SAFTA: Few Observations

1. SAFTA: Few Observations Shahid Ahmed, Ph.D Associate Professor, Department of Economics, Jamia Millia Islamia New Delhi

2. South Asia • South Asia region has great economic strength in terms of its market potential and in terms of the rich natural resources and capable human resources. • Notwithstanding the recent global financial crisis, countries in South Asia are still one of the fastest growing regions in the world. Among South Asian economies, India is the largest and the fastest growing economy - growing at a rate of around 7.3 per cent (in real term) since 2001. • In this context, SAFTA must be a success story.

3. Few Facts • Intra-regional trade not significant, remained below 5%. • Not much gains in terms of trade. • Inequalities in the region has gone up

4. Sensitive List Criteria • Sensitive List is generally prepared: • Based on RCAs, Unit Value analysis and Consultations with few business groups If FTA has an objective of trade creation, above methodology seems to be incorrect. • Welfare is not a criteria • Methodologically static one • Objective is not clear

5. SAFTA Sensitive List • SAARC members are still very conservative in trading among themselves. • Since India has a better and more favourable trade regime with Bhutan, Nepal and Sri Lanka under the Bilateral Trade Agreements (BTAs), the coverage of trade in Sensitive List is merely indicative and has no bearing on the actual trade flows between them and India. • Conventional goods agreement –outdated in the present global scenario where other issues are also included.

6. More Comprehensive SAFTA Needed • Goods Agreement like SAFTA can add value but not substantial • Other engagements are more broader and wider –covers services, investments, MRAs, trade facilitation etc.

7. Actions to be taken by India • India drastically cuts down the size of its sensitive list for LDCs, especially their globally export items. This would be “trade creating”. • The non-tariff measures should be addressed in a time bound manner. • Facilitate intra-regional trade • Take efforts for promoting investments in other SAARC members especially the LDCs so that overall economic activity is generated and greater employment opportunities are created. • Provide better infrastructure and support at the border check posts of customs.

8. Constraints • The policy-induced constraints include the presence of trade barriers, inadequate trade facilitation (TF) mechanisms and regulated investment regimes.

9. Implication of Negative List • That the negative lists effectively captured the most traded items, and • The negative lists are ineffective in checking trade. • It only blocks formal trade

10. Trade costs: Much of the source of trade costs in South Asia results from lack of trade facilitation and lack of availability of physical infrastructure. • (Sadiq and Ghani, 2007 cited that at the India–Bangladesh border a consignment needs at least 22 documentations, more than 55 signatures and a minimum 116 copies for final approval. Paying bribes is a common phenomenon. Across South Asia the size of a bribe was reported to be between 2.2 per cent and 2.5 per cent of firm sales). • According to Wilson and Ostuki (2007), if countries in South Asia raise capacity building in trade facilitation halfway to that of East Asia’s capacity, average trade is estimated to increase by $ 2.6 billion. This is approximately 60 per cent of the regional trade in South Asia. The areas that will provide the greatest gains are service-sector infrastructure, and efficiency in airtime and maritime ports. Banik and Gilbert (2009) estimated the quantum of trade costs in the South Asian region.

11. Write Approach • Ex ante analyses. • Application of a General Equilibrium modelling framework to simulate the potential implications. • Or • SMART/GSIM model of World Bank/UNCTAD • Using this model we can actually decompose the welfare effects, particularly