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  1. 1. A Journey Towards SAFTA (South Asian Free Trade Area) By Mukesh Mishra Kathmandu, Nepal 1
  2. 2. Table of Contents • Background of South Asia • Evolution of Economic Integration in South Asia • Introduction to SAARC • Introduction to SAPTA • Movement from SAPTA to SAFTA • Why SAFTA? • Objectives, Provisions and Limitations of SAFTA • Barriers to Implementation of SAFTA • Agreement of SAFTA • Conclusion 2
  3. 3. Background of South Asia • In 1980s Countries of South Asian experienced economic stagnation • South Asian countries had lagged behind in economic development and regional cooperation than that of East Asia • South Asia today is home to almost two-thirds of the world’s poor. Nearly one out of every three people, or over 600 million people, struggle to survive on income of less than one dollar a day. Wide income disparities existed within and between countries 3
  4. 4. Evolution of Economic Integration in South Asia SAARC SAFTA SAPTA Liberalization Policy 4
  5. 5. Evolution of Economic Integration in South Asia • First South Asia Foreign Secretaries’ Meeting, 1981 • First South Asia Foreign Ministers’ Meeting, 1983 • Establishment of SAARC, 1985 • South Asian Preferential Trading Arrangement (SAPTA), 1995 • Three rounds of tariff cut under SAPTA • Working toward a Free Trade Area (SAFTA) by 2001 5
  6. 6. SAARC (South Asian Association for Regional Cooperation) • In 1980s, Bangladesh has taken the initiative to establish regional cooperation • This led to first South Asian foreign sectaries meeting held in April 1981 in Colombo • Initially, five selected areas (agriculture, telecommunication, rural development, meteorology, and health and population) were selected for technical co-operation, while more complex issues were left out. 6
  7. 7. SAARC…. Contd…. • The first foreign ministers meeting held in 1983 formally launched the Integrated Programs of Actions (IPA) through the adoption of South Asian Regional Cooperation(SAARC) • Since then the foreign ministers of seven member countries began to meet on a regular basis • These meetings and technical co-operations led to the establishment of the SAARC • Its Charter was adopted in 1985 and the first summit was held in the Bangladesh capital of Dhaka in December 1985. 7
  8. 8. SAARC…. Contd…. • Formed on December 7, 1985 • Member countries: Bangladesh, Bhutan, India, Maldives, Nepal, Pakistan and Sri lanka • In April 2007, Afghanistan became the eighth member • A manifestation of the determination of the people of South Asia to work together towards finding solution to their common problems 8
  9. 9. SAARC…. Contd…. • To improve regional cooperation in economic development • To promote the welfare of the people of South Asian and improve their quality of life • To provide all individual to live in dignity and realize their full potential • To contribute to mutual trust, understanding and appreciation of one another’s problems • To strengthen cooperation with other developing countries 9
  10. 10. Liberalization Policy • The activities of SAARC were limited to soft areas such as health, population, culture, etc at its initial stage • The fourth SAARC summit held in Islamabad in Dec 1988 emphasized the need to include trade, manufacture and services as new areas of cooperation • The idea of liberalizing trade among SAARC countries was first considered by Sri Lanka at the sixth SAARC summit held in Colombo in Dec 1991 10
  11. 11. SAPTA (SAARC Preferential Trading Agreement) • An outcome of SAARC summit • The CEC (Committee on Economic Cooperation) at its meeting in New Delhi in November 1991 recommended a draft agreement on SAPTA • The Heads of State at the Colombo summit in December 1991 approved the establishment of the Inter-Governmental Group (IGG) to examine the institutional framework for South Asian Preferential Trading Arrangement (SAPTA). 11
