FEATURES NEWS THE RISING NEPAL (DAILY)

Preferential Trading Arrangement
Viability And Progress In South Asia

By Bhubanesh Pant

OVER the past two decades, the upcoming of preferential trading arrangements (PTAs) in various parts of the world has witnessed a noticeable development. Countries all over the world are regrouping in trade and political blocks such as the North American Free Trade Area (NAFTA), the European Union (EU), the Association of South-east Asian Nations (ASEAN) and the Shanghai Five. Moreover, there has been a recent initiative to form a BIMSTEC (Bangladesh, India Myanmar, Sri Lanka and Thailand) Free Trade Area, which is expected to come about in five years’ time. Under the planned BIMSTEC Free Trade Area, member countries would reduce import tariffs to 0-5 per cent, the same level of those in the ASEAN Free Trade Area (AFTA). The South Asian region is no exception as seven South Asian nations set up the South Asian Association of Regional Cooperation (SAARC) in 1985 as a first move towards regional cooperation.

It was only after the 1990s that economic integration was accorded top priority within the SAARC and the first step towards this path was the commission of a study on Trade, Manufactures and Services by the SAARC Secretariat. The South Asian Preferential Trading Agreement (SAPTA) was launched by the SAARC in 1995 as the second move.

Studies of PTAs have revealed that most of the conditions for a successful PTA do not exist in the case of South Asia. These conditions include, inter alia, geographical proximity, the presence of trade complementarity, high pre-PTA tariffs, high degree of intra-regional trade, variations in economic structure based on competitiveness, and little political tensions, if any, among member nations.

According to the natural trading blocks argument of Paul Krugman, geographical proximity does promote trade. Regional trading arrangements should be undertaken on the basis that it is natural for neighbours to indulge in trade with each other. However, the South Asian case moves away from this argument in the sense that although India and Pakistan are neighbours, trade between the two countries has been low historically. Again, in terms of trade complementarity, the trade indices developed by Drysdale has revealed that there is an absence of strong trade complementarity in the bilateral trade structures of South Asia.

It has been empirically shown that average nominal tariff rate has taken a downward trend in South Asia with the undertaking of trade liberalisation reform measures over the last two decades. Still, the average for South Asia is higher compared with other regions in the world which means that high pre-PTA tariff as a precondition for creating a PTA holds true of South Asia.

The share of intra-regional trade in South Asia’s total trade went up from 2.4 per cent in 1990 to 4.6 per cent in 1999. Yet, this figure is much less than that of other PTAs. Another concern in India’s growing trade surplus with other SAARC countries. Although an increasing trend has been noticed in the exports of India to other SAARC countries (excluding Pakistan) (from 3.9 per cent in 1970 to 5.5 per cent in 1999), its import share from the region fell from 1.4 per cent to 0.9 per cent during the same period. This demonstrates India’s role in attracting imports from other South Asian countries is limited.

Another principal issue related to South Asian economic integration is that countries in the region are producing and trading similar commodities. The Revealed Comparative Advantage indices estimated by economists have shown that South Asian nations have an almost identical pattern of comparative advantage in a relatively narrow range of commodities; moreover, these countries do not have comparative advantages in a wide range of capital goods and advanced manufactured products.

The political tension between the two major countries in South Asian, India and Pakistan, has been another primary hurdle to regional integration.

Despite these constraints, progress has been made to some extent. After the launch of SAPTA in 1995, three rounds of preferential tariff reductions have been conducted, namely SAPTA-I (concluded in 1995), SAPTA-II (concluded in 1997) and SAPTA-III (concluded in 1998), under the preferential trading arrangement.

Under SAPTA-I, member countries offered trade concessions for 226 commodities that formed just about 6 per cent of traded goods. The issue of non-tariff barriers was not taken up in this round. The product coverage and proposed tariff cuts appeared more significant under SAPTA-II where concessions were provided to all countries on about 1800 commodities. Non-tariff measures were also given prominence. However, both SAPTA-I and SAPTA-II seemed artificial in the sense that there was an almost total absence of demand for the products offered. Thus SAPTA-III appeared more significant in the sense that concessions were offered to all countries on about 3000 commodities with the aim of boosting intra-regional trade. Still, most of the items kept in such list of goods are those that are rarely imported by the country that has granted the so-called concessions. The negotiations for the fourth round were initiated in 1999, but no progress has been made so far.

SAPTA is considered to be a step on the path to creating SAPTA. As SAPTA is confined to trade in goods, unless SAPTA is expanded to encompass trade in services, there is possibility of SAFTA not being a real FTA. For landlocked countries such as Nepal and Bhutan, the service sector could be much more viable and cost-effective as compared to the manufacturing sector.

Before operationalising SAFTA, there is a need to resolve an array of complex issues such as rules of origin, identification and dismantling of non-tariff measures, a mechanism for the compensation for revenue loss, implementation timetable, monitoring mechanism, and protection of bilateral agreements and treaties, among others. Currently, there prevails no mechanism in SAARC for ensuring that targets agreed to are strictly pursued.

The initial target of the South Asian nations to activate the South Asian Free Trade Area (SAFTA) by 2001 did not materialise, neither did the signing of the draft treaty as later envisaged.

However, the recent statements made by the South Asian leaders in Kathmandu on 6 January 2002 have raised hopes that the SAARC Free Trade Area (SAFTA) would, after all, materialise sooner or later. The first action will be by finalising the text of the Draft Treaty Framework by the end of 2002.

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