Rajesh Mehta

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Rajesh Mehta Senior Fellow RIS, New Delhi rajeshmehta@ris.org.in    13 September, 2006 THE SOUTH ASIAN FREE TRADE AGREEMENT (SAFTA)  at 8th Annual Conference of the Economic Freedom Network Asia on PREFERENTIAL TRADING AGREEMENTS: LOCAL SOLUTIONS FOR GLOBAL FREE TRADE? 12-13 September, 2006 Kuala Lumpur, Malaysia

OUTLINE : 

OUTLINE BACKGROUND SAFTA FRAMEWORK SPECIAL ISSUES OF NEGOTIATIONS MFN  STATUS: INDIA – PAK TRADE WAY  FORWARD

I.  BACKGROUND : 

I.  BACKGROUND

SAARC Formed in ’80s Member Countries: : 

SAARC Formed in ’80s  Member Countries: Bangladesh  Bhutan  India  Maldives  Nepal  Pakistan  Sri Lanka Now: Afghanistan : Dialogue Partner

Map of SAARC Countries : 

Map of SAARC Countries

SOUTH ASIAN FREE TRADE AGREEMENT (SAPTA) : 

SOUTH ASIAN FREE TRADE AGREEMENT (SAPTA) Four Rounds of SAPTA Completed     - SAPTA started in 1993, launched in 1995 Adopted Positive List Approach for Tariff Reduction – Product-by-Product Approach: No serious attempt to take products which were intensely traded.

After SAPTA: Trade Overtime: 

After SAPTA: Trade Overtime Intra-Regional Trade increasing overtime Present Level of Inter-SAARC (official + unofficial) Trade: 7 Bill  

Intra-SAARC Trade (As % of Total Import of SAARC Countries): 

Intra-SAARC Trade (As % of Total Import of SAARC Countries)

SAFTA: Possible Impact on Trade : 

SAFTA: Possible Impact on Trade Studies show that Intra-SAARC trade will significantly increase with formation of SAFTA Increase noticed in all member countries Small countries to gain more

SAFTA Framework Ratified and formally launched on July 1, 2006 : 

SAFTA Framework Ratified and formally launched on July 1, 2006 Main Features: SAFTA may, inter-alia, consist of arrangements relating to: a. tariffs; b. para-tariffs; c. non-tariff measures; and d.  Direct trade measures. 

Tariff Reduction Schedule : 

Tariff Reduction Schedule Member countries to cut the customs tariffs to levels between zero and five percent over the next seven to twelve year. While the relatively developed countries like India and Pakistan are required to cut their tariff to these levels by 2013 and Sri Lanka by 2014, the least developed countries (LDCs) are required to cut these tariffs by 2016 years in a phased manner.

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NEGATIVE LISTS : 

NEGATIVE LISTS  Bhutan, Maldives, Nepal andamp; Sri Lanka – Same list for LDCs andamp; Non-LDCs Nepal: LDC andgt; Non-LDCs A large no. of TLs subject to Negative list, Final tariff 0-5%, and not 0%, for all commodities

NEGATIVE LIST-INDIA : 

NEGATIVE LIST-INDIA With respect of sensitive list, India has kept 884 tariff lines for non-LDCs and 763 for LDCs. India’s Sensitive Lists include mainly goods from agriculture sector, textile sector, chemicals andamp; leathers and sectors reserved for small-scale industries. On the market access to Bangladesh, a limited market access through Tariff Rate Quota (TRQ) has also been finalised for fertiliser sector. It has been decided to accord 6 million pieces of fabrics with the condition that sourcing of fabrics should be either from India or of Bangladesh origin. Also, TRQ of 2 million pieces without any conditions of sourcing of fabrics has been agreed.

R.O.O: 

R.O.O In the area of rules of origin, change of tariff heading (CTH) at four-digit HS has been agreed upon along with domestic value content of 40% for non-LDCs and 30% for LDCs. Product Specific Rules (PSR) for 191 tariff lines on technical grounds where both inputs and outputs are on the same four-digit HS level have also been agreed. Domestic Value Addition of 25% to 40%, 6-digit change in Tariff Heading.

SPECIAL ISSUES OF NEGOTIATIONS: 

SPECIAL ISSUES OF NEGOTIATIONS

Mechanism for Compensation of Revenue to LDCs : 

Mechanism for Compensation of Revenue to LDCs  Available to Non - Maldives LDCs for Four Years To Maldives for Six Years Compensation will be Subject to Cap of 1%, 1%, 5% and 3%. Custom Revenue collected on Non-Sensitive Items under Bilateral Trade in the Base Year

Technical Assistance in Areas to LDCs : 

Technical Assistance in Areas to LDCs  Capacity building in standards Product certification Training of human resources Data management Custom procedures and trade facilitation Market development and promotion etc.

MFN  STATUS: INDIA – PAK TRADE: 

MFN  STATUS: INDIA – PAK TRADE

Given the political frictions, Pakistan has refused to give India the MFN (Most Favoured Nation) status and decided to deal with SAFTA and importable items list from India separately. Pakistan will continue to allow imports only of 737 (out of around 5200) tariff lines from India.: 

Given the political frictions, Pakistan has refused to give India the MFN (Most Favoured Nation) status and decided to deal with SAFTA and importable items list from India separately. Pakistan will continue to allow imports only of 737 (out of around 5200) tariff lines from India.

Pak Positive Line Approach for India : 

Pak Positive Line Approach for India  India’s challenge: Pakistan can not ban India’s import of around 4500 lines – it is not in spirit of SAFTA framework. Dispute settlement mechanism not finalized. India raising this issue in different forums of SAARC/SAFTA. Pakistan says that the number of lines in negative list of India for Non-LDCs is large. India imposes a large number of non-tariff barriers.

WAY  FORWARD: 

WAY  FORWARD

From Free Trade to Monetary Union  : 

From Free Trade to Monetary Union  Custom Unions Common External Tariff Common Market Free movement of factors of production Economic Union Macroeconomic policy coordination  Monetary Union Common currency Number of studies have been conducted to analyze the benefits and challenges of above-mentioned SAARC arrangements

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IBSA Trilateral Arrangement : 

IBSA Trilateral Arrangement  Negotiations are going on for formation of India – Brazil – South Africa Agreement Since Brazil and South Africa have common external tariffs with other Member countries of MERCOSUR and SACU, respectively. TECHnically, arrangement can only be in the form of India – MERCOSUR – SACU India is suggesting that the arrangement can be extented to SAFTA – MERCOSUR – SACU

SUMMARY AND CONCLUDING REMARKS : 

SUMMARY AND CONCLUDING REMARKS

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Intra-Regional Trade has immense potential after the formation of SAFTA. In fact Intra-SAARC trade as a percentage of total imports (or exports) of SAARC countries has shown increasing trend after formation of SAPTA. SAFTA provides a long phase out plan (0 - 5%) of seven years by non-LDCs, and ten years by LDCs. Phase out plans of bilateral/regional arrangements has been faster, and leading to 0 % tariff. Most of the Members have given long negative lists. This may pre-empt large volume of intra-regional trade under SAFTA.

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No concrete instruments have been defined to phase out non-tariff and other barriers in time bound manner. Unique element of SAFTA: provides mechanism to compensate the LDCs for their loss in custom revenues. Non compliance of MFN principle by Pakistan in respect of its imports from India: Most sever limitations of SAFTA Agreement. For deeper integration: time schedule should be advanced; negative list should be reduced; R.O.O should not be stringent, etc.

Thank You: 

Thank You