  12. 12. SAPTA…. Contd…. • Signed during 7th SAARC summit in Dhaka held in April 1993 • Entered into force on 7 December 1995 • Provides each other the preferential treatment to reduce import tariffs on preferential items • First step towards the transition of South Asian free trade 12
  13. 13. Objectives of SAPTA • Promoting cooperation for the benefit of their people • Bringing awareness about the expansion of trade • Providing greater opportunities of employment • Strengthening intra-regional economic cooperation • Increasing the share in the total volume of South Asian trade 13
  14. 14. SAPTA…. Contd…. • After its launch, 3 round of preferential tariff reductions have been implemented • SAPTA 1- concluded in 1995 • SAPTA 2- concluded in 1997 • SAPTA 3- concluded in 1998 • Tariffs reduction have offered on the basis of two categories of members: LDC and non-LDC 14
  15. 15. Components (Article 4) • SAPTA may consist of arrangements relating to:  Tariffs  Para tariffs  Non tariff measures  Direct trade measures 15
  16. 16. SAPTA…. Contd…. • SAPTA focuses on preferential items: • all products • Manufactures • Commodities in their raw, semi-processed and processed forms 16
  17. 17. Measures of SAPTA • Dealt exclusively with trade in goods and constituted the first step in establishing an economic union • Member countries extended concessions to each other on tariff, para- tariff and non- tariff measures • Free to liberalize trade at their own pace • Included several provisions extending special treatment to LDCs • Allowed countries to withdraw from the agreement in the event they faced balance of payment difficulties 17
  18. 18. Limitations • Gives access to only certain goods • PTA is done by reducing tariffs, but it does not abolish them completely • Unable to handle trade related disputes • More powerful members were unwilling to accept legal mechanisms for dispute settlement • Many measures were not included in the SAPTA such as: harmonization of customs clearance, import licensing, registration and banking procedures, removal of barriers to intra- SAARC investment, etc 18
  19. 19. SAPTA to SAFTA • The Sixth Summit (1991), held in Colombo approved the establishment of an Inter-Governmental Group (IGG) to formulate an agreement to establish a SAARC Preferential Trading Arrangement (SAPTA) by 1997 • The framework Agreement on SAPTA was finalized in 1993, and formally came into operation in December 1995, well in advance of the date stipulated by the Colombo Summit. • Provides each other the preferential treatment to reduce import tariffs on preferential items
  20. 20. Movement Towards SAFTA (South Asian Free Trade Area) • After 4 round of trade negotiation were held under SAPTA to liberalize trade, the last 4th round of negotiation was focused on the creation of SAFTA • 9th SAARC Summit (Male 1997) – Head of States/Governments recognized the importance of achieving a free trade area by the year 2001. • 10th Summit (Colombo 1998) – reiterated the mandate of 9th Summit and decided to constitute a Committee of Experts (CoE) to draft treaty.
  21. 21. 21
  22. 22. Movement…. Contd…. • 11th Summit (Kathmandu 2002) • the Leaders agreed to accelerate cooperation in the core areas of trade, finance and investment to realize the goal of an integrated South Asian economy, gradually. • the Leader directed the Council of Ministers to finalize the text of the Draft Treaty Framework by the end of 2002.
  23. 23. Movement…. Contd…. • 12th summit (Islamabad 2004) • Head of sates endorsed the framework agreement of SAFTA. • “The Islamabad Declaration” aims to launch the SAFTA on January 1, 2006
  24. 24. Movement…. Contd…. • 1 January 2006: SAFTA into Operation • Implementation of SAFTA enhance trade within the region by  reduction of tariff rates  elimination of non-tariff and para-tariff barriers,  Focus on trade and investment facilitation measures.
  25. 25. Movement…. Contd…. • 16th summit is going to held at Thimphu, Bhutan • There is a need to revisit and upgrade Safta into a Comprehensive Economic Partnership Agreement (CEPA) in order to create a dynamic instrument for promoting regional integration in South Asia.
