February 17, 2006

By BIKENDRA SHAMSHER THAPA

The South Asian Association for Regional Cooperation (SAARC) was established to provide a platform to member countries to discuss mutually beneficial issues and accelerate the pace of socio-economic development in the region. SAARC initially envisaged the regional economic co-operation through South Asian Preferential Trading Agreement (SAPTA) that came into force on December 7, 1995 . SAPTA was the first step towards the transition to a South Asian Free Trade Area (SAFTA) that shall significantly contribute to strengthen intra-regional economic co-operation to maximize regional potential for trade and development. The SAFTA Treaty, signed during the Twelfth SAARC Summit in Islamabad , has come into effect from January 1, 2006 .

SAFTA Trade Liberalization Program offers the following schedule of tariff reductions:

The Non-Least Developed SAARC countries (non LDCs) -India, Pakistan and Sri Lanka - shall reduce their existing tariff rates to 20% within 2 years, from the date of coming into force of the Agreement. If actual tariff rates after the coming into force of the Agreement are below 20%, there shall be an annual reduction on a Margin of Preference basis of 10% on actual tariff rates for each of the two years. The subsequent tariff reduction by these countries from 20% or below to 0-5% shall be done within a second time frame of 5 years, beginning from the third year from the date of coming into force of the Agreement. However, the period of subsequent tariff reduction by Sri Lanka shall be six years.

The tariff reduction by the Least Developed SAARC countries (LDCs) - Bangladesh , Bhutan , Maldives and Nepal - shall reduce their existing tariff rates to 30% within 2 years from the date of coming into force of the Agreement. If actual tariff rates on the date of coming into force of the Agreement are below 30%, there will be an annual reduction on a Margin of Preference basis of 5 % on actual tariff rates for each of the two years. The subsequent tariff reduction by these nations from 30% or below to 0-5% shall be done within a second time frame of 8 years beginning from the third year from the date of coming into force of the Agreement.

Each member country shall maintain a sensitive list (a schedule of products on which members are not required to lower tariffs) to protect the interest of domestic stakeholders. The Sensitive Lists are subject to review after every four years or earlier with a view to reducing the number of items.

SAFTA provides safeguard measures in case of a decline in import of product(s) covered under the Trade Liberalization Program. It also offers a detailed dispute settlement mechanism.

SAFTA offers to compensate the LDCs for the loss of customs revenue due to the implementation of trade liberalization program.

Nepal has absolute cost disadvantage in almost all products that Nepal exports to SAARC countries or outside as compared to other SAARC members. Transporting raw materials from abroad and taking back finished products by the same surface route makes the transportation cost expensive compared to that of the coastal producers.

Moreover, Nepal ’s foreign trade is mainly Indo-Centric. In 2003/04, out of the total exports of Rs 53.95 billion, SAARC accounts for Rs 31.55 billion and India alone for Rs. 30.78 billion. Similarly, out of the total imports of Rs. 135.84 billion in 2003/04, SAARC is Rs 79.76 billion and India is 78.74 billion.

The Indo-Nepal Trade Treaty prohibits Nepal lower its tariff for third countries’ products to the level or below than that applied to Indian items. Under SAFTA, India has to reduce its tariff to 5% to all SAARC countries that will decrease the existing wide tariff gap that Nepalese products enjoy in India as against other South Asian countries. Nepal has adopted two sets of sensitive lists - one including 1,299 products for LDCs and the other including 1,335 items for developing members - to protect domestic industries under SAFTA. Despite the long list, SAFTA may not be able to protect the interest of Nepalese farmers, as Indian primary products will continue to enjoy duty-free market access in Nepal due to the prevalence Indo-Nepal Trade Treaty. In addition, certain products of Nepal are destined to a particular country. More than 80% of woolen carpet is exported to Germany and almost 90% of readymade garment is exported to the USA . Issues like these have very little to do SAFTA.

The service sector is playing an increasingly important role in economies of countries worldwide. It contributed 38% of the GDP and 35% of the total foreign exchange earnings of Nepal in 2003/04. These figures are likely to increase as economy develops further. However, SAFTA is quiet about trade in services. The economic integration effort in the region must include liberalization of services and investments, improvement in trade facilitation and co-operation in infrastructure so that investments are attracted towards tourism, health, education and business services.

South Asia has been identified as an energy deficit region. Nepal ’s industrial complementarity in hydropower generation is possible with production, processing and marketing spread on a regional basis.

The reduction in overtime revenue collection due to tariff cuts is inevitable. The loss in revenue may not be as high as expected due to the small share of Nepalese total trade to intra-region trade within SAARC, existence of bilateral agreements with preferential trading arrangement and Nepal ’s accession to the WTO. SAFTA also envisages compensating LDCs for the loss of their revenue due to tariff cuts. On the other hand, tariff reduction will encourage expansion of business by private enterprises, which will come into income tax net.

The production of cash crops in the agricultural field and employing manpower that have been the victim of disguise unemployment will supplement the efforts of Nepalese expatriates in poverty alleviation of the country.

South Asia ’s contribution in the global GDP and trade is minimal in spite of it being the habitat of a quarter of the world’s population. About two-fifths of its population falls below the absolute poverty line. Wide mistrust among the countries has hindered South Asia to reap the advantages of intra-regional trade even after two decades since the establishment of SAARC and a decade since the implementation of SAPTA. The member countries need to express genuine commitment to SAFTA if they desire to share economic prosperity originating from the free trade area. Nepalese industries, at present, are not in a position to compete with that of other SAARC countries. Hence, Nepal should start capacity building and governance reform measures to reap the benefits of trade liberalization in the region and integrate itself into the world economy.