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1. A Customs Unions is two or more customs territories which have an FTA and
which also apply a common external tariff on goods from non-members.
2. A regional economic integration agreement is the next step: it can include the
free movement of capital as well as goods and services, a common currency
and a common economic policy
Success of an FTA is measured in terms of increased flow of goods and services. The
more the economies trade among themselves, the greater the tendencies for further
economic integration. Since trade affects growth, a greater flow of goods and services
is likely to see less opposition in the way of economic integration.
(NTBs), such as antidumping measures, import licences and sanitary standards. The
answer to a successful FTA therefore lies in controlling
those factors which act against FTAs, and nurturing the factors which help in forming
and sustaining an FTA. Some of the factors that affect the formation of an FTA are
considered below:
1.4.1 Intra-industry trade:
An FTA is more likely to be formed when trade happens in
similar commodities, that is, intra-industry trade. The likelihood that industry
association will demand more protection is less in cases of intra-industry trade. In the
presence of intra-industry trade (for example, India exporting Tata Indica cars to the
United States and at the same time importing Ford cars from that country), adjustment
costs associated with removing trade barriers are lower. In this case, jobs lost due to
customers shifting to more efficient foreign suppliers may, to a large extent, be offset
by job-enhancing expansion in foreign demand for similar differentiated goods
produced domestically. The political opposition to liberalizing and expanding intra-
industry trade tends to be far less when compared with trade involving dissimilar
items, that is, inter-industry trade.
1.4.2 Economic characteristics:
Economies that are similar in terms of size are better
candidates for forming an FTA. Similarities are measured in terms of economic
development and geographical proximities. The more similar are the economies, the
greater is the likelihood of intra-industry trade. This is because geographically close
economies with similar levels of economic development have access to similar kinds
of technology. Consequently, they tend to produce more or less similar items and tend
to trade in similar commodities (closely differentiated products as in the monopolistic
competition type market structure). As the literature on the gravity model of trade
demonstrates, similarities in economic structure and geographical distance between
respective economies are powerful determinants of trade. Trade increases with
economic size and the proximity of the trading partners.
1.4.3 Prices:
Low technology intensive items, such as leather footwear, garments, gems and
jewellery and textile products, which are typical of any developing country’s export
profile, are very sensitive to movements in price, i.e., they are price-elastic. When it
comes to forming an FTA, countries analyse whether such an arrangement would
enable them to realize a greater demand for their exports. From the demand-side
perspective, it can be argued that sustained demand growth cannot be maintained in a
small domestic market, since any economic impulse based on expansion of domestic
demand is bound to be exhausted. However, export markets do not exhaust quickly.
FTAs not only provide a platform for a greater market share but also enable countries
to produce efficiently. As the literature on monopolistic competition suggests, a way
to produce exports competitively is to take advantage of economies of scale in
production, which can be realized from a greater market share resulting from an FTA
1.4.4Government policies:
More liberal government policies are likely to be beneficial for an FTA. There is a
general consensus in the literature that trade volume, for both exports and imports,
increases following external sector liberalization Higher
trade volume, resulting from external sector liberalization, is expected to increase the
likelihood of FTA formation.
Although free trade provides overall benefits, removing a trade barrier on a particular
good hurts the shareholders and employees of the domestic industry that produces that
good. Some of the groups that are hurt by foreign COMPETITION wield enough political
power to obtain protection against imports. Consequently, barriers to trade continue to
exist despite their sizable economic costs. According to the U.S. International Trade
Commission, for example, the U.S. gain from removing trade restrictions on textiles
and apparel would have been almost twelve billion dollars in 2002 alone. This is a net
economic gain after deducting the losses to firms and workers in the domestic
industry. Yet, domestic textile producers have been able to persuade Congress to
maintain tight restrictions on imports.
While virtually all economists think free trade is desirable, they differ on how best to
make the transition from tariffs and quotas to free trade. The three basic approaches to
trade reform are unilateral, multilateral, and bilateral.
Some countries, such as Britain in the nineteenth century and Chile and China in
recent decades, have undertaken unilateral tariff reductions—reductions made
independently and without reciprocal action by other countries. The advantage of
unilateral free trade is that a country can reap the benefits of free trade immediately.
