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New dawn for South Asian
trade
By Nadeem Malik
ISLAMABAD - With Indian trade officials
celebrating the South Asian Free Trade Area (SAFTA)
framework and other countries in the region fretting the
possibility of being swamped by low-priced Indian goods,
the trade agreement will enter into force in January 1,
2006 after required formalities, including ratification
by all the member states, are carried out.
SAFTA, which was agreed during the recent South
Asian Association of Regional Cooperation (SAARC)
conference in Pakistan, promises to be a major milestone
in South Asian trade relations. Under the terms of the
agreement, Pakistan and India will reduce their tariffs
to 0-5 percent within seven years beginning in 2006, and
the least developed countries (LDCs) are to reduce their
tariffs to 0-5 percent in a period of 10 years in the
same period. Each member state will maintain a sensitive
list of products in which tariffs will not be reduced.
Under the agreement, three developing countries
- Pakistan, India and Sri Lanka - will reduce their
maximum tariffs to 20 percent, and the LDCs, including
Bangladesh, Nepal, Bhutan and the Maldives, will reduce
their maximum tariffs to 30 percent before January 1,
2008. At the conclusion of the first phase, all
developing states of SAARC will reduce their maximum
tariffs to the 0-5 percent range for LDCs from January
1, 2009.
In the second phase, the developing
countries - Pakistan and India - will reduce tariffs to
the 0-5 percent range before January 1, 2013, Sri Lanka
will do the same before January 1, 2014 and LDCs will
follow suit before January 1, 2015. At this stage, SAFTA
will fully replace the existing South Asian Preferential
Trade Agreement (SAPTA) and trade will move from a list
of positive items to free trade, barring a few sensitive
items.
All member states will establish their
own Committee of Experts (COEs) to identify the list of
sensitive items, as well as para-tariffs, non-tariff
barriers and other restrictive measures within three
months from the signing of the SAFTA treaty.
According to some estimates, a free flow of
goods in the region will enhance intra-SAARC trade from
current low levels of US$4-6 billion per annum to $14
billion. At present, regional trade is largely dominated
by Indian exports to member states, amounting to almost
80 percent of all regional trade. During 2003-04,
Pakistan's trade volume in the region was just $507
million out of a total of $23 billion in international
trade.
Geographic, political and economic
differences among member countries in SAARC create major
hurdles, as small countries have been reluctant to have
a free trading arrangement with a giant neighbor, India,
which most of them traditionally do not trust or like.
Other than political differences, non-tariff and
para-tariff barriers in the form of countervailing
duties, surcharges, central and provincial sales taxes,
luxury duties, certification and quality approval
requirements continuously hampered cooperation in the
region.
Bangladesh, which is said to have many
non-tariff barriers, recently said that its products
were subjected to huge customs duties, additional
customs duties and surcharges in India. Indian importers
also have to pay central, provincial and turnover taxes.
In addition, poor port infrastructure costs Bangladeshi
importers 5-10 percent more, creating a mismatch between
the two countries.
According to trade statistics
for the region, it is an established fact that India has
benefited from trade in the region more than any other
country. India's share of exports in intra-SAARC trade
has shown strong growth during the post-SAARC period,
despite low levels of overall regional trade and weak
regional integration. During the pre-SAARC period of
1975-85, India's exports increased from $160 million in
1975 to $315 million in 1984, a compound growth rate of
7.8 percent.
However, during the post-SAARC
period, India's exports increased from $277 million in
1986 to $1.5 billion in 1995, showing an additional
growth of 22 percent. For more recent data, India's
exports increased from $622 million in 1991 to $2
billion in the year 2000, indicating 9 percent growth
during this period. However, at the same time, India's
imports from SAARC countries were quite low. It was just
$56 million in 1975 and rose to only $105 million during
1984, and was only $182 million in 1995.
This
created a situation where it was obvious that India was
not a good importer in intra-SAARC trade. India
benefited in the regional grouping far more than its
global trade trends. In 1985, the total turnover of
India's trade with SAARC was $382 million, a figure that
increased to $1.7 billion in 1995 and to $2.36 billion
in 2000. India's global trade increased from $24.6
billion in 1985 to $94 billion in 2000.
