South Asian Free Trade Area-SAFTA

RAB 8 Barisal

History

The South Asian Association for Regional Cooperation (SAARC) was established when its Charter was formally adopted on 8 December 1985 by the Heads of State or Government of Bangladesh, Bhutan, India, Maldives, Nepal, Pakistan and Sri Lanka. SAARC provides a platform for the peoples of South Asia to work together in a spirit of friendship, trust and understanding. It aims to promote the welfare of the peoples of South Asia and to improve their quality of life through accelerated economic growth, social progress, and cultural development in the region.

 The objective of SAARC

i. promotion of welfare of South Asia,

ii. speed up economic growth,

iii. promote and strength collective self-reliance and

iv. contribute to common trust, understanding and appreciation of one another’s problem in the region.

 

  • 1990 the professional shape was completed when its economic role was intensively articulated in accordance with the neoclassical framework of economic development.
  • 1991 – its direction was taken for the establishment of South Asian Preference Trading Agreement (SAPTA).
  • The idea of SAPTA was adopted in the summit in 1993 of which the first round was launched in 1995.
  • But the four rounds of negotiation under SAPTA have not been very effective in terms enhancing intra- regional trade in SAARC. South Asia is one of the least successful region in the world and many of the goods in the lists submitted by SAARC countries were not traded all or traded at very low level and the agreement was very time consuming. For these various reason SAPTA remained largely ineffective and it could a very little increase in global trade in the decade between 1995 and 2005.

SAFTA

The South Asian Free Trade Area (SAFTA) Framework Agreement, signed on January 06, 2004 visualizes the creation of a free trade area encompassing the seven member countries of the SAARC.

With the signing of the SAFTA, the SAARC Preferential Trading Arrangement (SAPTA) has been effectively replaced. Signing of SAFTA has definitely pushed cooperation among the SAARC member countries into a new level of trade and economic cooperation by removing barriers to cross-border flow of goods.

SAFTA would come into operation in January 2006. From the beginning of 2006, the agreement has already been come into force.

The SAFTA agreement will be implemented based on the following principles and mechanism:

  1. Modalities of tariff reduction
  2. Rules of origin
  3. Negative list
  4. Elimination of non-tariff and Para-tariff barriers on movement of goods.
  5. Safeguards
  6. Dispute settlement mechanism
  7. Revenue loss
  8. Special measures for LDCs.

The agreement offers Bangladesh as a LDC various opportunities to promote and expand its trade and commerce in the regional and global market.

 

Trade deficit with south Asian countries

Bangladesh has witnessed perpetual trade deficit with its SAARC counterparts during the period 1990-2003. The trade deficit of Bangladesh has increased between four to ten times during the period 1990-2003.

Currently the level of Bangladesh’s negative trade balance with India accounts more than 90 percent of its total trade deficit with the region.

In recent years, Bangladesh’s trade deficit with India is about 40% its total trade deficit with the world.

Bangladesh is also one of the Pakistan’s important destinations of the export in South Asia, which accounts about 40% of Pakistan’s exports in the region.

Bangladesh has also trade deficit with other countries in the region. In the mid-90s, Bangladesh had favorable trade with Nepal, but the trend has reversed in the latter years.

The bilateral trade balance with Sri Lanka now remains unfavorable for Bangladesh.

Trade of Bangladesh with other nations of SAARC (million dollar):
Year Bhutan India Maldives Nepal Pakistan Sri Lanka SAARC World
1999/00 5.18 901.01 2.51 115.92 13.04 1037.66 14155
2000/01 6.84 1246.25 00.005 6.04 130.38 10.61 1397.49 15830
2001/02 5.56 1062.12 4.00 95.92 8.19 1175.77 14526
2002/03 4.18 1439.06 00.96 5.91 100.18 11.74 1561.07 16206
2003/04 6.97 1688.73 00.34 4.95 157.81 20.09 1878.55 16457
2004/05 13.24 2153.25 00.002 2.56 202.04 21.29 2413.67 21832

In the SAFTA agreement

  1. the tariff reduction by the non-least developed countries from existing tariff rate 20% will be done within the frame of 2 year.
  2. the tariff reduction by the least developed countries from existing tariff rate will be to 30% within 2-year time frame from the date of coming into the force of the agreement.
  3. As least developed country, Bangladesh will have to follow the condition

Bangladesh has comparative advantage in fish, vegetable tea, leather, textile yarn, made up articles of textile material, clothing, and woven cotton fabrics.

Out of 71 commodity groups of comparative advantage in SAARC region, Bangladesh has comparative advantage in only 7 products. Despite having less comparative advantage there is still some scope for increasing intra-regional trade.