Countries that lower trade barriers by themselves do not have to postpone reform
while they try to persuade other nations to follow suit. The gains from such trade
liberalization are substantial: several studies have shown that income grows more
rapidly in countries open to international trade than in those more closed to trade.
Dramatic illustrations of this phenomenon include China’s rapid growth after 1978
and India’s after 1991, those dates indicating when major trade reforms took place.
Trade theory and evidences suggest that there are several forms of RTA:
• Preferential Trade Area (PTA): Tariffs are lowered among the members but
maintained against the outside world
• Free Trade Areas (FTA): Tariffs are removed among members but maintained
against the outside world
• Customs Union: All tariffs amongst the members are eliminated, while external
tariffs are adjusted to a common level
• Common Market: Customs Union + free movement of factors of production
• Economic Union: Customs Union + Common economic laws
For many countries, unilateral reforms are the only effective way to reduce domestic
trade barriers. However, multilateral and bilateral approaches—dismantling trade
barriers in concert with other countries—have two advantages over unilateral
approaches:
First, the economic gains from international trade are reinforced and enhanced when
many countries or regions agree to a mutual reduction in trade barriers. By broadening
1.9.1 G.A.T.T.
The major countries of the world set up the GATT in reaction to the waves of
PROTECTIONISM that crippled world trade during—and helped extend—the GREAT
DEPRESSION of the 1930s. In successive negotiating “rounds,” the GATT substantially
reduced the tariff barriers on manufactured goods in the industrial countries. Since the
GATT began in 1947, average tariffs set by industrial countries have fallen from
about 40 percent to about 5 percent today. These tariff reductions helped promote the
tremendous expansion of world trade after World War II and the concomitant rise in
real per capita incomes among developed and developing nations alike. The annual
gain from removal of tariff and nontariff barriers to trade as a result of the Uruguay
Round Agreement (negotiated under the auspices of the GATT between 1986 and
1993) has been put at about $96 billion, or 0.4 percent of world GDP.
In 1995, the GATT became the World Trade Organization (WTO), which now has
more than 140 member countries. The WTO oversees four international trade
agreements: the GATT, the General Agreement on Trade in Services (GATS), and
agreements on trade-related INTELLECTUAL PROPERTY rights and trade-related
INVESTMENT (TRIPS and TRIMS, respectively). The WTO is now the forum for
members to negotiate reductions in trade barriers; the most recent forum is the Doha
Development Round, launched in 2001.
The WTO also mediates disputes between member countries over trade matters. If
one country’s government accuses another country’s government of violating world
trade rules, a WTO panel rules on the dispute. (The panel’s ruling can be appealed to
an appellate body.) If the WTO finds that a member country’s government has not
complied with the agreements it signed, the member is obligated to change its policy
and bring it into conformity with the rules. If the member finds it politically
impossible to change its policy, it can offer compensation to other countries in the
form of lower trade barriers on other goods. If it chooses not to do this, then other
countries can receive authorization from the WTO to impose higher duties (i.e., to
“retaliate”) on goods coming from the offending member country for its failure to
comply.
As a multilateral trade agreement, the GATT requires its signatories to extend most-
favored-nation (MFN) status to other trading partners participating in the WTO. MFN
status means that each WTO member receives the same tariff treatment for its goods
in foreign markets as that extended to the “most-favored” country competing in the
same market, thereby ruling out preferences for, or discrimination against, any
member country.
The customs union exception was designed, in part, to accommodate the formation of
the European Economic Community (EC) in 1958. The EC, originally formed by six
European countries, is now known as the EUROPEAN UNION (EU) and includes twenty-
seven European countries. The EU has gone beyond simply reducing barriers to trade
among member states and forming a customs union. It has moved toward even greater
economic integration by becoming a common market—an arrangement that
eliminates impediments to the mobility of factors of production, such as capital and
labor, between participating countries. As a common market, the EU also coordinates
and harmonizes each country’s tax, industrial, and agricultural policies. In addition,
many members of the EU have formed a single currency area by replacing their
domestic currencies with the euro.
The GATT also permits free-trade areas (FTAs), such as the European Free Trade
Area, which is composed primarily of Scandinavian countries. Members of FTAs
eliminate tariffs on trade with each other but retain autonomy in determining their
tariffs with nonmembers.
