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Reinvigorating SAARC to rejuvenate SAFTA

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It is often said that economic imperatives determine the polity and political decisions. But, political condition may also influence the economic conditions. But ultimately, even that political condition is also decided by the economy. In other words, it seems to be a classic ‘chicken-egg’ syndrome, but in most cases, the economic turmoil has a direct bearing on the political system. An incapable polity may or may not negatively impact the economy in every scenario, but a bad economy has unilaterally caused political upheaval throughout human history.

For example, the economic conditions of Germany and Italy after the First World War, coupled with the Great Depression of 1929, completely uprooted the popularity of the democratic institutions and led to the emergence of Nazism and Fascism based on economic assurances and optimism. The support to these kinds of militant nationalist ideologies stemmed mainly from the fact that it is the military which would go for aggressive policy, win colonies and bring booty and bounty for the nation. Through this method, the economic conditions may be ameliorated. Recently, the ongoing Ukraine crisis has polarized most of the world into two opposing camps reminiscent of the Cold War. But strong German-Russian economic ties are constraining both nations and their partners to negotiate for a middle path and avoid an uncompromising extremist stance against each other. Closer to home, the deteriorating economic conditions have led to the decline of democratic institutions in Thailand and the world witnessed a coup in the nation. The defeat of UPA II by NDA, especially by BJP, can also be attributed to the failures of UPA II’s economic policies in tackling unemployment, inflation, fiscal deficit etc. Both the primary and secondary sector failed to perform at a satisfactory level and the growth in real terms was jeopardised. The newly elected prime minister of India Narendra Modi, who made Gujarat vibrant only through liberal economic policies, has already realized that this victory has been given to neither NDA nor RSS or any other sectarian factors. It is solely a mandate to transform the economic situation of the world’s most populated nation by 2028, with 1.45 billion expected inhabitants as per the latest United Nations report.

 

Considering the growing popularity of regional trade agreements (RTA) like ASEAN, NAFTA and MERCOSUR, especially among the neighbouring countries, let us evaluate the performance of a few landmark agreements. In an RTA two or more countries decide to remove all tariffs on trade amongst themselves to form a free-trade area (FTA). If they also maintain a common tariff vis-a-vis the rest of the world, this RTA becomes a customs union (CU) which, with complete integration, becomes an economic union. Examples of RTAs are SAPTA and NAFTA. The only major economic union in place is, of course, the European Union (EU). However, whatever the form of the RTA, it is clear that it is supposed to benefit the members by discriminating against non-members. NAFTA has more than tripled trade among USA, Canada and Mexico within 20 years, from $297 billion in 1993 to $1.15 trillion in 2012. Intra-NAFTA trade constitutes 48 per cent of overall trade by the group. As expected, Canada and Mexico were the top two purchasing nations of US exports in 2013 as well as the 2nd and 3rd largest suppliers of US imports. In 2013, the US goods trade deficit of $86 billion is only partially covered by a services trade surplus of $43.7 billion. Therefore, not only are all nations benefiting from greater market access, economies of scale and productivity, but the so-called weaker nations are also deriving greater benefits relative to their stronger counterparts. Strong political will overruled sectarian concerns of manufacturing job losses in US, environmental and labour exploitation in Mexico, and corporate takeover of Canadian firms by a sudden US investment avalanche.

ASEAN conducted $602 billion or nearly 25 per cent of its cumulative trade in goods with fellow member nations in 2012. This figure has almost quadrupled from 2000’s $167 billion. Steadfast political support and regional cooperation over the past decade has ensured elimination of customs duties for nearly 50 per cent of all commodities involved in intra-ASEAN trade; gradual expansion of the group’s membership; and signing of FTAs with other nations such as China, Japan, South Korea, India, Australia and New Zealand.

