The Hindu Business Line : SAARC initiative on free trade

In its essence, a free trade area means trading in a tariff-free environment, which should normally lead to a sharp increase in trade volume and value with the most efficient manufacturers of select products in the "area" raking in the maximum profits. There is no reason why this situation should not be replicated among the SAARC countries, the only snag being that since the member-countries are not equally strong, economically speaking, the stronger among the grouping will reap a larger harvest compared to the weaker set.

A Pakistani woman changes money with an RBI official... There is no reason why a free trade area cannot be created among the SAARC nations.

IT IS easy to agree with the view that the South Asia Free Trade Area (SAFTA) initiative taken at the Islamabad summit of the South Asian Association for Regional Cooperation is a "historic step," not only for the SAARC group per se but also for South Asia as a geographical entity.

There is no reason why this situation should not be replicated among the SAARC countries, the only snag being that since the member-countries are not equally strong, economically speaking, the stronger among the grouping will reap a larger harvest compared to the weaker set, among whom figure Bangladesh, Nepal, Bhutan and the Maldives.

In fact, this is precisely why all earlier efforts to finalise a draft SAFTA treaty (a preliminary draft was prepared by the SAARC secretariat in 2000) did not meet with success. Indeed, the first deadline for finalising a treaty was set for December 2001, and the second for December 2002.

No headway was made by the various committees working on the treaty under the SAARC negotiating process for reasons which are well-known now.

To take last year's abortive effort, among the issues which were holding up an agreement were differences on such subjects as reduction and gradual revocation of tariff and non-tariff barriers, technical assistance and "flexibility to...the least-developed members (of the group), allowing them to enlist a higher number of `negative products'."

This apart, there was the issue of setting up an appropriate revenue compensatory mechanism, a subject which — according to one official — had been "strongly raised by Bangladesh and supported by Nepal as Customs is a major source of revenue in the country."

It was perceived at the time that the differences on such issues as the transition period to a SAFTA system and on the approach to be adopted regarding reduction in tariff and non-tariff measures were growing, which in effect indicated that, instead of the problems in the way of SAFTA being resolved quickly, the road ahead was turning out to be a long and tortuous one indeed.

Such were the differences among the developed and least-developed countries under the SAARC umbrella that, at the third meeting of the Committee on Experts set up to deliberate on the SAFTA draft, Bangladesh had placed its own draft treaty framework.

Given the momentous step that has been taken at Islamabad, it is of some interest to note that the experts' committee discussed the Dhaka draft "at length and decided to incorporate some of its provisions in the main draft".

There is one view which holds that the SAFTA treaty, which is to become effective from January 2006, has been rushed through, which may not augur well for its future implementation.

Just a year ago, there were reports that a number of SAARC member-countries had voiced the need for the SAFTA treaty to be finalised only after a detailed study of the implications of the setting up of a free trade area had been carried out.

In fact, the SAARC secretariat had appointed the Sri Lanka-based Institute for Policy Studies to study the implications for SAARC members of transformation to a SAFTA regime from the existing preferential trade arrangement (SAPTA).

The Institute had been asked to submit the report by March this year, which merely underscores the fact that the effort to finalise a SAFTA treaty by the end of last year was unrealistic as well as improper because of the absence of reliable data.

In fact, even now, when SAFTA has been accepted by the SAARC members, there are many loose ends to be tied, such as the rules of origin and product coverage issues, which promise to be hard nuts to crack because of their close involvement with the national economies of member countries.

So what led Dhaka to agree to finalisation of a treaty when it is clear that the nuts and bolts of a free trade area are yet to tightened? Certainly, an important factor was the concession made by the developing members of the group, especially the host, Pakistan, which — after refusing to go along with India to make concessions to the LDC members citing the argument that it was weaker economy — in a surprise move agreed on January 2 "to the idea of positive discrimination for the LDCs and a deferred schedule for the implementation of SAFTA". The lurking suspicion therefore is that, being the host nation, Pakistan has contrived the "success" on SAFTA to gain political marks, probably being least bothered by the poor prospects of the treaty being implemented effectively (even after two years).

For New Delhi, the acceptance of the SAFTA treaty has served the purpose of retaining the focus of the Islamabad summit on economic issues, although it too is perhaps aware of the fact that true implementation (which will be immense help to Indian industry) is probably light years away.

Indeed, it is not only the LDCs in the SAARC flock which, by virtue of their economic position, could put the brakes on effective implementation of the SAFTA treaty. Pakistan itself will most probably play the role of a spoilsport using the argument that open trading borders with a country like India would swamp its manufacturing industries.

After all, Islamabad is yet to offer the most-favoured-nation status to India, a status which Pakistan had agreed to at the time it became a member of the WTO. A free-trade area would automatically mean extending the best trading terms to SAARC members (which would include India), which is why it is to be expected that Islamabad will create problems later in the implementation of the free-trade treaty.

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