India's
balance of trade with almost all SAARC countries has
been highly favorable, with a surplus of well over $2.2
billion, a matter of great concern for other SAARC
members. Above all, there were huge subsidies for the
Indian industry in the shape of subsidized energy rates.
This might create problems for Pakistan, which has one
of the highest electricity prices in the region.
India is the major exporter and minor importer
in intra-SAARC trade, and this issue needs to be
addressed before a real free trade regime can take
place. Many LDCs, like Nepal, have suffered a lot in
recent years. Nepal's share of exports to India has
declined rapidly in the post-SAARC period. For
Bangladesh, India's exports rose from $180 million in
1991 to $1 billion in 2002-2002, while India's imports
from Bangladesh increased from $31 million in 1991 to a
mere $50 million in 2001-2002.
Another problem
that has afflicted the region is inconsistent trade
patterns during the 1980s and 1990s. The trade-GDP
ratios in India (from 12 percent to 21 percent) and
Bangladesh (from 16 percent to 28 percent) have improved
in the period under review. However, in Pakistan, the
trade-to-GDP ratio declined from 38.5 percent in the
early 1990s to 33.7 percent in the late 1990s.
Small countries like, Nepal, Bhutan, the
Maldives and Bangladesh fear being swamped by Indian
products due to low duties. Under the preferential
regime, low tariff lines on some 5,500 products have
been agreed to so far.
Pakistan is also
reluctant to offer India Most Favored Nation (MFN)
status due to political apprehensions and fears of major
losses to local industries, such as automobiles, light
engineering and pharmaceuticals, which would have no
chance of competing with highly subsidized, cheap Indian
products once free trade begins. India, on the other
hand, granted MFN status to Pakistan, but maintained
quota restrictions; licensing requirements; currency
issues; registration process, tardy customs clearance
procedures and other restrictions to suppress imports
from Pakistan. These restrictions served as a de-facto
ban on higher imports from Pakistan.
The
government of Pakistan has repeatedly said that it would
consider the possibility of Normalization of Trade
Relations (NTR) with India instead of MFN status.
However, India claims that signing the SAFTA will
automatically serve the same purpose, as the progress
towards uniform tariff regimes would open up all
barriers.
However, senior officials of the
Pakistani Ministry of Commerce have denied that signing
the SAFTA framework agreement will automatically entitle
India with "most favored" status. They maintain that the
MFN issue relates to the World Trade Organization (WTO)
and has nothing to do with the SAFTA. Under MFN terms,
Pakistan would be obliged to grant Indian goods with
treatment similar to that offered to other countries
under WTO rules. However, Pakistani officials believe
that trade with India would be governed by the list of
positive items until progress is made on broader
political issues. Under SAPTA, Pakistan maintains a list
of around 600 items that are tradable with India.
Commerce Minister Humayun Akhtar Khan, however,
fell short of saying that trade with India was linked
with political issues. "We are willing to discuss
bilateral trade issues with India." He hoped that the
composite dialogue between the two sides from February
2004 would make some headway to resolve core issues. The
minister was also optimistic that SAFTA would allow
Pakistani importers to get low-cost raw materials and
components from India.
Bilateral trade between
India and Pakistan totaled $262 million in 2002-03, with
the balance of trade strongly tilted in the favor of
India. Most of the bilateral trade takes place through
third countries, like Dubai or Singapore, or via
smuggling. Total trade through all channels is estimated
to be around $1.5-2 billion per annum.
Pakistan
Commerce Ministry officials have also identified some
achievements for Pakistan in the SAFTA deal.
Particularly, they mentioned clause g of Article 8,
which allows transit facilities for efficient
intra-SAARC trade, especially for the landlocked
contracting states. He said this clause would enable
Pakistan to export its goods through India to
Bangladesh, Nepal and Bhutan. However, they believe that
there is no legal obligation to offer similar
concessions to India for its exports to Afghanistan,
which is not a SAARC member state. They also highlighted
that SAFTA requires simplification and harmonization of
customs and banking procedures, which would help
facilitate Pakistan exports to India, which are hovering
around just $45-50 million per annum through official
channels.