The European Union (EU) follows the ‘single market’ principle that grants the free movement of goods, services, capital and people across national borders. To facilitate such movement, EU institutions are empowered to enact laws that take precedence over national laws and are binding on national authorities. Between 1992 and 2011, cross-border trade between EU member nations has risen from Euro 800 billion to Euro 2.8 trillion, while international trade has leaped from Euro 500 billion to Euro1.5 trillion. The benefits of EU can be seen from tackling of the ‘PIGS-Portugal, Italy, Greece and Spain’ crisis. The strong economies within EU, especially Germany, planned a road map and helped those nations financially to get rid of their crisis situation.

Mercosur’s intra-group trade reached $67 billion in 2012. Despite repeated rounds of political instability and unrest as well as the major 2001 Argentinian economic meltdown, the group has managed to register respectable annual rates of growth (10-year average) of 14.9 per cent and 14.5 per cent for all exports and imports respectively by 2010. Still, stronger political will and coordination is needed to change the protectionist nature of the customs union against imports from non-members and hostility to trade liberalization. Leftist ideological forces within Mercosur still view the protectionist customs union as a political body that should oppose free markets as a threat to South American unity. Trade within Mercosur currently represents only 16 per cent of the group’s total trade. SAFTA’s trade with both its sub-regional and external partners has increased significantly since 1990s, although trade growth with external partners has been faster. As per IMF, intra-regional share of overall trade has risen very gradually from 2.7 per cent ($1.8 billion) in 1990 to 4.23 per cent ($41 billion) in 2012, compared to Mercosur’s 16 per cent, ASEAN’s 25 per cent, NAFTA’s 48 per cent and EU’s 65 percent. The sensitive list appears to be the major obstacle for intra-regional trade in SAARC. Every country has made a fairly rigid sensitive list as per its protectionist domestic self-interest that discourages regional trade. Cold political relationships among the member states and denial of transit pass-through to third country by the second country in the group have further exacerbated the existing transport and logistics infrastructure bottlenecks. Despite having multiple trade agreements with various regional partners, India’s trade performance has been dismal so far, as evidenced by India’s trade share with Thailand (1.1 per cent), Sri Lanka (0.6 per cent), Singapore (2.9 per cent), Malaysia (1.8 per cent), Japan (2.4 per cent) and ASEAN (9.7 per cent). In 2012-13, only 5 nations UAE, China, USA, Saudi Arabia and Switzerland accounted for 35 per cent of India’s total trade, most of them being very distant countries.

Therefore, sectarian and national political constraints are retarding the natural potential rate of regional trade growth in SAARC by a much greater extent than in Mercosur. The economy has failed to achieve the escape velocity to counter polity’s gravitational pull to the extent that politics still decide the economic agenda rather than act as regulators and facilitators for promoting productivity, market access, innovation and healthy competition to the benefit of both producers and consumers. Crony capitalism is an understated but omnipresent reality in South Asia’s four-dimensional politician-bureaucrat-corporate-criminal nexus. South Asian Preferential Trade Arrangement (SAPTA) was envisaged primarily as the first step towards the transition to a South Asian Free Trade Area (SAFTA) leading subsequently towards a Customs Union, Common Market and Economic Union. The Agreement on SAFTA presently consists of Bangladesh, Bhutan, India, Maldives, Nepal, Pakistan, Sri Lanka and Afghanistan. The countries agreed to reduce customs duties on all traded goods to zero by year 2016. This proposal was drafted by the COE and signed on 6 January 2004 during the Twelfth SAARC Summit in Islamabad. The Agreement entered into force on 1 January 2006. Currently, the Sensitive Lists of products, Rules of Origin, Technical Assistance as well as a Mechanism for Compensation of Revenue Loss for Least Developed Member States are under negotiation.

Under the Trade Liberalisation Programme scheduled for completion in ten years by 2016, the customs duties on products from the region were to be progressively reduced. Sri Lanka has to bring down its customs duties to 0-5 per cent in six equal instalments by 2014 for the products from other member states. The Least Developing Countries (LDC) like Afghanistan, Bangladesh, Bhutan, Maldives and Nepal were supposed to bring down duties to 0-5 per cent in 8 equal instalments by 2016. India and Pakistan were to bring down their tariff 0-5 per cent in 5 equal instalments by the end of 2013. Besides that, a decision has been made to reduce the SAFTA Sensitive List (Negative List) by 20 per cent by all member states at the 14th meeting of the Committee on Economic Cooperation of SAFTA, held in February 2009 at New Delhi.

