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South Asian Free Trade Area - Some Issues

South Asian Free Trade Area - Some Issues. Sanath Jayanetti. Outline. 1. Regional Trading Arrangements and the WTO 2. Existing Trading Arrangements – Case of Sri Lanka - Broad summary of all agreements, Sri Lanka, June 2005 (8-digit level) 3. SAFTA – Some issues of concern

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South Asian Free Trade Area - Some Issues

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  1. South Asian Free Trade Area- Some Issues Sanath Jayanetti

  2. Outline 1. Regional Trading Arrangements and the WTO 2. Existing Trading Arrangements – Case of Sri Lanka - Broad summary of all agreements, Sri Lanka, June 2005 (8-digit level) 3. SAFTA – Some issues of concern - Substantial trade - RoO 4. Sri Lanka’s FTAs with India and Pakistan 5. SAFTA – Some of the Challenges 6. Moving forward/Conclusion

  3. Regional Trading Arrangementsand the WTO • Non-discrimination is the cornerstone of multilateral trading order as envisaged by the MFN Principle (Article 1) and National Treatment Principle (Article III) of GATT • MFN Principle allows an exception for regional trade initiatives under the GATT Article XXIV and the Enabling Clause; GATS Article V with respect to trade in services • According to Article XXIV there should be a “plan and schedule” and “substantially all the trade” should be included in the FTA arrangement

  4. Existing Trade Arrangements • India Sri Lanka Free Trade Agreement • Pakistan Sri Lanka Free Trade Agreement • SAPTA • SAFTA • Generalized Scheme of Trade Preferences • Bangkok Agreement

  5. Broad summary of all agreements, Sri Lanka – June 2005 (8 digit level) ISFTA PSFTA SP B SL S GSTP BK Negative 1831 1145 Free 2034 763 7 0 6 0 2 11 Positive 2541 4498 194 25 155 5 86 297 Note: ISFTA-India Sri Lanka Free Trade Agreement; PSFTA-Pakistan Sri Lanka Free Trade Agreement, SP-SAPTA for developing countries; B-Bangladesh; SL-SAPTA LDC; S-SAARC; GSTP-Generalized Scheme of Trade Preferences: B-Bangkok Agreement Source: Author’s calculations

  6. SAFTA – Some issues of concern Substantial Trade • 20% of tariff lines to be permitted for inclusion for non-LDCs • Items high on the present trading list will most likely be in the negative list (substantial trade?) • Sensitive List to be reviewed every 4 yrs • No commitment unlike ASEAN to phase out list This will make the effective protection very high for those industries in the negative list and may lead to inefficient sectors at a high cost to the country

  7. SAFTA – Some issues of concern (cont.) RoO • RTAs require RoO to determine whether a consignment of goods is eligible for preferential treatment or not • Success of trading arrangement in terms of net-trade creation and welfare would depend a great deal on its RoO • RoO might force producers in the FTA to source their inputs from high cost regional producers of intermediateries • RoO can be used as a protectionist tool Has to be simple

  8. SAFTA – Some issues of concern (cont.) RoO • VA (percentage test) may create bias against efficient producers; more likely to have trade diversion • Change of tariff heading (CTH) origin? 4-digit or 6-digit? Eg. Tea

  9. 100% removal of tariffs on 1351 items upon entry into force 429 items in the negative list Rest 2797 items follow phased removal of tariffs up to 100% Within 3 years 25% reduction for textiles 50% fixed tariff concession for imports of tea from Sri Lanka on a preferential basis annual max. quota upto 15 mil. Kgs. 50% fixed tariff concession for imports of garments from Sri Lanka subject to max. annual quota of 8 mil. pieces of which minimum of 6 mil. pieces should contain Indian fabrics (no single category should exceed 1.5 mil. pieces per annum) 100% removal of tariffs on 319 items upon entry into force 1180 items in the negative list 50% reduction in tariffs for 889 items upon entry into force with phased out tariffs: upto 70% at the end of the 1st year; 90% at the end of 2nd year; and 100% at the end of 3rd year Remaining 2724 items removal of tariffs will be phased out: not less than 35% before the end of the 3rd year; not less than 70% before the end of the 6th year; not less than 100% before the end of the 8th year Indo – Lanka Free Trade Agreement Sri Lanka India

  10. Indo – Lanka Free Trade Agreement (cont.) ROO criteria: To receive tariff concessions, a product should either be wholly obtained in a country or should go through a substantial transformation within a country, if it contains any material imported from a third country. • In the FTA, the ROO criterion has been fixed at 35 per cent of FOB value. Hence, a product with a minimum domestic value addition of 35 per cent of the FOB value would become eligible for tariff concessions to be sourced from any other country. • The ROO is further reduced to 25 per cent, provided that the product exported from Sri Lanka contains a minimum of 10 per cent content originating from the importing country (as imported from India).

  11. Indo – Lanka Free Trade Agreement: CEPA • Widened to include more goods, and deepened to improve market access through trade facilitation and removal of non-tariff barriers • Agreement on trade in services • Measures for promotion of investment in each other’s countries • Enhance cooperation in areas such as education, education, transportation and ICT.

  12. 100% tariff removal for 206 tariff lines upon entry into force 540 tariff lines on the negative list Will eliminate the customs tariff on 4,680 tariff lines out of a total of 5,224 tariff lines at six-digit level, over a period of three years. 34% by the end of the 1st year, 64% by the 2nd and 100% after three years. Special Tariff Rate Quotas (TRQs):10,000 MT of tea free of duty per annum; 1200 Tons of betel leaf per annum at preferential margin of 35% TRQ of 35% duty concession for 200,000 pieces for each of 21 categories of Sri Lankan Apparel products without RoO on fabrics. 20% preferential tariff margin on ceramic tiles and tableware (No complete tariff elimination). 100% tariff removal for 102 tariff lines upon entry into force 697 tariff lines on the negative list Will eliminate 4527 tariff lines of 5224 at 6-digit HS code over five years. 30% tariff reduction by the end of the 1st year, 40% by the 2nd, 60% by the 3rd, 80% by the 4th and 100% after 5 years TRQ for 6000MT of Basmathi rice and 1000MT of potatoes free of duty per annum. Pakistan Sri Lanka Pakistan - Sri Lanka FTA

  13. Pakistan - Sri Lanka FTA (cont.) • Rules of Origin require 35% domestic value addition. Or 25% Sri Lankan value addition along with 10% using Pakistani imports. • Investment and services will be drawn into the process of liberalization with the CEPA.

  14. SAFTA – Some of the Challenges • Bilateral FTAs in South Asia • Other more dynamic regional/bilateral deals

  15. Moving forward/Conclusion • Negative lists not larger than bilateral negative lists, negative lists should be phased out • ROO similar or better than bilateral with regional cumulation • Importance of incorporating bilateral agreements into SAFTA • No paratariffs or NTBs • No TRQs • Investment agreements to facilitate trade • Trade facilitation • India’s lead role

  16. Thank You

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