South Asian Free Trade Agreement (SAFTA): Issues and Implications

1. South Asian Free Trade Agreement (SAFTA): Issues and Implications Presented By: Mohammad Muaz Jalil, Senior Researcher and Trade Specialist, I-PAG Cost of Economic Non Cooperation to Consumers in South Asia COENCOSA Project Review MeetingDhaka, June 28, 2011

2. The large majority of the WTO Members are party to one or more RTAs. As of January 2005, the WTO had been notified of 312 RTA South Asian Association for Regional Cooperation (SAARC) was established in 1985 In 70s and 80s, Inward-oriented development strategy, highly regulated financial, fiscal and industrial policy, anti-export bias Geared more towards import substitution rather than export led development Countries faced poor economic performance which provided incentive for liberalization (Sri Lanka liberalized in 70s) Background

3. The objectives of the treaty are sought to be achieved in the following ways: Eliminating barriers to trade and facilitating cross-border movement of goods Promoting conditions of fair competition and ensuring equitable benefits, taking into account their respective levels and patterns of economic development Creating effective mechanisms for the implementation and application of the agreement, for its joint administration and the resolution of disputes Establishing a framework for further regional cooperation to expand and enhance mutual benefits. Background

4. South Asian Preferential Trade Arrangement (SAPTA) signed in 1995 to promote trade and economic cooperation Slow progress of SAPTA as it did not increase the volume of intra-regional trade and investment flows SAFTA more ambitious than SAPTA, the agreement entered into 2006, with the provisions of its Trade Liberalization Program scheduled to be fully implemented by 2016 SAFTA has six core elements: Trade liberalization programme; Sensitive lists; Rules of origin; Non-tariff & para-tariff barriers; Revenue compensation mechanism and Technical assistance for LDCs Agreement also allows for safeguard measures, allows partial or full withdrawal of preference SAFTA and SAPTA

5. Several analyses of regional free trade in South Asia have demonstrated minimal gains from trade expansion and unequal benefit For intra-regional trade to expand it is important that the trade profiles of the countries match Trade profile more aligned, intra-regional trade in South Asia has a potential to increase substantially. Impact of South Asian Free Trade Area (SAFTA)

6. Between 1995 and 2005, intra-regional trade in South Asia hovered around 5% of total trade of these countries. Trade ranged between 20-60% in the case of many other regional economic blocs The net result of this economic non-cooperation among the SAARC countries is high costs to consumers It is estimated that trade between India and Pakistan could have been 70% more than what it is today! Impact of South Asian Free Trade Area (SAFTA)

7. It is estimated that almost 53% of the total import trade in SAFTA members has been subject to the negative lists of the respective countries Seriously inhibit intra-regional trade as well as significant reduction of consumer welfare Barriers to Trade : Sensitive List

8. India’s total imports from Bangladesh during the period 2005-­06 were US$127.03mn Top 20 items that were imported from Bangladesh amounted to US$60.16mn Of these 10 items which are in India’s sensitive list for LDCs under SAFTA,( constitutes 7.28 %of the total imports from Bangladesh) Implies substantial market access for Bangladesh under SAFTA. Over 70% of Bangladesh’s export includes mainly items of textiles & textile materials, and shrimp. Out of Bangladesh’s top 50 export items, 31 items are in India’s sensitive list for SAFTA LDCs Barriers to Trade : Sensitive List

9. Very little research has been done in this area; primary focus of most research has been on producer surplus. Primary focus on producer surplus, trade creation trade diversion, cost minimization, least-cost suppliers Redefining in terms of maximizing consumer surplus Most common theoretical tool used : Computable General Equilibrium (CGE) models and gravity models Applied Research on SAFTA : Issues

10. CGE models often have several key driving forces that originate in their social accounting matrix data base, algebraic structure and parameter assumptions, Whose influence on the model’s results remain hidden and open to misattribution. Restrictive assumptions : full employment, all firms earn zero profits, all households are on their budget constraint May fail to incorporate the trading arrangement characteristics like RoO, and new products that become tradable following an FTA Only passing references are made to consumer welfare gains/loss in such exercises. Applied Research on SAFTA : CGE

11. Standard gravity model predicts bilateral trade flows based on the economics sizes (GDP) and the (economic) distance McCallum (1995): dummy variable if traded goods crossed a provincial border (intra-US, intra-Canada trade Anderson and Wincoop (2003) specification: Multilateral Resistance term, otherwise omitted variable bias Border effects have an asymmetric effect on countries of different size: they have a larger effect on small countries. The more resistant a country is to trade with all other countries, the more it is pushed to trade with a given bilateral partner Applied Research on SAFTA : Gravity Model

12. Evans (2003) : Differences in international and national transaction costs and Policy-related barriers explained a significant part of the border effect Effects of language, national networks, and social capital on transaction cost very high Geographical proximity has not translated into lower transport or transactions costs for the SAARC countries (NTBs and Para tariff) Para-tariffs : these charges are levied to bring import prices at par with domestic pricesbut usually overcompensates Greater integration and tariff reduction in Sensitive list may not increase consumer welfare Barriers to Trade : Beyond Borders

13. Strong need for conducting research on evaluating the impact of SAFTA on Consumer welfare Need for identifying key policy and structural bottlenecks Perception based survey may yield valuable and insightful information however there might be perception bias: Dreze and Sen (2002) showed that the incidence of reported morbidity was higher in Kerala than in Bihar, a poorer state with considerably higher mortality Way Forward

14. Thank You