Obstacles and prospects before SAPTA

  1. The political rivalry of India and Pakistan, especially after 26/11 Mumbai blasts, has jeopardised the prospects of SAARC. Pakistan has refused to accord MFN status to India. At the same time, the political conditions of Nepal, Sri Lanka and Afghanistan (8th member) have not been stable enough to give a positive direction to the trade relations in the region.
  2. There should have been 29 Summits, but only 17 summits were organized. This speaks about the sincerity and importance of SAARC for their members. Nepal has officially proposed to host the 18th SAARC Summit in November 2014 in Kathmandu.
  3. Despite having high objectives to eliminate poverty, to ensure free trade, and the need to establish good neighbourly relations, SAARC has failed to achieve any significant breakthrough in reducing poverty. There has been no meaningful coordinated attempt to tackle this problem..
  4. Even after three decades, intraSAARC exports are a mere five per cent of the total exports of the region. India’s exports to SAARC registered a 14.71 per cent growth in 2013-14 at $17.3 billion. While South Asia accounts for 5.5 per cent of India’s exports, imports from the region have a share of just 0.55 per cent. India’s imports from the region declined 8.31 per cent in the last fiscal at $2.4 billion, leaving a trade gap of $15 billion. There is a potential to increase bilateral trade between India and Pakistan to $10 billion, from the current level of $2.7 billion.
  5. The MFN status means that Pakistan will treat India at par with its other economic partners. Under the World Trade Organisation agreements, the MFN principle ensures that WTO members do not discriminate against one another, allowing all countries in the organisation to benefit equally from the lowest possible tariffs. While India granted Pakistan the MFN status in 1996, Pakistan did not reciprocate as it feared that its markets would be flooded by Indian goods. This has created a big hurdle for India and Pakistan trade relations.
  6. The existence of trade barriers and inadequate trade facilitation mechanism has further impeded the cooperation efforts. The security concerns mainly between India, Bangladesh and Pakistan have been holding back the economic integration of the region. There is an imperative need to ensure that the next SAARC summit in Nepal, likely in November, 2014, must emphasize the removal of such obstacles by inking pacts on game-changing proposals including a SAARC visa system similar to the European Union’s Schengen visa as well as a South Asian Development Bank. At present, there is a SAARC Visa Exemption Scheme, in which some categories of people (including higher court judges, businesspersons, parliamentarians, journalists, senior officials and sportsmen) are given a Special Travel document that exempts them from visas within the region. This arrangement is required to be reworked to promote tourism (including medical tourism) and trade within the region.
  7. The region as a whole has competitive, rather than complimentary nature of product mix.
  8. The growing political tension has also eroded the relevance of SAFTA. India has started to give emphasis to IBSA as an alternative to SAPTA. But geo-political locations cannot be shifted.
  9. India’s comparative advantage in a range of products has resulted in asymmetric trade relations with her neighbours, hindering regional integration.
  10. All the countries in the region had been pursuing, until the late 1980’s, import substitution policies aimed at promoting domestic industries.
  11. Region-wide agriculture is facing several challenges, threatening its growth and sustainability. The physical and economic environment in which agricultural activities are under taken is changing rapidly and getting complex. This necessitates preparedness to face upcoming challenges from the unfolding new reality. Many changes affecting agriculture transcend geography and are trans-boundary in nature: climate change and trans boundary animal and plant diseases pose formidable challenges which require strong regional cooperation to face. ‘SAARC Agriculture Vision 2020’ would help maximize benefits from available options, enhance ability to face threats and new challenges and to harness the opportunities forthcoming.
  12. Disappointingly, New Delhi’s initiative to open up Indian skies to more frequent air services from its SAARC neighbours was not given attention. As SAARC’s GDP growth is now projected at five per cent, intra-regional trade growth has become a key driver in the region’s GDP whilst exploring the possibility of establishing a pan-SAARC Airline and permitting private airlines to operate in the region will also improve the much-needed air connectivity required for SAARC. As a result of equipping the region with new ports, airports and logistic facilities during the last decade, SAFTA shows potential to be an emergent Asian Corridor.
  13. Tariffs are high across South Asian borders-Pakistan and Bangladesh have import levies as high as 25 percent. ASEAN members charge each other 5 percent or less for 96 percent of the goods they trade.
  14. Despite the target year of 2016, Sri Lanka has just a modest amount of trade taking place under and within SAFTA agreement accounting for only US $ 1.18 million from July 2006 to December 2010. Since the operationalization of bilateral Free Trade Agreement (FTA) in 2000, trade has multiplied by as much as eight times. Trade volumes crossed $5 billion in 2011-12 and the cumulative FDI approvals for Indian investments stand at about $1 billion since 2003, with investment inflows of $160 million in 2012. India has planned to double its bilateral trade with Sri Lanka to $10 billion in the next three years.
  15. At the same time the total intraregional trade under SAFTA stood at US$ 823.62 million from July 2006 to December 2010. Intra-regional trade makes up five per cent of the total trade done by the SAFTA nations. By contrast, intra-regional trade among the 10 south-east Asian nations hovers around 50 per cent.
  16. Even today, most of the tradable items are in the negative lists of the respective member states. Besides that, even those concessions granted under South Asian Preferential Trading Arrangement (SAPTA) for tradable itemshave been placed in the negative list of SAFTA, though the SAFTA concessions were expected to supersede the concessions granted under SAPTA.
  17. Under the SAFTA, which came into force in July 2006, India’s imports are classified under two lists – the MFN list and sensitive list. India provides duty-free quota free access to all items barring just 25 products to the least developed countries in the group under SAFTA. The SAFTA agreement came into force on January 1, 2006. It required the developing countries in South Asia (India, Pakistan and Sri Lanka) to bring their customs duties down to 20 per cent in the first phase of the two-year period ending in 2007 and to zero by 2016 in phases. In 2012, India had reduced its sensitive list from 868 to 614 products, on which tariff concessions will not apply. India has the shortest sensitive list among these nations after Maldives. It has been felt, despite the SAFTA deal, that trade between South Asian nations could not blossom due to excess size of the Sensitive Lists, which has allowed member countries to practically bar access to competitive items produced in the region.

