SAFTA: Overlooked Barriers; Underrated Benefits

Diplomatist, December 16, 2011

By Joseph George

The fact that South Asian countries are importing many products from outside the region although regional trading partners are relatively more price competitive, also indicates the existence of numerous non-tariff barriers. As noted by many research studies, intra-regional trade costs because of poor connectivity and transport infrastructure, costly customs procedures and absence of adequate trade finance is very high in South Asia

Among the growing number of Preferential Trade Agreements in operation across the globe, SAFTA has so far remained relatively unsuccessful in bringing about any significant improvement in intra-regional trade. As a result, a growing sense of pessimism is shrouding the real potential of the Agreement. A closer look at the prospects of SAFTA would reveal immense amount of underrated benefits that can be realised, provided certain mendable shortcomings in the traditional approach of its members towards regional trade are rectified.

The Positive Cycle of Trade

Rapid growth in world trade during the past two decades has been achieved, not only by reduction in trade restrictions, but also by the transformation of production patterns and processes. The current global trend of specialisation and fragmentation of production processes is the cause of competitiveness of both firms and countries and the result of access to efficient, reliable and low cost supply chains. Transport and other supply chain costs have been significantly reduced because of scale economies benefiting from the growth of trade. This has further inspired more trade and commerce.

This circular link is missing in South Asia, as SAFTA members are still grappling with preferential market access issues in goods trade and are yet to embark on services trade liberalisation and other complimenting trade policy reforms. Potential of SAFTA to contribute towards economic growth and development in the region is hidden by the Agreement’s inability to generate actual trade preferences sufficient enough to reach a minimum sustainable level of intra-regional trade flows, which would then kick-start a positive cycle of trade leading to more trade.

Scaling Down Sensitive Lists

A source to search for a change in this scenario is the sensitive lists of SAFTA members, containing products kept out of bounds of the Tariff Liberalisation Programme under the Agreement. At the time of commencement of preferential tariff reductions under SAFTA in 2006, all the major five member countries kept 15 to 25 percent of total product lines (at HS Code 6-digit level) out of bounds under their respective sensitive lists. Since then only marginal reduction in the lists has been achieved. While India brought down its lists for LDCs from 744 to 484 product lines, the list for non-LDCs has remained the same, at around 860 product lines. Bangladesh, Nepal, Pakistan and Sri Lanka still retain more than 1000 product categories in their lists, with a hitherto unaccomplished commitment to remove 20 percent each.

However, it is not the sheer number of products in the list of exclusion which deserves attention here, but the critical importance of many such products for regional trade. When member countries are allowed to choose sectors that can be excluded from tariff preferences under a PTA, they would face pressure from domestic constituencies to exclude products in which they may not be able to withstand competition from the PTA partners. Thus product categories with high regional trade potential usually find their place in negative lists. That this factor has played its part in the SAFTA case has been verified by the results of an on-going research project entitled ‘Cost of Economic Non-cooperation to Consumers in South Asia’, undertaken by Consumer Unity and Trust Society (CUTS) with the support of the Asia Foundation.

Balancing Consumer Welfare and Producer Gains

It is often forgotten that benefit from trade has two streams – gains to producers and gains to consumers – which are essentially inseparable. Though it is said about trade that the best amongst producers in each traded sector will capture the market by outcompeting inefficient competitors and earn their right to sell, it necessarily also means that buyers get to choose from the best quality products at the lowest possible prices. But consumer welfare effects of trade are often neglected as consumers’ savings out of cheaper imports are not as visible as producers’ export earnings. Moreover, import is often viewed with discontent owing to the uncertainty it poses on the survival of domestic industries.

In reality, reciprocity forms the fundamental basis of trade negotiations, and trade agreements cannot function without exchange of import allowances for export opportunities. Import relaxations are an integral part of the trade liberalisation process and underscore the essential fact that producer welfare can only coexist with consumer welfare.

Assessment of consumer welfare gains from trade liberalisation has hardly been subjected to thorough research in the context of SAFTA. The CUTS study took into account those products included in the sensitive lists of five major SAFTA members (Bangladesh, India, Nepal, Pakistan and Sri Lanka), which currently rank high in their respective import baskets in terms of share in total import volume and estimated savings to consumers if regional trade preferences were applied to them. A combined total of 355 such product categories with very high regional trade potential have been identified. The study revealed that intra-regional trade at reduced tariffs in these products would amount to about 31 percent cut on their current import bills, which translates to annual savings of $1948.15 million for South Asian buyers. This scenario also means an absolute increase of about 50 percent in intra-regional trade volume.

A Change in Attitude

South Asian countries have shifted to more outward looking policies in 1990s, including freeing private sector involvement in business and trade. However, remnants from the previous economic policy approaches still remain. Export promotion has emerged as a key component of growth strategies for most governments in the region, but there are traces of mercantilist attitude – increasing exports and restricting imports. A change in this attitude is imperative to push the tariff liberalisation agenda forward, without which deeper economic integration will remain unattainable. The first step towards this is to realise the importance of granting import concessions on a reciprocal basis, not only just as a policy tool to gain export markets, but also as a significant source of economic benefits on its own.

The CUTS study has also shown that regional trade can be boosted with minimal risks to import competing sectors by selecting product categories diligently. The fact that at least one South Asian partner country has revealed comparative advantage in terms of its current export performance in the global markets in selected products lessens the probability of negative trade diversion effects. A combination of preferential tariff rates below MFN and reduced transportation costs because of geographical proximity would work together to ensure replacement of imports from the rest of the world with cheaper imports from within the region in many product categories.

Furthermore, the figures for consumer welfare gains generated under the CUTS study only show the effects of change in import price with fixed quantity of imports. But the initial changes in import prices owing to preferential trade is only a starting point which would thereafter trigger a host of other factors into action like reduction of domestic prices owing to import competition, with a combined effect of increasing consumer welfare gains several times the current estimates.

Trade Policy Reforms

The fact that South Asian countries are importing many products from outside the region although regional trading partners are relatively more price competitive, also indicates the existence of numerous non-tariff barriers. As noted by many research studies, intra-regional trade costs because of poor connectivity and transport infrastructure, costly customs procedures and absence of adequate trade finance is very high in South Asia.

There is a dire need of trade policy reforms at the regional level to improve this situation, which cannot occur without actual increase in trade volume between South Asian countries. As trade volume increases, it would naturally fuel growth of the trade relationship, resulting in better trade facilitation measures, procedural ease and economies of scale in the transport sector, better returns and rents from investments in trade infrastructure and additional incentives for private enterprises to explore regional markets. Subsequently, substantial cuts in trade costs can surely be expected along with ensuing benefits.

(The writer is a Research Associate at Consumer Unity & Trust Society (CUTS International), Jaipur)

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