needs to be done though triangulation of trade, investment and transport connectivities if SAFTA’s potentials are to be realised. Deepening of sub-regional cooperation through transport linkages such as BBIN-Motor vehicle Agreement could serve as a building bloc towards a more economically integrated South Asia in the image of the SAFTA. The move towards Free Trade Area needs to be complemented by initiatives to promote cooperation in the areas of intra-regional investment, removal of all types of NTBs, promoting customs and trade facilitation, and closer cooperation in the areas of trade related capacity building. In 1997 the SAARC leaders, at the Ninth Summit in Male, set up a Group of Eminent Persons (GEP) which was mandated to prepare a Vision document for the SAARC. The GEP report articulated the aspiration of establishing an Economic Union (a la the European Union) by 2020. SAARC countries have not only failed to attain this lofty target, but remain far from attaining it. Much more will need to be done if such an ambitious target is to be realised. However, this remains primarily in the domain of politics and political economy, although realising the goals of SAFTA could contribute to attaining the vision at some point in time in near future. [AMM Shawkat Ali]

References Ahmed, S. (2021). Promoting Bangladesh Development Through Regional Cooperation in Bangladesh Foreign Policypaedia Volume titled 'Bangladesh Economy in an Evolving Regional and Global Context'. Professor Mustafizur Rahman (ed.), Dhaka, FES Bangladesh Office and CGS, University of Dhaka. [Forthcoming]; Raihan, S. (2021). Sustaining South Asia’s Regional Integration Process in Bangladesh Foreign Policypaedia Volume titled 'Bangladesh Economy in an Evolving Regional and Global Context'. Professor Mustafizur Rahman (ed.), Dhaka, FES Bangladesh Office and CGS, University of Dhaka. [Forthcoming]