  26. 26. Movement…. Contd…. Measures focused by 16th summit : • Combining liberalisation of trade in goods with liberalisation of trade in service, as well as investment liberalization; • Substantially reducing the sensitive list • Encouraging various national and regional stakeholders to set up goals
  27. 27. Conditions to be met for trading • To qualify for preference, products must:  fall within a description of products eligible for preference in the schedule of concessions of SAFTA country of destination;  comply with SAFTA Rules of Origin. Each Article in a consignment must qualify separately in its own right; and  comply with the consignment conditions specified by the SAFTA Rules of Origin
  28. 28. Objectives of SAFTA • Elimination of trade barriers • Promoting conditions of fair competition • Creation of effective mechanism • Framework for regional cooperation 29
  29. 29. Why SAFTA? • South Asian exports have lagged other developing countries • Growth of intra-regional trade in South Asia has lagged behind other regions • South Asia is among the least integrated of all regions • Tariffs, though lower now, remain high relative to other regions • Trade between India and Pakistan has been abnormally low 30
  30. 30. SAFTA: Major Provisions Instruments (Article 4): The Agreement will be implemented through: 1. Trade liberalization Program 2. Rules of Origin 3. Sensitive List 4. Non-tariff and Para-tariff 5. Institutional Arrangement 6. Consultation and Dispute Settlement Procedure 31
  31. 31. Trade Liberalization Program (Article 7) A. Non-LDCs • First Phase (2006-2007) • for tariffs higher than 20 per cent, reduction of tariffs to 20 per cent within 2 years. • for tariffs lower than 20 per cent, annual 10 per cent reduction. • Second Phase (2008-2012) • from 20 per cent or below to 0-5 per cent within 5 years, Sri Lanka 6 years. 32
  32. 32. Trade Liberalization…. Contd…. B. LDCs • First Phase (2006-2007) • for tariffs higher than 30 per cent, reduction of tariffs to 30 per cent within 2 years. • for tariffs lower than 30 per cent, annual 5 per cent reduction. • Second Phase (2008-2012) • from 30 per cent or below to 0-5 per cent within 8 years. 33
  33. 33. Rules of Origin • Products with at least 40% domestic value addition will enjoy the tariff reduction preferences under the SAFTA • Special and differential treatment is provided for products of LDCs (30% value addition is required for LDCs to qualify tariff reductions) 34
  34. 34. Sensitive List • To protect some relevant domestic industries, member countries may maintain Sensitive Lists, i.e. lists of products, which will not be covered by SAFTA • The number of products in the list shall be subject to a maximum ceiling to be mutually agreed among the Contracting States with flexibility to LDCs • Members may have two lists- one for the non-LDCs and the other, a more permissive one for the LDCs 35
  35. 35. Non-Tariff and Para-Tariff barriers • All quantitative restrictions, not compatible with GATT 1994 shall be eliminated (Article 7.5) • The COE reviews the non-tariff and para-tariff barriers in its regular meeting to make recommendations for their elimination to facilitate intra- SAARC trade and make it non-restrictive (Article 7.4) 36
  36. 36. Institutional Arrangements (Article 10) • SAFTA Ministerial Council (SMC) consists of Ministers of Commerce, responsible for the administration and implementation of agreement • SMC will be supported by a committee of experts (COE) 37
  37. 37. Consultation and Dispute Settlement Procedure • Any dispute between or among the contracting states regarding the application of provisions will be settled through bilateral consultations • If they fail to settle such disputes, COE looks the matter following its own procedures 38
  38. 38. Barriers to Implementation of SAFTA • Indo-Pak relationships • India is looking for bigger market outside the SAARC region • Every member country of SAARC has listed its product in the negative list 39
  39. 39. Agreement of SAFTA • Goods • Services • Investment 40
  40. 40. Limitations for Promoting Trade and Investment • The region has diversity in socio-political and economic conditions • Political considerations and geographical disadvantages for some countries, which are responsible for affecting intra-regional trading • Informal trade in the borders of the countries has been increasing • Intra-regional flow of capital and technology is very limited • Weaker trade links among SAARC countries 41
  41. 41. Conclusion • The determination of the people of South Asia to work together towards finding solution to their common problems • Liberalize services can be beneficial for member countries • SAARC member countries are labor-abundant, there is a huge potential to gain from the supply of labor 42
  42. 42. Conclusion…. Contd…. • Provides each other the preferential treatment to reduce import tariffs on preferential items • SAFTA will enhance trade within the region by progressive reduction of tariff rates, non-tariff and Para-tariff barriers, and putting in place trade and investment facilitation measures • In order to capitalize on the inclusion of services within SAFTA, an initiative to increase services availability in less developed parts of the LDCs is desirable 43
  43. 43. Conclusion…. Contd…. • SAFTA is governed by the provisions of this agreement and also by rules, regulations, decisions, understanding and protocols to be agreed upon within its framework by the contracting states. • The implementation of SAFTA provide an institutional framework for the liberalization of mutual trade in the region. 44
  44. 44. Conclusion…. Contd…. • When SAFTA comes into force, Indian goods will start flowing across the border without any tariff walls. so, Nepal will lose customs revenue • The unrestricted and untaxed inflow of Indian goods means a debilitating impact on domestic industries. 45
  45. 45. THANK YOU !!! 46