The future of free trade in South Asia

The Free Trade Agreement (FTA) is the state of the art of the present trading world. It has come to the forefront as the WTO has taken a back seat. The quest for bilateralism and regionalism has gained additional momentum with the comment of the senior US Trade Representative Robert Zoellick soon after the collapse in WTO negotiations in Cancun in 2003: "The United States will favour bilateral and regional trade deals with individual blocs or countries, instead of the multilateral accords bartered with all the WTO's 146 (now 147) members."

The US has already signed a FTA with Singapore and is on the verge of FTA discussions with Thailand. Besides, the US has signed a Trade and Investment Framework Agreement (TIFA) with Malaysia, Indonesia, the Philippines, and Brunei. Free Trade Bloc of American Hemisphere involving 34 nations is also on the cards. 2005 has been set as the deadline for the FTA of the Americas agreement to create the world's largest free trade area, with a market of some 800 million people and $3.5 trillion in trade annually.

The Latin American trade bloc Mercosur, involving Argentina, Brazil, Uruguay, and Paraguay, with Chile and Bolivia as associate members, and NAFTA, involving the US, Canada, and Mexico, are functioning effectively. The Association of Southeast Asian Nations (ASEAN) involving Brunei, Malaysia, Indonesia, the Philippines, Singapore, Thailand, Cambodia, Myanmar, Laos, and Vietnam with 530 million people and annual trade worth $800 billion, and the expanded European Union (EU) involving 25 European countries with 450 million people and trade of over $2 trillion annually are also advancing properly. ASEAN will reach full-scale FTA by 2010 and has targeted entering into FTA with China by 2010, with India by 2011, and with Japan by 2012. All are set to launch free trade talks with South Korea, Australia, and New Zealand. They are preparing a road map to create a European-style single market by 2020.

India is the only SAARC member which has so far made trade allies outside the SAARC region. Besides its on-going FTA negotiations with ASEAN, India recently signed a framework agreement with Mercosur to pave the way for FTA. A similar process is going on with some Central Asian, Middle East, and African countries. India has signed FTA with another SAARC member Sri Lanka on a large number of items. Pakistan has started FTA negotiations with Malaysia recently,

BIMSTEC was initiated in 1997 and now comprises seven countries: the four original members, Bangladesh, India, Sri Lanka, and Thailand and three new ones, Myanmar, Nepal, and Bhutan. It is now holding FTA talks under the framework agreement signed at the 6th BIMSTEC ministerial meeting held in February 2004. Having a combined population of 1.3 billion people, the trade volume within the group is only 4 per cent of the group's total transnational trade, amounting to about $250 billion. Under the framework agreement, it was agreed that the three developing countries of India, Sri Lanka, and Thailand would cut import tariffs on products on a "fast track" list to zero no later than June 30, 2009, while the four LDCs would do the same in 2011.

With this backdrop, it is felt that trade cooperation status in the SAARC region should be elevated. Thus in the 12th SAARC Summit in Islamabad in January 2004, the South Asian Free Trade Agreement (SAFTA) was signed with a view to bolster mutual trade and economic cooperation. The agreement will come into effect from January 1, 2006 through notification from the SAARC Secretariat after the ratification by the member countries and completion of some procedural issues. As SAARC, we have to accelerate economic integration for grabbing opportunities and exploring potentialities therein. How we can achieve this needed economic integration? Is it through SAFTA? Maybe SAFTA provides opportunities, but at the same time it poses challenges. The question is does Bangladesh have the ability to face the challenges of SAFTA?

Before talking about SAFTA, let us take a look at the South Asian Preferential Trading Arrangement (SAPTA) that was signed in 1993 and came into effect in 1995, a decade after the formation of SAARC. Bangladesh was sincere in implementing the agreement by abruptly and drastically reducing the import tariffs and waiving restrictions on imports in the early nineties. This charity was not reciprocated. Rather, new non-tariff barriers (NTBs) and quantitative restrictions (QRs) have been imposed on our products such as batteries, garments, tableware, etc. According to SAPTA, 40 per cent local value addition was needed to get preferential market access, which was next to impossible for Bangladesh and the other LDCs of SAARC. After long bargaining, the share of local value addition needed for preferential access was reduced to 30 per cent in 1999. However, things have not improved much.

