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SAFTA: A First Step towards South Asian Economic Union?

Free trade areas (FTAs) are often compared to flying geese that make cooperative efforts to reach a desirable destination. Yet, a FTA is the basic step towards a greater economic interaction and integration among countries usually situated in a given geographical region. Customs Union is at the next level where the region as a whole has a common external trade policy with non-members. Then it progresses to a Common Market that allows free movement of goods, labour and capital across borders, but within the region. And at the highest level of integration comes the Monetary Union where the region as a whole has a common currency and monetary policy. Where does South Asia figure? Is the South Asian Free Trade Agreement (SAFTA) a first step in achieving full economic union in South Asia? What are the challenges involved?

South Asia is the most populous region in the world, housing 23 per cent of the world's population. Once fully operational, the SAFTA should be the largest FTA. Signed on 6 January 2004 at the Islamabad Summit and scheduled to come into force on 1 January 2006, it is aimed at promoting and enhancing "mutual trade and economic cooperation" among SAARC countries. The member states are divided into least developed countries (LDCs) (Bangladesh, Bhutan, Maldives and Nepal) and Non-LDCs (India, Pakistan and Sri Lanka). The SAFTA envisages tariff reduction to 0-5 per cent in two instalments. While NLDCs are required to reduce existing tariffs to 20 per cent in two years from the date of entry into force of the agreement, the LDCs will bring down the tariff level to 30 per cent during the same time frame. In the second instalment, the NLDCs will take another five years (except Sri Lanka, which has six years) to dismantle the tariff to 0-5 per cent, while the LDCs will have eight years for the same purpose. Therefore, the SAFTA will be fully operational only in 2016. This mandatory tariff reduction, however, is not applicable to products under the 'Sensitive List', which comes under review not more than every four years.

With this, economic interaction in South Asia switches over from SAPTA (SAARC Preferential Trading Arrangement) to SAFTA. SAPTA's record in a decade of its operation is not encouraging as it could not take the intra-regional trade beyond four per cent ($7 bn) of the total regional trade. Optimistically viewed, however, before the formation of FTA in ASEAN the intra-regional trade was only seven per cent from the present figure of 49 per cent; NAFTA could boost its intra-regional trade to 44 per cent and the EU to 67 per cent. The SAFTA is expected to reach this level; but the anticipation looks ambitious given numerous challenges.

One of the primary hurdles in realizing a FTA and moving beyond is irritants in bilateral relations of the countries of the region. At times it becomes difficult even for the leaders to meet annually at the summit level owing to bilateral tensions. SAARC has been especially hostage to "love-hate relations" between India and Pakistan; and the shadow of suspicions spill over to economic arena. Pakistan is yet to ratify the SAFTA; it has already enlisted 1,880 items under sensitive list as against India's 884. The long sensitive list declared by all countries raise the issue not addressed so far, whether the countries are really serious about free trade at all. Hopefully, the successful operation of the SAFTA would not only increase people-to-people contacts, but would also boost economic dependency among countries eventually minimizing conflict situations.

Yet another major issue is the very potential of the region in increasing intra-regional trade. Nearly two-thirds of the world's poor live in South Asia, and there are wide income disparities within and between the countries of the region. Purchasing power of the people is low as over 600 million still live under a dollar a day. But the preferential treatment to LDCs in the form of an extended timeframe and compensation mechanisms would go a long way in boosting the trade and in turn the economies of the LDCs.

Another concern that arises is the issue of 'trade creation'. Economists like Jagdish Bhagwati argue that a FTA in South Asia, due to its inherent characteristic of 'trade diversion' instead of 'trade creation', would in the long run hamper liberalization of trade at the global level. Therefore, there is a need to concentrate in 'trade creation', apart from increasing overall quality of goods to global standards. In this regard, what is required on priority basis is infrastructure linking all the countries to facilitate easy flow of goods and making South Asia as transit point between East and the West. Cooperation in energy sector is highly promising. In the long run, the SAFTA has to include provisions for trade in services and investments. This would increase the degree of complementarity in trade. On the whole, the SAFTA is promising in taking SAARC - still in infancy compared to other arrangements - to new heights and in the process passing on the benefits to its inhabitants. But, realising the status of an Economic Union is a distant dream.