Two issues lie at the heart of all free trade agreement; reducing tariff and the product coverage. The demand of the LDCs of south Asia especially Bangladesh is that the other countries of region should open up their market for the products in 3 years time. Regarding the products covered by SAFTA, Bangladesh wants several concessions for the LDCs of south Asia.

The export and import policies of Bangladesh

Import policy
Policy objective
  • Reduction of tariff
  • Elimination of quantitative restrictions of import
Tariff
  • Custom duty rate range-7.5%-45%(1997)
Banned item
  • 11% items subject to import banned or restrictions
Quantitative restrictions
  • QRS have to be progressively removed
  • At 8 digits its level, only 2% of items are subject to quantitative restrictions.
Export policy
Export processing zones
  • Export processing zones set up in Dhaka and Chittagong
  • Private export processing zones allowed in 1996.

 

Energy sector

Bangladesh has a huge reserve of gas but unfortunately, little progress was made in the area of energy cooperation. India is the most suitable market for it. Bangladesh has a great reserve of coal

Intra industry trade

The bilateral intra industry trade between Bangladesh and India consisted of organic chemical elements, oxides and halogen salts, fertilizer and insecticides and herbicides.

Significant intra-industry trade took place in basic manufactures such as made up articles of textile materials, floor coverings and nails and screws.

There are a few products, which have reasonable intensity intra- industry trade Bangladesh, and Sri lanka.these products include textile yarn, woven fabrics, special yarns, and printed materials

Stopping illegal trade

SAFTA will give a severe blow to the illegal trade in the region. Large volume of illegal trade takes place between India and Pakistan and India and Bangladesh. Once this trade is routed through the legal channel, it will boost revenue collection in the subcontinent

Increasing investment

Beside trade SAFTA will increase investment in the subcontinent. Integration of economy in south Asia would lead to encourage of big market for the investors. Industries can be located anywhere in the region according to suitability. A greater international trade would cause a greater movement of business people from one country to another. This would positively impact on the hospitality and aviation sector

Trade RELATIONSHIP

Bangladesh-India

India-Bangladesh issue is a doubted one.. The existing gap between these two neighbor countries is $1 billion. India has become worlds one of the fastest growing economies. It has significantly developed in infrastructure, pharmaceutical, automobile, and software development, in the world. Bangladesh is the closest to India and the largest trade and investment partner with Bangladesh among developing countries. It is true that Bangladesh-India is having weighted in India’s favor. The bilateral FTA will complement and supplement SAFTA by providing faster and more effective access on a preferential basis for specific goods from Bangladesh to the fast growing Indian market

Bangladesh -Pakistan

Pakistan is eager to settle the FTA with Bangladesh as possible with its rival country, India. Islamabad has already created a condition favorable to hold talks by offering tariff on the import of tea and jute from Bangladesh. Bangladesh has no non-tariff barrier problem in trade with Pakistan. Bangladesh import from Pakistan raw cotton, textile and light engineering products, fruits etc amounted to US$67.32 million against her export of US$28.60 in the fiscal year 2001-02. Bangladesh export jute, tea, leather and pharmaceutical products to Pakistan. A free trade would open more export of raw jute and jute goods, leather and pharmaceutical products to Pakistan

Bangladesh-Srilanka

In last few years trade between Bangladesh and Srilanka has continued to rise against Bangladesh. Bangladesh exports to Srilanka jute manufactures, jute yarn, textile fabrics, pharmaceuticals, battery and tobacco and imports animal and vegetable fat and oil and their cleavage products, prepared edible fats, plastic, live animals, glass, machineries, etc.  Srilanka-Bangladesh FTA is likely to benefit both of the countries in terms of enhancing trade, investment and services Srilanka would expand business in insurance, banking, shipping and ports leaving a chain effect on the Bangladesh economy

obstacles:

  • the absence of strong complementary in Bangladesh trade with other south Asian nations
  • The member countries require a high rate if have to develop fast. To achieve this high rate growth Bangladesh requires a peaceful and favorable political environment, which is almost absent here
  • Many economists think that Bangladesh will not be befitted from SAFTA. it will make Bangladesh serious trouble due to having small economy
  • Bangladesh prefers regional and multilateral trade deals while India prefers bilateral trade deals. Again according to CPD Bangladesh get full duty free market access to India in 2013 whereas India-ASEAN partnership Myanmar, Vietnam will in 2010. These may create problem in trade between Bangladesh and India
  • Some restricted trade policies also cause the low level of intra-regional trade.

Requirements

  • Bangladesh should negotiate with SAARC countries for an on-arrival visa and uniformity in standard requirement with china
  • Bangladesh needs more trade experts of negotiation because it lacks of professional experts.
  • Bangladesh will have to move ahead with trade negotiation with china and India.
  • SAFTA has a great potentiality and Bangladesh should accept the short term costs for long term benefits
  • Relevant policies also need to be reviewed to reflect our beliefs and nationalism.

 

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