There should be serious attempts to reduce the sensitive list under the trade liberalization programme of SAFTA and the focus should also be to bring down the tariff levels for those items which still remain within the sensitive list. Further, India has earmarked US$100 million each for its neighbouring countries to undertake developmental work in basic infrastructure projects. There is a need for activating and concluding the SAARC Agreement on Trade in Services (SATIS) as growth in manufacturing will necessarily give rise to a greater demand for services.

Therefore, the inward looking policy has to be relinquished. The SAARC countries should collectively try to tap the global market than out compete with each other. The small and medium enterprises (SME) sector in Pakistan also needs the help of its Indian counterpart as the SME sector plays significant role in sprucing up the production and manufacturing sector that creates massive number of jobs.

Although Prime Minister Narendra Modi stressed on areas of concern such as infiltration of terrorists from Pakistan and plight of Tamils in Sri Lanka, he mainly pitched for improved economic partnerships and better infrastructure linkages with his South Asian neighbours. As per the expected lines, Modi shared his vision for the region built on partnerships for development and mutual prosperity, and stressed on the need to improve road and rail linkages connecting SAARC countries, and also discussed sub-regional connectivity with the Premiers of Nepal, Sri Lanka, Maldives and Bhutan. One should not think that this visit will dilute the issues of cross-border terrorism but one should be positive about the normalisation of trade ties between the two countries, including Pakistan’s acceptance of India’s long-pending demand of a non-discriminatory market access (NDMA). Granting India the most favoured nation status or the non-discriminatory market access if one were to use a less politically sensitive term would clear the hurdle for full implementation of the South Asia Free Trade Area (SAFTA). The two sides had agreed to a roadmap in September 2012, according to which India was to bring down its sensitive list under SAFTA to 100 by April 2013, after Pakistan grants India MFN status by December 2012. Pakistan had missed the December deadline. Now Pakistan had made a conditional offer for granting MFN status to India in January 2014, and had sought access for 250 to 300 items at lowered duties. The negative list which became operational from March 21, 2012 contains 1,209 items that India cannot export to Pakistan, including pharmaceutical and agricultural products. India can export around 7,500 items there. Earlier, under a small ‘positive list’, India could export 1,946 items. Some of these items of export were vegetables, meat products, animals, fruits, tea, spices, palm oil, crude oil, sugar, cotton and organic chemicals.