One difficulty with the WTO system has been the problem of maintaining and
extending the liberal world trading system in recent years. Multilateral negotiations
over trade liberalization move very slowly, and the requirement for consensus among
the WTO’s many members limits how far agreements on trade reform can go. As
Mike Moore, a recent director-general of the WTO, put it, the organization is like a
car with one accelerator and 140 hand brakes. While multilateral efforts have
successfully reduced tariffs on industrial goods, it has had much less success in
liberalizing trade in agriculture, textiles, and apparel, and in other areas of
international commerce. Recent negotiations, such as the Doha Development Round,
have run into problems, and their ultimate success is uncertain.
1.9.4 N.A.F.T.A.
As a result, many countries have turned away from the multilateral process toward
bilateral or regional trade agreements. One such agreement is the North American
Free Trade Agreement (NAFTA), which went into effect in January 1994. Under the
terms of NAFTA, the United States, Canada, and Mexico agreed to phase out all
tariffs on merchandise trade and to reduce restrictions on trade in services and foreign
investment over a decade. The United States also has bilateral agreements with Israel,
Jordan, Singapore, and Australia and is negotiating bilateral or regional trade
agreements with countries in Latin America, Asia, and the Pacific. The European
Union also has free-trade agreements with other countries around the world.
Free trade agreements promote greater trade among the parties to the agreement. It is
clear fact that the trade among the member countries tend to increase when the
member countries follow the trade agreements.
Countries which undertake a regional trade agreement has to reduce the trade barriers
for the other member countries which promotes trade of goods and services among
the members.
They may also hasten global trade liberalization if multilateral negotiations run into
difficulties. Recalcitrant countries excluded from bilateral agreements, and hence not
sharing in the increased trade these bring, may then be induced to join and reduce
their own barriers to trade. Proponents of these agreements have called this process
“competitive liberalization,” wherein countries are challenged to reduce trade barriers
to keep up with other countries. For example, shortly after NAFTA was implemented,
the EU sought and eventually signed a free-trade agreement with Mexico to ensure
that European goods would not be at a competitive disadvantage in the Mexican
market as a result of NAFTA.
Suppose, for example, that JAPAN sells bicycles for fifty dollars, Mexico sells them for
sixty dollars, and both face a twenty-dollar U.S. tariff. If tariffs are eliminated on
Mexican goods, U.S. consumers will shift their purchases from Japanese to Mexican
bicycles. The result is that Americans will purchase from a higher-cost source, and the
U.S. government receives no tariff revenue. Consumers save ten dollars per bicycle,
but the government loses twenty dollars. Economists have shown that if a country
enters such a “trade-diverting” customs union, the cost of this trade diversion may
exceed the benefits of increased trade with the other members of the customs union.
The net result is that the customs union could make the country worse off.
Despite possible tensions between the two approaches, it appears that both
multilateral and bilateral/regional trade agreements will remain features of the world
economy. Both the WTO and agreements such as NAFTA, however, have become
controversial among groups such as antiglobalization protesters, who argue that such
agreements serve the interests of multinational CORPORATIONS and not workers, even
though freer trade has been a time-proven method of improving economic
performance and raising overall incomes. To accommodate this opposition, there has
been pressure to include labor and environmental standards in these trade agreements.
Labor standards include provisions for MINIMUM WAGES and working conditions, while
environmental standards would prevent trade if environmental damage was feared.
One motivation for such standards is the fear that unrestricted trade will lead to a
“race to the bottom” in labor and environmental standards as multinationals search the
globe for low wages and lax environmental regulations in order to cut costs. Yet there
is no empirical evidence of any such race. Indeed, trade usually involves the transfer
of technology to developing countries, which allows wage rates to rise, as Korea’s
economy—among many others—has demonstrated since the 1960s. In addition, rising
incomes allow cleaner production technologies to become affordable. The
replacement of pollution-belching domestically produced scooters in India with
imported scooters from Japan, for example, would improve air quality in India.
LABOR UNIONS and environmentalists in rich countries have most actively sought labor
and environmental standards. The danger is that enforcing such standards may simply
become an excuse for rich-country protectionism, which would harm workers in poor
countries. Indeed, people in poor countries, whether capitalists or laborers, have been
extremely hostile to the imposition of such standards. For example, the 1999 WTO
meeting in Seattle collapsed in part because developing countries objected to the
Clinton administration’s attempt to include labor standards in multilateral agreements.
