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SOUTH ASIAN FREE TRADE

AGGREMENT


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SOUTH ASIAN FREE TRADE AREA

(SAFTA)

HistoryDuring the immediate post- independence period namely in the 1940s, most of the South

Asian countries had very open economies but the whole scenario changed around t1970s

and they became highly protectionist to the extent that tariff and even non- tariff barriers

were extremely high, attitude to foreign investment was were negative often very hostile.

However this started to change in the late 1970s. This was started by Sri Lanka and was

in turn followed by other countries, but this process began in India only in the early

1090s, in the form of a major reform process.

South Asian countries were late in realizing the concept of regional economic

corporation. But never the less in 1985 the South Asian countries started with preferential

trade liberalization with the establishment of SAARC (South Asian Association For

Regional Cooperation). The proposal to set up a SAARC was accepted and came into

formal operation in December 1995.

In 1996 the member countries of SAARC decided to go a step further and thus the

agreement of SAFTA (South Asian Free Trade Agreement) came into existence.

However the completion of the act faced a set-back in 1998 due to the deterioration in

bilateral relation between India and Pakistan due to the Kargil war. But by January 2002

the official contacts were resumed and the agreement was completed by January 2004.


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Introduction

The South Asian Free Trade Area or SAFTA is a pact signed on 6 January 2004 that

gradually eliminated most tariffs and other trade barriers on products and services passing

between Bangladesh, Bhutan, India, Maldives, Nepal, Pakistan, Afghanistan and Sri

Lanka. The pact has effectively create a free-trade bloc among the eight countries of

South Asia.The SAFTA agreement came into force on 1 January 2006 and is operational following

the ratification of the agreement by the seven governments. SAFTA requires the

developing countries in South Asia (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 (Nepal, Bhutan, Bangladesh,

Afghanistan and Maldives) have an additional three years to reduce tariffs to zero. India

and Pakistan ratified the treaty in 2009, whereas Afghanistan as the 8th member state of

the SAARC ratified the SAFTA protocol on the 4th of May 2011.

SAFTAs main provisions called for the gradual reduction of tariffs, customs duties, and

other trade barriers between the seven members, with some tariffs being removed

immediately and others over periods of several years. SAFTA ensured eventual duty-free

access for a vast range of manufactured goods and commodities traded between the

signatories.


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Objectives and Principles

The Objectives of this Agreement are to promote and enhance mutual trade and economic

cooperation among Contracting States by, inter-alia.

1. Eliminating barriers to trade in, and facilitating the cross-border movement ofgoods between the territories of the Contracting States.

2. Promoting conditions of fair competition in the free trade area, and ensuringequitable benefits to all Contracting States, taking into account their respective

levels and pattern of economic development.

3. Creating effective mechanism for the implementation and application of thisAgreement, for its joint administration and for the resolution of disputes.

4. Establishing a framework for further regional cooperation to expand and enhancethe mutual benefits of this Agreement.

SAFTA shall be governed in accordance with the following principles

1. SAFTA will be governed by the provisions of this Agreement and also by therules, regulations, decisions, understandings and protocols to be agreed upon

within its framework by the Contracting States.

2. The Contracting States affirm their existing rights and obligations with respect toeach other under Marrakesh Agreement Establishing the World Trade

Organization and other Treaties/Agreements to which such Contracting States are

signatories.3. SAFTA shall be based and applied on the principles of overall reciprocity and

mutuality of advantages in such a way as to benefit equitably all and industrial

development, the pattern of their external trade and tariff policies and systems.


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4. The special needs of the Least Developed Contracting States shall be clearlyrecognized by adopting concrete preferential measures in their favour on a non-

reciprocal basis.

