Time to Move Beyond SAFTA

There are strong arguments for deeper regional economic integration in South Asia, as it is believed to generate significant intra-regional trade and welfare gains for the countries involved. Deeper regional integration is supposed to provide countries in the region improved market access in each other’s markets, and thus help boost their exports, which would augment the significance of intra-regional trade and associated investment flows. That would, on the other hand, generate more trading opportunities among the countries involved since there will be tariff differentials due to the most favored nation (MFN) vis-à-vis regional tariff regimes. These are static gains that the countries involved would be able to realize. Dynamic gains could be even greater due to the possible expansion of the scale of operation owing to easy access to the large regional market buoyed by increased investment and more efficient allocation of regional resources.

There are also convincing evidences that deeper regional integration is needed for generating and sustaining economic growth in South Asian countries in a region that is home to a significant share and the highest density of poor people in the world, sustainable economic growth can ensure employment creation and contribute to poverty alleviation. Moreover, South Asia is one of the most food insecure regions in the world where ensuring food security continues to remain an insuperable challenge. Consequently, intra-regional trade in agriculture and food products is crucial to improve the situation of food security in the region.

Inarguably, deeper regional integration through trade and transport facilitation, along with the presence of efficient regional supply chains, will dramatically improve intra-regional trade and increase the competitiveness of South Asian countries to better participate in the global market. Meanwhile, peace dividends of intra-country stable political relations—a pre-requisite for regional integration—will also be immensely high.

Regrettably, intra-regional trade in South Asia has hovered around 5 percent for the past decade, which is significantly lower when compared to other regional arrangements such as the North American Free Trade Agreement (NAFTA), Association of Southeast Asian Nations (ASEAN), and the European Union (EU). Such inferior performance is despite the focus of the current regime of regional integration on improving intra-regional trade in goods. There is, however, a growing perception that South Asia’s intra-regional trade is underestimated since a large volume of informal trade among South Asian countries is not fully captured. Additionally, while formal intra-regional trade is low in the region as a whole, bilateral trade among South Asian countries, namely between India and other smaller countries such as Bhutan and Nepal, is exceptionally high. Furthermore, trade in services, particularly in education, health care, information technology and construction, is vibrant at best, but is not recorded well.

In their pursuit to improve intra-regional trade, South Asian countries crossed an important milestone in regional integration with the implementation of the Agreement on South Asian Free Trade Area (SAFTA) in 2006. SAFTA is a landmark achievement, but sadly, it has thus far failed to bring about significant changes in the status of intra-regional trade. Hence, for a deeper integration in South Asia, countries in the region have to first fully implement SAFTA and then move beyond it.

New regime of regional integration

South Asia is at the verge of a new regime of regional integration, which involves four integration processes, namely: i) market integration: integration in trade in goods and services; ii) growth integration: integration in economic growth processes of South Asian countries; iii) investment integration: promotion of regional investment and trade nexus; and iv) policy integration: harmonization of economic and trade policies.

The new regime of regional integration should focus more in promoting regional investment and trade nexus. Promoting intra-regional investments and attracting extra-regional foreign direct investments (FDIs) in goods and services in general, and energy and infrastructure sectors in particular, should be the key features of the new regime. Additionally, it is necessary to link intra-regional trade liberalization with enhanced intra-regional investment in different services sectors. Regional and sub-regional efforts must be promoted for different trade and transport facilitation measures, for cooperation in energy generation and transmission, and for linking energy cooperation and trade and transport facilitation with investment and growth processes of countries in the region. Importantly, regional focus should include the development of efficient regional supply chains to gain competitive edge in the international market. In addition, the new regime should re-emphasize the importance of concrete regional efforts to diversify the export structures of the weaker economies for their effective integration into the regional economy. Notably, realistic short- and medium-term targets should be set to ensure timely progress in achieving the ultimate goal of deeper regional integration for shared regional prosperity.

In that context, there is need to further reduce intra-SAARC tariffs and sensitive lists, relax rules of origin, and establish effective mechanisms to deal with non-tariff measures (NTMs) and non-tariff barriers (NTBs). Moreover, a more proactive policy initiative should be taken for SAFTA to match extensive tariff reductions under the bilateral Free Trade Agreement (BFTAs) within the region. Accordingly, a review of all current commitments under SAFTA should be initiated with the objective of converging SAFTA’s tariff reductions to match those provided under the bilateral FTAs. In addition, the Rules of Origin (RoO) under SAFTA should also be made consistent with those that are now in force under the BFTAs, in which the rules are often more liberal than those in SAFTA.

Some of the important elements of regional integration in South Asia, which exist today but need serious revisiting include, among others: i) overcoming NTBs; ii) deepening customs cooperation; iii) promoting services trade; iv) enhancing investment cooperation; v) smoothening trade and transport facilitation; and vi) promoting energy cooperation. These are briefly discussed below.

