"The success depends on how member countries remove fears of disproportionate advantage by bigger countries"

SAFTA, as a free trade area where trading is possible in a tariff-free environment, has finally come into force from January 1, 2006 simultaneously in all the SAARC member countries. There were several hurdles in finalising the draft SAFTA accord. Many countries wanted to finalise the treaty only after a detailed study of the implications of setting up a free trade area.

There still exist loose ends in most of the agreed instruments. As the region has three distinct economies such as the developing, least developed and landlocked least developed, many people suspect that the comparative advantage in the production of the goods and varying degree of opportunity cost involved in the institutional and physical facilities, the bigger and better economies may make regional integration asymmetric. For example, India’s total trade with SAARC countries had increased over 8 per cent to $ 5.2 billion in 2004-05, and benefit is expected to keep multiplying in the next 10 years after the implementation of the agreement. However, for the entire region also, as the Indian prime minister observed, SAFTA implementation would raise the current level of intra-regional trade from $6 billion to $14 billion annually.

The provisions in the agreement are generally based on standard international practices. SAFTA treaty is technically compatible with WTO rules. The major concern is the country-specific grudges to fully realise the agreed provisions in the treaty. It is feared that implementation will not be that smooth. Islamabad is yet to offer the most-favoured-nation status to India, a status that Pakistan agreed at a time when it became the WTO member. Bangladesh has shown its concern that even being the closest neighbour and member of SAARC, India has not shown any interest in providing Bangladesh with duty free market access facility before the four LDCs, from ASEAN.

After the renewal of Nepal-India Trade Treaty in 2002, the two countries still experience unusual difficulties in fully implementing bilateral free trade agreements. Nepal considers Sri Lanka, the latecomer in bilateral treaty with India, has been relatively better placed in sharply increasing trade volume with India vis-a-vis Nepal. The success of implementation depends greatly on how the member countries remove the fears of disproportionate advantage by bigger countries by at least developing skills to pursue aggressive negotiations on bilateral free trade deals and last but not the least, the standoff between India and Pakistan.

Under Article 7 of SAFTA, the trade liberalisation proposes a phased tariff liberalisation programme from the date of its coming into force. In the initial phase the LDCs will bring down the tariffs to 30 per cent as against 20 per cent for the non-LDCs within first two years and 0-5 per cent in eight years. The non-LDCs are supposed to bring it down in five years with one-year grace period for Sri Lanka. Too much emphasis has been given to revenue loss through tariff reduction without giving much importance to other important factors and methods for market access under trade liberalisation regime. Under the revenue compensatory mechanism, developing countries have agreed to compensate in US dollars the total loss incurred by the LDCs from the reduction of tariff for the period beginning 2006 through 2009.

A careful policy planning and restoration of peace can provide enough opportunity to Nepal to absorb the shock from revenue loss. In the FY 2004, customs contribution was Rs. 16.60 billion. It is merely 17 per cent in the total revenue of Rs. 71 billion. Further reduction can be compensated through various other sources including the non-tax revenues. The average tariff at the moment is about 8.4 per cent, one of the lowest in the region. At the macro level, the overall strategy should be to establish link between the costs of compliance created by bilateral and multilateral agreements and desired rate of growth through sound macroeconomic policy.

In 2002, when China became more liberal, her trade-to-GDP ratio reached to 75 per cent. However, it remains at only 33 per cent for South Asia. The problem of LDCs and Nepal is the negligence of pursuing trade facilitation measures by focusing on the growth-induced trade expansion by linking trade expansion with industrial expansion. We still lack serious study in the region to understand each other’s constraints. Homework to implement SAFTA agreement should be linked up with several other critical issues by quantifying technical and financial requirements; exploring the possibility of integrating with other regional trade arrangement (RTA) and estimating the impact of SAFTA on FDI.

Nepal needs to increase resources and capability to take benefit from the existing provisions through negotiations. This is possible through the public-private partnership. The government should therefore find out what aspects of SAFTA would the private sector like to see focused on?

Prof. Pyakuryal is president, Nepal

Economic Association