Instruments Used To Active The Above Stated

Targets

1. Trade Liberalisation Programme

2. Rules of Origin

3. Institutional Arrangements

4. Consultations and Dispute Settlement Procedures

5. Safeguard Measures6. Any other instrument that may be agreed upon.

Trade Liberalisation Programme

Contracting States agree to the following schedule of tariff reductions:

a) The tariff reduction by the Non-Least Developed Contracting States from existing

tariff rates to 20% shall be done within a time frame of 2 years, from the date of coming

into force of the Agreement. Contracting States are encouraged to adopt reductions in

equal annual installments.

b) The tariff reduction by the Least Developed Contracting States from existing tariff

rates will be to 30% within the time frame of 2 years from the date of coming into force

of the Agreement.

c) The subsequent tariff reduction by Non-Least Developed Contracting States from 20%

or below to 0-5% shall be done within a second time frame of 5 years, beginning from the

third year from the date of coming into force of the Agreement.

d) The subsequent tariff reduction by the Least Developed Contracting States from 30%

or below to 0-5% shall be done within a second time frame of 8 years beginning from the

third year from the date of coming into force of the Agreement.


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Institutional Arrangements

The following Institutional arrangements were done to

1.The Contracting States hereby establish the SAFTA Ministerial Council (SMC).2. The SMC shall be the highest decision-making body of SAFTA and shall be

responsible for the administration and implementation of this Agreement and all

decisions and arrangements made within its legal framework.

3. The SMC shall consist of the Ministers of Commerce/Trade of the Contracting States.

4. The SMC shall meet at least once every year or more often as and when considered

necessary by the Contracting States. Each Contracting State shall chair the SMC for a

period of one year on rotational basis in alphabetical order.

5. The SMC shall be supported by a Committee of Experts (COE), with one nominee

from each Contracting State at the level of a Senior Economic Official, with expertise in

trade matters.

6. The COE shall monitor, review and facilitate implementation of the provisions of this

Agreement and undertake any task assigned to it by the SMC. The COE shall submit its

report to SMC every six months.

7. The COE will also act as Dispute Settlement Body under this Agreement.

8. The COE shall meet at least once every six months or more often as and when

considered necessary by the Contracting States.

10. The SMC and COE will adopt their own rules of procedure.

Rules of OriginRules of Origin shall be negotiated by the Contracting States and incorporated in this

Agreement as an integral part.


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The Role of India

Bilateral Trade Agreements

The relationship between India and other SAARC member countries is historical. Indias

trade with Bangladesh, Bhutan, Maldives, Nepal and Sri Lanka are governed by the

bilateral treaties/agreements.

TheIndia-Bangladesh Bilateral Trade Agreement signed on October 04, 1980, has been

extended from time to time and presently the agreement is valid till March 31, 2009. This

Agreement provides for expansion of trade and economic cooperation, making mutually

beneficial arrangement for the use of waterways, railways and roadways, passage of

goods between two places in one country through the territory of the other, exchange of

business and trade delegations and consultation to review the working of the Agreement

at least once a year. In the bilateral trade talks, issues for recognising Bangladeshs

accredited agencies like Bangladesh Standards and Testing Institution (BSTI) for

certifying biscuits, processed food, and cement are being discussed. A lab for testing

Hilsa fish at Petrapole border has been set up as a measure for bilateral cooperation.

Earlier Bangladesh imposed restriction on import of yarn from India through land route.

This issue was also resolved mutually in 2006 when Bangladesh lifted the ban on

movement of yarn through Petrapole for yarn used by export oriented industry which

consumes major share of total import of yarn from India.

Indian and Bhutan

The first formal Agreement on Trade and Commerce between India and Bhutan was

concluded in 1972. It was renewed periodically, with mutually agreed modifications. The

current Agreement between the two countries on Trade, Commerce and Transit was

signed on July 28, 2006 and is operational from July 29, 2006 for a period of 10 years.

The Agreement provides for free trade and commerce between the two countries. The


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new agreement also provides for movement of Bhutanese goods from one part of Bhutan

to another part of Bhutan through India. As a token of friendship, Chukha Hydel Project

was commissioned. Bhutan earns nearly 25 percent of its revenue through export of

electricity to India. Efforts are being made to develop a Residue Monitoring Plant inBhutan for fruits and vegetables so that the testing etc., can be done there itself and the

consignments are not held at Indian border check posts.

Indo-Maldives

Indo-Maldives trade relations are governed by the Trade Agreement signed on March 31,

1981 initially valid for a period of one year with the provision that it shall progressively

remain in force until it is modified or terminated by either country on giving three months

notice to the other. The Agreement provides for Most Favoured Nation (MFN) treatment

to each other in trade and merchant vessels, promotion of commercial and technical

cooperation through exchange of delegations and participation in trade fairs and

exhibitions and supply of essential commodities by Government of India to Government

of Maldives on annual quota. As per the agreement, India supplies essential commodities

annually at the request of Maldives. These commodities usually consist of eggs, potatoes,rice, onion, wheat flour, sugar, etc., and despite having export restrictions on some of

items, India continues to supply them to Maldives.