Addressing NTBs

One of the crucial factors that have largely rendered SAFTA ineffective is the various types of NTBs imposed by countries in the region. According to a recent study (Raihan, S., M. A. Khan and S. Quoreshi. 2014. NTMs in South Asia: Assessment and Analysis. Kathmandu: SAARC Trade Promotion Network), there are many products in which SAARC countries have high export capacities, but intra-SAARC trade of these products are absent due to the presence of various NTMs. In order to effectively deal with existing NTMs, the SAARC Secretariat should take the inventories on NTMs of the SAARC member states into cognizance and endorse the many initiatives taken by the private sector and development partners. Importantly, prominent NTMs should be reviewed and analyzed to identify their impact on trade. Subsequently, to reduce the trade-impeding effects of NTMs and NTBs, SAARC countries should sign mutual recognition agreements (MRAs).In that context, SAARC countries should accept certificates issued by the competent authorities of other SAARC member countries, for which the laboratories issuing the certificates should be accredited. Accreditation bodies or agencies may set up accreditation centers in collaboration with a designated national agency. It is also important to strengthen the SAARC Regional Standards Organization (SARSO) and allocate adequate human and financial resources to make it function effectively. Importantly, focused interactions on NTBs and NTMs between the private sector and the government should be conducted regularly in each SAARC country.

Deepening customs cooperation

In order to facilitate regional trade, customs valuation should be strictly in line with the WTO Customs Valuation Agreement, and the certificates issued by designated national institutions should be accepted by all ports of entry. Fees levied should be based only on the cost of services rendered. Additionally, considering the importance of automation of customs in trade facilitation, SAARC Members should expedite and prioritize the introduction of increased automation of their customs clearance procedure under the harmonized Automation System of Customs Data (AYSCUDA).

Promoting services trade

Considering the rising prominence of global trade in services, deeper regional integration in South Asia requires enlarged services integration in the region. Deeper regional integration in services trade would provide huge welfare gains for South Asian countries as almost all South Asian countries are net importers of services. SAARC countries, therefore, have signed the SAARC Agreement on Trade in Services (SATIS), which awaits implementation. Unfortunately, many South Asian countries lack established and well-functioning regulatory and institutional frameworks that support services trade liberalization and hence effective implementation of SATIS. Therefore, considering their specific economic requirements and the necessary technical assistance for capacity building, SAARC countries should frame appropriate domestic regulations without delay. . Thus, countries should be provided adequate regulatory flexibilities to promote services trade liberalization.

Enhancing investment cooperation

South Asia lacks adequate investment in different sectors, which is necessary to deepen regional integration. While much of such investments need to be attracted from countries outside the region, there is ample scope for intra-regional investment too. However, for that to materialize, effective domestic regulatory frameworks need to be harmonized with the regional investment framework, taking into account the country-specific priorities in different sectors. That will require streamlining of investment regulations, improvement of the business environment, enhancement of institutional and regulatory capacities, making regulatory cooperation effective, and enhancing people’s mobility. Notably, a regional investment treaty and double taxation treaties among SAARC countries are needed to remove existing barriers to investment in the region.

Smoothening trade and transport facilitation

Studies have shown that development of economic corridors among South Asian countries would help these countries better integrate regionally and globally. In this regard, the need for harmonization of laws and processes related to transport networks, and transit and trade facilitation among these countries, becomes obvious. Trade facilitation landscape of South Asia is unimpressive when behind-the-border issues are considered. South Asian countries suffer from excessive direct costs and time taken to cross borders and from inefficiency in cross-border transactions. Trade in the region is also constrained by the poor conditions of trade- and transport-related infrastructure, congestions, high costs, and lengthy delays. Among the major causes of high trade transaction costs is the number of cumbersome and complex cross-border trading practices, which also increase the possibility of corruption. Goods carried by road are subject largely to transshipment and manual checking at the border, which imposes serious impediments to regional and multilateral trade. The problem is further compounded by the lack of harmonization of technical standards.

Studies have shown that improved trade facilitation in South Asia would increase the volume of intra-regional trade by reducing the transaction costs of trade, thus making exports more competitive and imports less expensive. Therefore, reduction of transaction time through simplification of documentation and promotion of paperless trade should be a priority. To reduce trade-related transaction costs, governments must collaborate on a trade facilitation agenda that encompasses procedures, regulations and processes that impose costs on cross-border commercial transactions such as customs, standards and movement of people, among others.

Promoting energy cooperation

South Asian countries have wide variations in commercial energy resource endowments and commercial energy demand. Hence, they can immensely benefit from efficient sharing of their energy resources through a wider energy system integration, which would lead to more optimal energy supply solutions with greater energy security for the region. Regional cooperation is thus needed in the areas of increased energy production, expanded energy trade infrastructure, promotion of a regional power market, and harmonized legal and regulatory frameworks, together with an improved investment environment.

Conclusion

SAARC leaders have visioned an Economic Union in South Asia. To materialize this vision, SAARC should now enter into a new regime of regional integration. Building on past experiences and effectiveness of the existing regional integration regime, the new regional integration regime will require pro-active and visible leadership, mainly from India, in taking the agenda forward. The success and the effectiveness of the new regime will largely depend on the delicate balance between what each country can offer and what it can expect in the deeper integration process. Moreover, regional institutions, like the SAARC Secretariat, have to be institutionally reformed and reoriented. Business associations and civil society organizations have to understand and participate in the political economy process of pursuing regional integration agenda in South Asia more than ever under the new regime.

Published at the Trade Insight, Volume 10, No. 2, 2014, SAWTEE, Kathmandu

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