2. WHY SAFTA?
Following arguments support the need for free trade agreement in South Asia:
4000000
3500000
3000000
2500000
All developing
2000000 EAP
SAS
1500000
1000000
500000
0
1981 1984 1987 1990 1993 1996 1999 2002
The graph of exports above demonstrates the fact that the South Asian exports have
been much lower than East Asia and Pacific and that of the remaining all the
developing countries. Hence there was need to improve the exports of these countries
to speed up the pace of their economic development through a platform in the form of
SAFTA.
0.2
0.18
0.16
0.14
0.12 EAP
0.1 LAC
0.08 SAS
0.06
0.04
0.02
0
80
82
84
86
88
90
92
94
96
98
00
02
19
19
19
19
19
19
19
19
19
19
20
20
South Asian Trade has very small portion in the overall world’s trade although this
area has very huge population but trade growth as compared to its population is
desperately low. So, in order to enhance the trade activity in this region a trade
agreement in the form of SAFTA was necessary.
30%
26.5%
25%
20%
15.3%
15%
10%
6.4%
5.3%
5% 3.5%
0.8%
0%
Latin America--------------------------6.4%
South Asia-----------------------------0.8%
Sub-Saharan Africa---------------------5.3%
2.4 Tariffs, though lower now, remain high relative to other regions
Tariffs have been very high in this area from 1986 to date as compared to the rest of
the world as shown by the graph below. One possibility to remove these very high
trade tariffs seems to undertake a regional trade agreement to promote trade activity
among the South Asian countries.
80
70
60
1986
50
1990
40
1996
30
2002
20
10
0
South Middle Sub- East Asia Europe & Latin
Asia East & Saharan Central America
Africa Africa Asia
The following graph shows protection rates faced by the exporters of different regions
and it is clear that this rate is the highest for the South Asian exporters. High
protection rate affects trade activity adversely that’s why South Asian exports have
been lower than other countries in the region.
20
18
16
14
12
10 Series1
8
6
4
Protection
2
0
rates faced by South Asian exporters of manufactures, 19.97%
t
ia
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a
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as
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As
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lA
er
st
Af
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h
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In
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id
So
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ha
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La
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an
b-
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e
op
r
Eu
0.4% $515 b.
Values in USD millions, 2002. T otal bilateral trade is calculat ed as the sum of bilateral exports, shares are ratios of total b ilateral trade to the sum of each
country’s total exports. Source: COMTRADE and Global Trends.
Trade between India and Pakistan has been abnormally low as compared to the most
of the bilateral trade in the world. This has been due to political and other regional
disputes between these countries.
The Agreement on the South Asian Free Trade Area is an agreement reached at the
12th South Asian Association for Regional Cooperation (SAARC) summit at
Islamabad, capital of Pakistan on 6 January 2004. It creates a framework for the
creation of a free trade zone covering 1.4 billion people in India, Pakistan, Nepal, Sri
Lanka, Bangladesh, Bhutan and the Maldives.The seven foreign ministers of the
region signed a framework agreement on SAFTA with zero customs duty on the trade
of practically all products in the region by end 2016. The SAARC Preferential
Trading Arrangement (SAPTA), with concessional duty on sub-continent trade, went
into force on 7 December 1995. The new agreement i.e. SAFTA, came into being on
1 January 2006 and will be operational following the ratification of the agreement by
the seven governments. SAFTA requires the developing countries in South Asia, that
is, India, Pakistan and Sri Lanka, to bring their duties down to 20 percent in the first
phase of the two year period ending in 2007. In the final five year phase ending 2012,
the 20 percent duty will be reduced to zero in a series of annual cuts. The least
developed nations in South Asia consisting of Nepal, Bhutan, Bangladesh and
Maldives have an additional three years to reduce tariffs to zero. Pakistan has signed
but not ratified the treaty, though there is hope in India that it will sometime in 2008.