India and Nepal

India and Nepal have signed the Treaty of Trade to regulate bilateral trade, which was

renegotiated and renewed for five years with effect from March 06, 2002. The Treaty ofTrade has been renewed in the existing form for a further period of five years with effect

from March 06, 2007. The treaty provides India and Nepal to exempt primary products

from each other from the basic custom duty/quantitative restrictions. India has also

undertaken to promote industrial development of Nepal, by granting duty free access to


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Nepalese goods, on non-reciprocal basis. The treaty on the other hand, provides Nepal to

exempt wholly/partially Indian imports from customs duty/quantitative restriction to the

extent feasible.

India and Pakistan

After independence, India and Pakistan signed a standstill agreement under which goods

from one country to another were exempted from customs duty. Between 1965 and 1975,

there was trade embargo between the two countries. A trade protocol (Shimla

Agreement) was signed for lifting the trade embargo with effect from December 07,

1974. India accorded MFN status to Pakistan in 1996 and in the same year Pakistanincreased its positive list of 600 items that could be imported from India. The present

Positive List of Pakistan specifies 1075 items which are importable from India. Pakistan

is yet to grant MFN status to India despite its obligations, including under the WTO, and

has cited extraneous political, economic and other reasons for this.

India and Sri Lanka

Agreement, which was made operational in February-March, 2000, both countries

committed to eliminating tariffs in a phased manner on all items except for items in the

Negative List and items under the tariff rate quota mechanism. While India has

completed its tariff elimination programme in 2003 as envisaged in the FTA, Sri Lanka

will complete the tariff liberalisation programme in the year 2008.

India and Sri Lanka have signed an agreement on the US$100mn Line of Credit in

January 2001 to enable Sri Lankan importers to source goods and services from Indiaunder soft loan terms. The credit is only for items of Indian manufacture and services.

The credit covers import of capital goods; import of consumer durables and five specified

food items, i.e. sugar, wheat flour, rice, red split lentils and wheat grains, as well as

consultancy services. India and Sri Lanka are now engaged in negotiating a CEPA with


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the objective of widening the ambit of the FTA to include services and investment. Both

sides are also negotiating for reducing the size of Negative List so that the market access

opportunities could be enhanced.

ConclusionThought South Asia has not achieved the required economic growth and prosperity as

compared to other economic regions such as Europe, North America and South East

Asia, it has great economic strength in terms of its market potential (one third of

humanity resides in this area) and in terms of the rich natural resources and capable

human resources. South Asian countries, with the highest number of poor in the world,

cannot afford to keep SAARC as a meaningless coalition. The need of the hour is to

make SAARC a strong economic bloc, setting aside bilateral disputes. Under these

circumstances, progress towards SAFTA is very important. To reap the benefits of

increased regional trade, however, all SAARC states have to prepare themselves for the

new challenges of the free trade area. The importance of India in ensuring the success of

SAFTA is derived both from the countrys geographic position at the centre of the regionand the size of its economy. The studies show that without open trade involving India, the

prospects of SAFTA being meaningful in enhancing trade is limited.

However, studies by Baysan et.al,11 (2006), Pitigala12(2005) and Srinivasan13 (2001)

draws from both existing literature and own analysis to argue that an economic case for a

free trade area in South Asia is relatively weak due to reasons like the small size of the

economies (other than India), lack of openness and higher transaction costs of doing

formal trade. Baysan, et.al (2006), holds the view that political rather than economic

reasons were behind the creation of the SAFTA, a view finds echo in other studies as

well. The paper argues that the trade preferences under SAFTA may be more trade


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diverting than trade creating. In order to limit the potential adverse effects and maximize

the benefits of SAFTA, the countries of the region are advised to:

take steps to minimize the sectoral/product exceptions; have rules of origin that are very liberal, simple, transparent, and remain the

same for all products;

have clear rules against tariff-rate quotas; and India and Pakistan move to MFN-based trade

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