In the first round of concessions under SAPTA, the member countries offered tariff concessions ranging from 7.5 per cent to 100 per cent on a total of 226 items. In the second round, about 1900 items, and in the third round about 5200 items were negotiated for tariff concession. Non-tariff barriers on 180 items have been removed. But these concessions remain ineffective, as intra-SAARC trade is not increased. In the fourth round, concerned authorities found out the flaws of inaction and promised to take remedial measures. At present, the member states are at bilateral and group negotiations to finalize the negative lists for FTA. The stated reasons for this bleak picture may be the asymmetry in the relative size of the member economies, lack of complementarities in their production structure, and varying degrees of openness in these economies. However, the unstated reason is definitely mistrust -- and that goes both vertically and horizontally.

Let us also have a look about the trends of intra-SAARC trade. According to IMF report, intra-SAARC import was 1.9 per cent of total SAARC imports in 1985; it was 1.8 per cent in 1990, 3.7 per cent in 1996, and 3.9 per cent in 2001. Again, intra-SAARC export was 4.5 per cent of total SAARC exports in 1985; it was 3.1 per cent in 1990, 4 per cent in 1996, and 4.2 per cent in 2001.

Bangladesh accounted for 7.1 per cent of the total intra-SAARC exports in 1990. It came down to 2.8 per cent in 1996, and further declined to 2.6 per cent in 2001. In contrast, the share of Bangladesh in intra-SAARC imports was 35.8 per cent in 1990, 51 per cent in 1996, and 49.8 per cent in 2001.

In comparison, India's share of intra-SAARC exports is about 80 per cent for the last one decade and Pakistan's share is about 12 per cent.

India's share of intra-SAARC imports has been gradually declined and reached at 6 per cent in 2001. The same goes for Pakistan also and it reached 12 per cent of intra-SAARC imports in 2001.

Intra-regional trade has been rallying 3.5 per cent to 4 per cent of the total regional trade since the formation of SAPTA.

Interestingly, without any mentionable progress on economic cooperation through SAPTA, the member countries agreed on the formation of SAFTA in 1995 and set 2005 deadline to give it final shape. In 1997, the date for achieving SAFTA was brought forward to 2001, but was later postponed indefinitely due to the Kargil war. Maybe the urge towards forging SAFTA came partly from the fact that South Asia had been largely by-passed by the recent rapid growth of world trade including in neighbouring ASEAN countries. Either way, SAFTA was signed with a goal to implement trade liberalization programs, institutional arrangements, consultation and dispute settlement procedures, safeguard measures, and other trade issues agreeable to all. The agreement allows the four LDCs of the group ten years to reduce import tariff to 5 per cent or below while the other three developing countries will reduce their import tariff to 5 per cent or below for the four LDCs' products within three years of the implementation of the agreement.

In the decision making process, the issues of trade creation and diversion should be counted mainly by the weaker economies. Trade creation negatively affects local production and employment as demand is shifted from higher-cost local production to lower-cost PTA or FTA member countries. However, it affects consumers positively as they get goods with lower price. Again, the trade diversion negatively affects the welfare of the importing country. Therefore, the net benefit of the trading arrangement would depend on the trade-off between the trade creation and trade diversion effects. This will in turn depend on the initial conditions, resource endowments, production structures, structure of exports, export-import complementarities, competitive strength, and relative comparative advantage.

It is observed from the growth process of other regional trading blocs that intensification of regional integration is often accompanied by growing intra-regional trade. Intra-regional trade was only 7 per cent in the ASEAN region before grouping, but it shot up to 43 per cent in 1995 and to 49 per cent in 2003. In NAFTA it was only 12 per cent before grouping, but was 44 per cent in 2003, and in EU, it was 23 per cent in the early eighties and 67 per cent in 2003.

It may be hypothetically true that after the formation of SAFTA, intra-regional trade will be increased significantly. However, will it be true for Bangladesh's export? History does bode well on this count. NTBs, QRs and hassles at customs points have jeopardized a few positive approaches. The very limited trade complementarities should be dealt with thoroughly, as most of the member countries have comparative advantages on similar products like textile materials and products, leather and leather products, agricultural products, fresh fish, etc.

Political divisions and lack of confidence and conflicts amongst the SAARC member countries should be resolved to gear up meaningful economic cooperation. Above all, unilateral free trade facilities to LDCs by SAARC stronger economies and cooperation in the area of investment, technology transfer, technical assistance, and trade promotion of the LDCs should be taken immediately to level up the current inequalities. Once greater equality and equilibrium is established, SAFTA would be the immediate means to strengthen regional trade cooperation.

The author is a freelance contributor to The Daily Star.