3.1.2 Trade
Trade in the SAFTA region is currently low. There are reasons for lower intra-
SAFTA trade. Most of the SAFTA member countries have a lower trade-GDP ratio
and have initiated external sector liberalization (that is, bringing down tariff barriers),
starting only in the 1990s. A large number of NTBs currently exist in the region.
These NTBs include antidumping measures, procedural requirements, sanitary and
phytosanitary standards, certification and technical standards (Banik, 2001). The
encouraging point is that most of these economies have started to open up and have
also registered healthy GDP growth. During the period 2003-2004, all SAFTA
countries, except Nepal, witnessed strong economic growth in the range of 5-9 per
cent as well as 4-5 per cent per capita GDP growth. As McCombie and Thirlwall
(1997) and Paulino and Thirlwall (2004) pointed out, robust economic growth
encourages a more liberalized trade regime. With a similar export profile, trading
partners are better off with less restrictions. Because countries in the SAFTA region
share a similar export profile they also face the same types of NTBs; hence, they share
a similar negotiating stance for removing these barriers. Recent trade data suggest that
3.3 Principles
SAFTA shall be governed in accordance with the following
principles:
SAFTA will be governed by the provisions of this Agreement and also by the rules,
regulations, decisions, understandings and protocols to be agreed upon within its
framework by the Contracting States;
• The Contracting States affirm their existing rights and obligations with respect
to each other
3.4 Instruments
The SAFTA Agreement will be implemented through the following instruments:-
1. Trade Liberalisation Programme
2. Rules of Origin
3. Institutional Arrangements
4. Consultations and Dispute Settlement Procedures
5. Safeguard Measures
6. Any other instrument that may be agreed upon.
3.5 Components
SAFTA may, inter-alia, consist of arrangements relating to:
a) tariffs;
b) para-tariffs;
c) non-tariff measures;
d) direct trade measures.
Table suggests that intra-regional imports among the South Asian countries as a share
of world imports is very low, only 4.45 percent. However, there are differences
among individual countries in South Asia. For example, India’s figure of total imports
from other South Asian countries is only 0.86 percent of her total imports from all
over the world. Nepal’s share in this regard is the highest in South Asia, as Nepal is
heavily dependent on India for her imports. Bangladesh’s share is 20.3 percent which
is primarily imports from India. Figure shows that Bangladesh is the largest importer
in South Asia as far as regional imports share is concerned
EXPORTS
I ndia
77.2%
IMPORTS
Maldives
Nepal 2.6% I ndia
14.5% 12.8%
Pakistan
7.1%
Bangladesh
Sri Lanka 36.4%
26.6%
Non-LDCs are required to reduce tariffs on the products other than products under
Sensitive
Lists for LDCs to 0-5% within 31 December 2008 as per following schedule.
However, India is reducing its tariff for LDCs at an accelerated pace. Time table for
tariff reduction by India is as follows:
LDCs are required to reduce tariffs on the products other than the products under
sensitive lists to 0-05% within 31 December 2015 as per following schedule:
be applied against the product of LDCs if share of import from an LDC of the product
concerned in total import of importing country is less than 5%.
One of the chief queries posed at the implementation of the agreement was as to
how economically rational the agreement would be and whether the countries
One of the factors that contributed to this may be the fact that most of the
countries have gravitated toward manufacture and industry-based economies.
The influx of Foreign Direct Investment is set to increase with the agreement for
a number of projected reasons: increased regional cooperation would make South
Asia more attractive as a destination for investment. If an investor were to settle
in one country, the low tariff rates would act as a gateway to expansion of his
market. Increased intra-regional trade would reduce the security fears of
investors as well. To quote the report by the ADB-UNCTAD, “higher trade
openness attracts higher FDI”. The SAFTA benefits on importing intermediate
goods too have shown to be healthy for investment as high import of these goods
has recorded high inward FDI into the same country. Exports of goods to other
areas of the country however do not seem to have any effect on the FDI situation
in general.
The survey records the main disadvantage of the SAFTA to be revenue loss
caused by the tariffs being cut down to almost 0%-5%. Sri Lanka is budgeted to
lose Rs. 100 million worth of revenue as a result of this. Also, the latter phases of
the SAFTA (up to 2016) would produce a negative impact on the unskilled
employment of the country. While all this was recorded, some of the forum
members highlighted other pressing issues that affect the credibility and logic of
the agreement as well as the survey.