They claimed that textiles would be
the mainstay of Pakistan's bilateral trade with India.
Cotton and textile exports make up almost 66 percent of
Pakistani exports to the world. Officials believe that
Pakistan will maintain its competitive advantage in this
sector as the Indian textile industry is not very well
placed. The Pakistani textile industry has gone through
a massive modernization process during the past five
years to prepare for the post quota regime beginning in
January 2005 under WTO rules.
As a result, the
performance of overall exports has been encouraging,
keeping in view the narrow export basket. Additional
quotas granted by the European Union after September 11
also helped this cause, as exports from Pakistan
registered 21 percent growth to cross the $11 billion
mark for the first time in 2002-03. During the first
half of the current fiscal year, the growth rate of 13.1
percent is seen as satisfactory among Pakistan
officials. Exports during the period of July-December
2003 totaled $5.9 billion as compared with $5.2 billion
for the same period last year. Imports during this
period registered an increase of 14 percent, to $6.6
billion, against $5.8 billion during the same period
last year. Humayun Akhtar said that growth rates for
non-oil and non-food imports was much higher, which
indicates higher industrial activity in the country.
The large-scale manufacturing sector has shown
13.97 percent growth during first four months of the
current fiscal year, including 5.1 percent in the
textile sector, 34 percent in leather products, 11.5
percent in chemicals, rubber and plastic, 43 percent in
metal products and machinery, 52.8 percent in
automobiles, 5.2 percent in tires and tubes and 8.2
percent in paper and paper board. The State Bank of
Pakistan hopes that the GDP growth target of 5.3 percent
will be surpassed during the current fiscal year on the
back of robust growth in industry and a better than
expected harvest of major crops, excluding cotton.
However, some of these industries will face fierce
competition once trade barriers are removed.
Similarity with India's export basket is the
major concern for many experts, who suggest that member
states will end up competing again each other rather
than taking a strong position in world trade. In the
case of India and Pakistan, competition could be more
pronounced. India's major exports include the following:
gems and jewelry; textiles and garments; chemicals and
pharmaceuticals; leather and manufacturing; machinery
and instruments; marine products; metal manufacturing;
carpets; oil meals; rice; transport equipment;
electronic goods; primary and semi-finished iron and
steel; dyes and intermediates; plastics and linoleum
products; iron ore; tea; coffee; spices; cashew;
petroleum products; rubber; fresh and processed fruit
and vegetables; tobacco; non-ferrous metals; project
goods and software.
Pakistan's export basket
includes cotton, yarn and textile products, rice,
synthetic textiles, leather products, sporting goods,
carpets, fish and products, surgical instruments,
chemicals, pharmaceuticals and footwear.
Both
countries are heavily dependent on energy imports to
meet rapidly growing domestic consumption. Similarly,
imports of machinery, machine tools, newsprint,
paperboard, pulses, crude fertilizers and crude minerals
are increasing in both countries.
However,
despite this similarity, the trade potential between
these two countries is enormous, reflected in the huge
volumes of smuggled chemicals, medicines, videotapes,
cosmetics, tires, spices and viscose fiber from India,
and the smuggling of textiles from Pakistan.
If
the "big two" could shun their bilateral differences,
regional trade volumes will definitely grow from the
current precariously low levels of around 3.8 percent.
If the performance of intra-SAARC trade is compared with
other regional blocks, there have clearly been missed
opportunities. Trade within the North American Free
Trade Area is 49 percent, 78 percent in the European
Union and 53 percent in the Association of the Southeast
Asian Nations, which protects them from major shocks in
other parts of the globe.
The joint declaration
at the end of the 12th SAARC summit underscored the need
to maintain increasing trade momentum and move towards
broadening economic cooperation and to ensure equitable
distribution of the benefits of trade.
Although
some experts have criticized the long timeframe of
SAFTA, the fact that regional differences require time
to be resolved makes it a good beginning. To reap the
fruits of regional trade, however, all member states
have to prepare themselves for the new challenges of the
free trade area. Industries might collapse and
adjustment costs will be incurred, but this pain will be
tenable if its means a better price for the consumer and
a better future for the impoverished people of the
region.
(Copyright 2004 Asia Times Online Ltd.
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