According to a study by think-tank CUTS International the trade liberalisation across five south Asian countries would result in a consumer welfare gain of at least $597 million to India and $2 billion to the region. Consumer gain is defined as a difference between the total import expenditure and likely import expenditure if that country were to import products at a lower price from the region.

It is often analysed by the experts that Modi wanted to dispel the widespread international impression that his government will embark on a confrontational path with the neighbours. Let me clarify that politically NDA has secured 334 seats out of which the BJP has 284 seats and therefore, political factors matter nothing to them, at least at this juncture. Today, in a globalized world, the diplomacy matters predominantly for economic interaction and consolidation and is not a mere tool for settling border disputes. The economic imperatives can drive both China and Russia to strike a gas deal after 10 years of negotiation. Russia has agreed to invest some $55 billion in pipeline construction. Gazprom’s Chinese counterparts, China National Petroleum Corp., will provide for similar infrastructure within China and the project is likely to be operational by 2018. One can recollect that a number of border disputes are pending between China and Russia. They have overcome such issues to meet the future of the energy security. The Modi Government wants a deal struck in India-Pak trade in electricity and hydrocarbons, in addition to speeding up of opening of branches of Indian and Pakistani banks in each other’s territories and boosting infrastructure development at the border for trade facilitation. Despite border disputes and bitter historical antecedents with Russia, Japanese lawmakers are reviving efforts for a 600 billion yen ($5.9 billion) natural gas pipeline from Russia, which last week signed a supply deal with China, to cut energy costs after the Fukushima nuclear disaster. A group of 33 lawmakers is backing the 1,350-kilometer (839 miles) pipeline between Russia’s Sakhalin Island and Japan’s Ibaraki prefecture, northeast of Tokyo, Naokazu Takemoto. I am not trying to undermine the significance of the initiative of the NDA government, but if this international mini-meet is not followed by liberal policy announcements from all the members of SAARC, then its outcome cannot be regarded as positive and, if we evaluate from a political point of view, then this event could be regarded as nebulous like many others that had happened in the past. To me, only economic growth and creation of opportunities in terms of employment can dilute and undermine the core intractable pending political issues and nothing less than that will work. But the odds of this scenario bearing fruit seem as poor as ever. Both prime ministers Modi and Sharif are being pilloried by their own countrymen and supporters for avoiding the KT issue (Kashmir & Terrorism) and focusing on trade, infrastructure and economic cooperation during the mini-meet. It is blatantly obvious that the incessant prolonging of the KT issue economically and politically benefits various sectarian factions and parallel power centres operating both in India and Pakistan, none of which truly cares about the primary welfare and development of the citizens of Kashmir. The almost unsurprising shelling of Indian borders by the Pakistan Army on the eve of Sharif’s arrival unmistakably drives home this forlorn point.

Outgoing Prime Minister Manmohan Singh had observed that borders cannot be changed, but they can be made irrelevant. But the seemingly intractable obstacles challenging NDA’s bid towards greater economic integration of South Asia are amply demonstrating that if borders cannot be made irrelevant, nothing can change. Only the power and fruits of economic growth and sustainability for the common man which affords him social security can convert the trespassing of borders into the meeting of hearts and minds.

 


(Vivek. S. Raj)