SAFTA ignoring non tariff barriers (NTB) was brought to light by Janaka
Wijeysiri, Research Economist from the IPS. “Unfortunately, no commitments
have been made to remove NTBs from the SAFTA,” he said, adding that when
the sensitive lists too were added into the equation, the trade potential within the
region was minimized substantially. The lack of binding commitments to reduce
or remove the negative lists too is a major barrier, he said.
The credibility of the models used by the ADB and UNCTAD were criticized by
Upali Wickremasinghe, Professor of Economics, University of Sri
Jayewardenepura, who suggested that the use of models which use past data to a
great extent might not be fully beneficial. “The RCA basically analyses what has
happened in the past,” he said, adding that the Trade Complementarity Index and
the Gravity models used were also of the same type, “using these to project
future possibilities may be elusive,” he said. The SMART model that was used
from some of the data simulations depends on Infinite Supply Elasticity, which
he pointed out would be tough assumption to adopt, especially for countries with
supply constraints.
He pointed out the animosity between certain countries, particularly India and
Pakistan, was only present at tense official-level meetings and that it does not
reflect in the business to business dealings or inter-personal encounters. His
opinion was that this should be kept in mind, and that the SAFTA should focus
on removing barriers like supply constraints instead of concentrating on “the
political black box”.
Some of the other main problems faced by the SAFTA are the Trade Restriction
Quotas (TRQ) and the Rules of Origin.
The ROO guidelines have been a significant bone of contention in the Indo-
Lankan FTA, as many of the local companies have significant foreign ownership,
and the solution remains to lower the threshold for foreign ownership.
The Tea and Apparel industries, the largest of the export sector and highest
contributors to local GDP have been hampered on the other hand by TRQ’s.
Kavita Iyenger, Regional Cooperation Specialist from the ADB said that when
compared to the Jawaharlal Nehru port in Mumbai, India, the Colombo port was
ranked highly in 1998 but that the ranking has fallen in 2004. Much of the traffic
at the port is trans-shipment traffic and the most of it from the SA region.
Currently, the survey has identified that the port requires enhancement of
operational efficiency and improvement of infrastructure to reach its full
potential. If Sri Lanka can finance the expenditure, the development will result in
considerable economic growth in the country.
Including services in the SAFTA has always been a topic of debate and five
sectors have been identified to increase trade liberalization - Health Services,
Tourism and Travel, Higher Education, Construction and Telecommunications.
The SAFTA countries, except Bhutan, have made commitments to liberalize
trade under the GATS, and the SAFTA offers them an opportunity to widen their
liberalization regionally. Liberalizing trade under the SAFTA would have a more
benefits when compared to liberalizing under GATS. For instance, the results are
more likely to be seen early regionally because a fewer number of countries are
involved, whereas with the GATS, the whole of the WTO would be included.
Also, since trade in services is still a relatively new mechanism, the risk factor
would be minimized with a small number of countries that already have Regional
Corporation.
4.1 History
In the 1990s, it was known as the country ruled by the Taliban, the hard-line Islamic
group that re-imposed the veil and other restrictions on women and destroyed the
Bamiyan Buddhas, two priceless pre-Islamic statues regarded as part of the world's
cultural heritage.
In the next decade, it became the land bombed by the US and allied forces in search of
Osama bin Laden, believed to be the mastermind of the September 2001 terrorist
attacks in New York City.
This year, Afghanistan, occupying a strategic position between South and Central
Asia, has acquired yet another identity as the newest member of the South Asian
Association for Regional Cooperation (SAARC).
Though Afghanistan had expressed its desire to join the grouping since 1985 - when
SAARC came into being with seven members - Bangladesh, Bhutan, India, Maldives,
Nepal, Pakistan and Sri Lanka - political instability and civil war kept it isolated.
4.2 Introduction:
Afghanistan has learned stark lessons from its political and economic isolation. More
than two decades of conflict resulting from occupation and foreign interference
inhibited economic and political development.
It has been decided in fourteenth SAARC Summit by all SAARC members that
Afghanistan’s political and economic isolation must never be repeated. Instead,
enhanced economic cooperation must be pursued for the sake of regional economic
and political stability.
