South Asian Free Trade Area. Dushni Weerakoon Institute of Policy Studies of Sri Lanka

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1 South Asian Free Trade Area Dushni Weerakoon Institute of Policy Studies of Sri Lanka

2 History of Regionalism MFN principle allows an exception for regional trade initiatives GATT Article XXIV Enabling Clause Two stipulations: trade barriers should not be raised for nonparticipating countries. lower trade barriers to cover substantially all trade GATS Article V with respect to to trade in services 2

3 History of Regionalism First wave of regionalism: associated primarily with political factors EEC, ASEAN, etc. Second wave of regionalism: associated primarily with economic factors NAFTA, MERCOSUR, APEC, etc. 3

4 History of Regionalism Why was there a proliferation in the 1990s? Protracted negotiations under the GATT Uruguay Round of multilateral trade talks ( ) US entered into regional deals for the first time NAFTA, APEC 4

5 Forms of Regionalism Preferential trade arrangement Percentage tariff reduction on selected imports Free trade arrangement Tariff reduction to zero on substantially all trade Member countries free to set external tariff to rest of the world 5

6 Forms of Regionalism Customs Union Zero tariffs to all members Adopt a single tariff for the rest of the world (Common External Tariff) Common Market In addition to above, also allow complete free mobility of labour and capital between members 6

7 Regionalism: Is it good or bad? Negative: Trade diversion Sourcing of a good is switched from efficient producer in ROW to an inefficient producer from within bloc. Positive: Trade creation Countries producing same good divert production to more efficient economy within bloc. 7

8 Regionalism: Is it good or bad Trade deflection Non-participating countries may transship goods through one member to another To avoid such abuses Rules of Origin stipulating value addition in member states are built in. However, many argue such rules complicate global trading system 8

9 SAARC SAARC turned its attention to economic cooperation only in the late 1980s Global economy centred around North America, Europe and East Asia with emergence of strong regional blocs South Asian economies undertaking accelerated economic liberalization from late 1980s/early 1990s. 9

10 SAPTA 3 rounds of negotiations on SAPTA between 1995 &1998. Limited success: Time consuming negotiations on productby-product basis Limited depth of tariff cuts Tariffs cuts not relevant to actual trade Non-tariff issues not addressed restrictive rules of origin criteria 10

11 SAFTA: Likely Benefits? + Increase trade and investment + Strengthen voice at multilateral issues - Lack of infrastructure - Red tape - Weak trade facilitation Empirical evidence inconclusive. But, weak trade complementarities implies limited gains. 11

12 SAFTA Framework agreement signed in Jan Begin implementation Jan Recognizes S&D treatment to LDCs phase-out period Sensitive list Revenue compensation Technical assistance Possibly on rules of origin 12

13 SAFTA: Tariff Reduction Top-down reduction of tariffs For Non-LDCs Reduction of existing tariffs to 20% in 2 yrs Reduced to 0-5% over the next 5 yrs For LDCs Reduction of existing tariffs to 30% in 2 yrs Reduction to 0-5% over the next 8 yrs 13

14 SAFTA: Tariff Reduction Disadvantages Back-loading of tariff reduction process (if tariffs below 20% requires only a 10% margin of preference reduction in each of 2 yrs; 15% reduction recommended in each of next 5 yrs.) Advantages Addresses issue of tariff dispersion More efficient to achieve initial convergence Ensures benefits extended to all countries 14

15 SAFTA: NTBs/Sensitive List NTBs No commitment unlike ASEAN to eliminate QRs on products receiving concessions & eliminate NTBs within 5yrs of receiving concessions Sensitive List 20% of tariff lines to be permitted for inclusion for non-ldcs Sensitive List to be reviewed every 4 yrs No commitment unlike ASEAN to phase out list 15

16 SAFTA: ROO Percentage Test May create bias against efficient producers More likely to generate trade diversion Vulnerable to fluctuations in world prices Change of Tariff Heading (CTH) Simple & predictable May not be sufficient to confer origin May not satisfy originating status at 4-digit 16

17 SAFTA: ROO ASEAN VA 40% NAFTA CTH & VA 50% ANZCERTA VA 50% MERCOSUR CTH/VA 60% LAIA CTH/VA 50% COMESA CTH/VA 40% Andean Group CTH/VA 50% ILFTA CTH/VA 35% 17

18 SAFTA: ROO percentage criterion? what percentage? Percentage criterion with CTH? if latter, CTH at 4-digit or 6-digit HS Code? Some products do not satisfy originating status at 4-digit & CTH occurs only at 6-digit. accept CTH at 4-digit but permit some products at 6-digit? 18

19 SAFTA: Challenges Bilateral FTAs in South Asia Membership of other more dynamic regional/bilateral deals Global trend in regionalism continuing WTO estimates total number of agreements could reach 300 by end 2005 New deals are going beyond tariffs on trade to include investment, services, intellectual property, labour standards, environment, etc. 19