SAARC's Achilles Heel? The South Asian Free Trade Agreement

Amita Batra | 20 Apr 2020

The 14th SAARC (South Asian Association for Regional Cooperation) Summit held earlier this month concluded on a note of optimism. While welcoming Afghanistan in its fold, the SAARC declaration reiterated member nations' commitment to the welfare of the peoples of South Asia while agreeing to build upon a partnership towards shared prosperity and economic cooperation.

Towards achieving this objective, the summit agreed to operationalise the SAARC development fund, establish the South Asian University, create a SAARC food fund and establish the SAARC arbitration council. South Asian leaders have also agreed to make tangible progress on four issues –water, energy, food and environment –that impact on the lives of people of the region. Further, with respect to "connectivity", the underlying theme of the summit, the heads of the member nations agreed to implement the recommendations of the SAARC Multimodal Transport Study (SRMTS) and its extension to Afghanistan. Underlining terrorism as a threat to peace and security in the region, a commitment was reached to abide by international conventions relating to combating terrorism with member states agreeing to work on modalities to implement the provisions of existing SAARC conventions to combat terrorism, narcotics, smuggling and other trans-national crimes. These are all laudable initiatives, and in all probability will be translated into action in the immediate future. In particular, the setting-up of a South Asian University may help elevate the standard of higher education and contribute to the process of reverse brain-drain in the sub-continent.

The summit also reiterated its intention to promote trade and economic cooperation. However, the deliberations at the summit and the formal declaration released at its conclusion, missed out on several aspects relating to this objective. Discussions on the South Asian Free Trade Agreement (SAFTA), the big item on the agenda, one which the ministers of India and Pakistan were hoping for a breakthrough, found only an occasional mention. Although the Summit declaration had members expressing their desire for the finalisation of an agreement on services cooperation and investment promotion and protection, details in terms of sectors, modalities or problems were neither discussed nor mentioned in the formal declaration.

Even though it may be true a declaration of intent is half the road covered, serious work needs to be done to incorporate both the services sector and investment liberalisation in the SAFTA. In fact, trade liberalisation under SAFTA has yet to take off and its implementation calls for several issues that should have been taken up at the highest level, something the summit provided ample opportunity for.

More tellingly, in striving to ensure that the summit was rancour-free, many of the thorny issues were completely left out of discussions. At this historical juncture, when continent-wide trade blocs have emerged elsewhere in the world, South Asia needs to emphatically establish a case for economic cooperation, and to realise the economic potential of a South Asian regional entity while convincing the smaller economies in the SAARC neighbourhood to shed their inhibitions towards its formation.

Notwithstanding the current low level of intra-regional trade in South Asia, the region has potential to form a regional economic grouping given its growing economic strength. It is a well known fact that official trade figures understate the extent of intra-regional trade in South Asia. There is considerable amount of informal trade taking place in the region not only to evade high tariffs, but also to carry out trade that would not have been permitted at all. Established models, like the augmented gravity model estimates indicate positive trade potential for the SAARC region as a whole. In fact, just the potential trade between India and Pakistan is estimated to be U$6.5 billion more than what statistics reveal. Give these realities, the summit should have highlighted the missed trade opportunities owing to Pakistan's reluctance to grant India Most Favoured Nation status, despite having ratified the agreement. The declaration, requesting member nations to implement SAFTA in letter and spirit continues to remain meaningless in the absence of suggested action to correct glaring anomalies.

Furthermore, gains from regional economic integration in South Asia are possible through intra-industry trade. Scope for vertical integration at different stages of production among South Asian nations exists in sectors like textiles, leather goods, light engineering, rubber products, automobiles and exploitation of bio-resources. The fact that the potential (with the exception of the India – Nepal intra-industry trade which represents a well-oiled machine already) is obviously evident, should have led South Asian leaders to perceive the summit as a forum to undertake discussions on sector-specific ways and means to exploit this lacunae. It should be recognised that it was the intra-industry trade linkages that facilitated the production networks in Southeast Asia and East Asia, and it is this market led integration in East Asia that now awaits institutionalisation through the ASEAN +X configurations.

SAFTA came into effect in July 2006. In the lead up to the 14th SAARC Summit, the leaders of member nations must have been cognisant of the missing elements and shortcomings of the agreement. While the formalisation of services and investment agreements was discussed at the Summit, important issues like informal movement of people across borders was left out. Furthermore, supportive measures that are required for the successful implementation of SAFTA, albeit not embodied in the agreement itself, need to be urgently dealt with. Among these are measures to facilitate trade and lower logistics costs to promote intra-regional trade in South Asia. Inadequate trade facilitation mechanisms contribute to the unrealised trade potential between the SAARC member nations.

A review of trade facilitation and transport logistics in the region illustrates the continued weakness of South Asian countries in port and transport infrastructure, regulatory environments and service – sector infrastructure. Delays at seaports due to congestion and outdated infrastructure, for example, raises costs for exporters throughout the region. The region can therefore gain by expanding intra-regional trade through complimentary investment in infrastructure and the continuation of regulatory reform. These have, however, only found a generic mention in the SAARC discussion. Both the declaration and the discussions were devoid of specifics. While the multimodal transport study is likely to be implemented, the regional transport network calls for infrastructure to be broadly defined to include the electricity, gas and oil grids of the region and a well formulated plan that will link these in addition to the region's road, rail and port systems.

While Afghanistan's entry into SAARC has undoubtedly strengthened the regional entity, it also raises the issue of negotiations relating to transit rights, something that will become even more pertinent when SAARC extends to potentially include Iran. The granting of transit rights for inter-state commerce is essential and therefore needs to be depoliticised rather than conditioned by narrow national interests, to facilitate free flow of commerce in the region. So while welcome remarks for new entrants are in order, the more relevant and practical aspects should also be resolved at future SAARC summits.

Finally, including Japan, Korea and China as observers from the region augurs well in terms of widening the stakeholder base for countries that have an economic interest in South Asia and SAARC. It may also buttress regional efforts for cooperation and more importantly, provide the much needed impetus to "think regional". A cautionary note nonetheless with regard to increasing membership would be to first consolidate SAARC in its current configuration before expanding the entity any further, especially with regard to trade related issues.

Amita Batra is a Senior Fellow at the Indian Council for Research on International Economic Relations (ICRIER) in New Delh, India.

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