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Kathmandu Monday February 11, 2002 Magh 29, 2058.
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A few thoughts on SAFTA
By RATNAKAR ADHIKARI
That the eleventh Summit of the South Asian
Association for Regional Cooperation (SAARC) directed the Council of Ministers to finalize
the text of the Draft Treaty Framework of South Asian Free Trade Area (SAFTA) by the end
of 2002, for the eventual signing by Ministers, did not come as a surprise to observers
keenly watching economic developments in the South Asia region. Now that the Member
countries and the SAARC are busy preparing the draft agreement, it is important to look
into how they envisage to take this forward, with challenges galore.
The first challenge before the drafters is to
ensure that the agreement is going to be compatible with the relevant provisions of the
World Trade Organisation (WTO). It is pertinent to mention here that five Members of SAARC
are already the Members of the WTO and two (Nepal and Bhutan) are in the process of
accession. By the time SAFTA is signed, they will have probably secured their membership
to the global trade body.
SAARC Preferential Trade Agreement (SAPTA),
the precursor to SAFTA has already been notified to the WTO. However, it has been notified
under what is technically known as the "Enabling Clause" which, inter alia,
allows a group of developing countries to form a regional trade arrangement (RTA) among
themselves without violating WTO provisions. A short answer to those skeptics, who argue
that SAPTA may not be compliant with the relevant WTO provisions, is that SAPTA is very
much WTO compliant.
It is just because of the paralysis in the
present examination/decision making process of the Committee on Regional Trade Agreements
(CRTA), that WTO has not given a ‘certificate of approval’ to SAPTA. It is not
surprising because CRTA has so far only approved six agreements out of 156 RTAs notified
to the WTO and groupings like the European Union (EU) and North American Free Trade Area
(NAFTA) are not included in those fortunate six which have received a WTO stamp.
The second part of this article focuses on
whether SAFTA is poised to become a building block or stumbling block to the multilateral
trade liberalization. It is therefore necessary to see how these two theories have
evolved. The theoretical foundations to these notions are provided by two schools of
thoughts: namely, Summers (named after Larry Summers, former US Treasury Secretary and
currently President of Harvard University) School and the Bhagwati (named after noted
trade economist at Columbia University) School.
While as per the Summers School all the
‘laterals’ (uni-, bi-, pluri- and multi-) are good as long as they promote trade
liberalization, the Bhagwati School argues that regionalism is a stumbling block to
multilateral trade liberalization as it creates more trade diversion than trade creation.
The later school drew on the 1950 work of Jacob Viner and it turns out that some practical
evidences are in favour of this school. The former school too has some practical as well
as theoretical arguments to back up its claims. The battle between regionalists and
multilaterals does not show the sign to recede and it is likely to further intensify in
days to come.
A third point this article is trying to make
is about how SAFTA should proceed given the present scenario. Obviously, SAFTA’s goal
should be to support the multilateral forum, as that is where the interests of the
developing countries and least-developed countries (LDCs) are better protected. However,
SAFTA might be a trade diverting than trade creating instrument if proper care is not
taken while drafting the same. What therefore follows is a non-exhaustive list of the
important factors that need to be taken into consideration during the drafting process.
First and foremost, the goal of SAFTA has to
be to go all the way in terms of trade liberalization barring a very a few very sensitive
sectors. Though SAFTA will still qualify to be notified under the Enabling Clause there is
every possibility that it will have to be converted to what is called Article XXIV (the
GATT Article, which deals with real RTAs) notification as happened with the Southern
Common Market (MERCOSUR). One of the major requirements of Article XXIV is that the
Members should liberalize "substantially all" trade among themselves. This
effectively means that substantially all (which is yet to be defined but Australia has
proposed more than 95% as the threshold requirement) tariff, para-tariff and non-tariff
barriers should be removed among the Member countries.
Secondly, as is the general practice LDCs
should be provided with a longer transition period to phase in trade liberalization, with
an even longer transition period for the landlocked LDCs (LLDCs) so that they do not lose
out disproportionately compared to relatively better off countries.
Thirdly, since relatively weaker countries in
the region are dependent on tariff as their major source of revenue, some
‘transitional’ mechanism for compensation should be devised. Here, the emphasis
on the word ‘transitional’ is important because an eternal compensation
mechanism is neither sustainable nor desirable.
Fourthly, the dispute settlement process
should not only be fair and transparent, but should also provide the option to the Members
to either resort to the regional dispute settlement mechanism or to the WTO dispute
settlement mechanism as in the case of NAFTA. This provision was included in NAFTA at the
insistence of Canada and Mexico, which suspected that NAFTA mechanism could favour the
largest country within the FTA. Due to asymmetry in the countries within South Asia and
dominance of one large country, this approach can and should be replicated by SAFTA.
Having discussed so much about the
modalities, a note of caution is worth sounding. Empirical evidence suggests that as
opposed to North-North and North-South RTAs, South-South RTAs are the worst – they
divert trade, place weaker nations at a comparative disadvantage and cause income
divergence rather than convergence (as happened in the EU, when three poor countries
joined the Union). However, the only major benefit of South-South RTA is of long-term
nature and that comes mainly through increased size of the market. When the market size
and resultant trade potential increases, it becomes attractive for the Northern free trade
areas and customs unions to enter into an embrace the same, in the same manner as MERCOUSR
currently. Both the EU and NAFTA are in an unusual hurry to bring MERCOSUR into their
fold.
The road ahead for SAFTA is, therefore, to
follow the Summers School and eventually contribute to multilateral trade liberalization.
While SAFTA requires some sacrifice on the part of the weaker nations, nothing short of
magnanimity is likely be enough on the part of stronger nations. Let us hope that it is
forthcoming.
(The author is currently associated with the
World Trade Institute, Bern)
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