Afghanistan enters the SAARC bloc as a much-needed bridge between South and
Central Asia in terms of trade and security and defense cooperation.
Working towards transit and transport facilities under the Regional Multi-
Model Transportation System. This will link the region’s road, rail and ports
systems
Land locking members’ transit rights; it must not allow narrowly defined
interests to trump the benefits of free-flowing trade in the region. Its collective
efforts are required for the successful implementation of the SAFTA
Agreement.
4.5 Conclusion:
Afghanistan seeks peaceful and prudent solutions to regional and international issues.
And it respects national sovereignty. Its foreign policy relies on the multilateralism
that SAFTA represents.
We hope that that Afghanistan will maintain constructive relations with each of its
regional partners, and will work in cooperation to further strengthen SAARC into an
effective instrument for regional prosperity. But at the same time we also know that
all this is not going to fructify overnight.
Studies based on the partial equilibrium gravity model to estimate the welfare gains
from regional trading arrangements (RTAs) are methodologically flawed. The left
hand side of the Gravity equation is the bilateral trade not the welfare. Also, the
impact of the RTA is captured by introducing the dummy variables in the equation
which is a very weak methodology. Furthermore, Gravity models are partial
equilibrium analysis, not a general equilibrium analysis. Therefore, they fail to take
into consideration the inter-sectoral and inter-regional linkage effects. Therefore,
gravity models can not actually estimate the trade creation and trade diversion
impacts of RTAs. We, therefore, argue that a global general equilibrium model like
the GTAP model is the best method in explaining the welfare effects of any regional
trading arrangements. Box 3 presents the commodity and regional aggregation of the
GTAP model under consideration.
SAFTA Scenarios
Name Explanation Banglades India Pakistan Rest of
h South
Asia
SAFTA1 Full 100% 100% 100% 100%
Implementatio
n of
SAFTA. 100%
Tariff cut for
the SAFTA
Countries
SAFTA2 Full 100% for 100% 100% 100%
Implementatio SAFTA+
n of 50% for
SAFTA. 100%
MFN Tariff
Tariff cut for
the SAFTA
countries and
Bangladesh
reduces her
MFN
tariffs by 50%
is large enough to offset the positive gain. However, all other South Asian countries
stand to gain from SAFTA1. The gain for India is the largest as far as any individual
country is concerned.
Trade Creation and Trade Diversion Effects of SAFTA1 Scenario
The high negative trade diversion effect for Bangladesh under SAFTA1 can be
explained by the fact that imports from India (a relatively high cost import source)
increases substantially and imports from all over the world (relatively low cost import
source) also declines significantly
Table reports the estimates of the changes in exports from Bangladesh to other South
Asian countries. Comparing the figures of table 6.10 with those of 6.9 it appears that
Bangladesh trade balances with India will deteriorate under SAFTA1. According to
table below Bangladesh’s exports to India increases by only 134 million US$,
whereas India’s exports to Bangladesh increases by 1489 million US$ (above table).
In fact, Bangladesh’s exports to other South Asian countries increase less than the
increases in the exports of other South Asian countries to Bangladesh.
5.4 Rise in Exports from Bangladesh to other South Asian Countries
under SAFTA1 (Million US$)
CONCLUSION
It appears that a full implementation of SAFTA will lead to welfare
gains for India, Sri Lanka and rest of South Asian countries, though Bangladesh
suffers from welfare loss. Bangladesh’s welfare loss is mainly driven by the negative
trade diversion effect. Simulation results also suggest that the negative trade diversion
effect can be undermined by some associated unilateral trade liberalisation measure. It
is also important to note that trade diversion for Bangladesh and possibly for other
LDCs under SAFTA is inevitable. Bangladesh and other LDCs in South Asia will
have to raise their export share into the Indian market substantially in order to
increase welfare through positive terms of trade effect. Export diversification in this
regard is very important. Technical assistance to Bangladesh and other South Asian
LDCs to diversify their export basket can be a vital agenda. It should also be noted
that the Special and Different Treatments for the LDCs under SAFTA are not
sufficient, especially maintaining the sensitive list for some of the critical products by
India will not help the South Asian LDCs to increase their export share. Also, South
Asian LDCs should reduce tariff on the import of (at least) raw materials from India,
which will have positive impact on LDCs welfare.