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SAARC: A free trade area that never was

Kamal Dev Bhattarai

Kamal Dev Bhattarai

SAARC: A free trade area that never was

Trade integration, it was thought, was the key to unlocking regional growth. But the South Asian Free Trade Agreement (SAFTA) under the aegis of SAARC has not been able to contribute much towards this goal

The 11th summit of the South Asian Association for Regional Cooperation (SAARC) held in Kathmandu in 2002 agreed to the development of a South Asian Economic Union by 2020 in a phase-wise process. This commitment was never implemented. 

Again, during the 18th summit in 2014, regional leaders renewed their commitment to the same through a free trade area, customs union, common market, and common economic and monetary unions. This pledge too never saw the light of the day, as the SAARC process remains stalled after 2016 over India-Pakistan tension.  

The regional body was formed to promote economic growth in member states. And trade integration, it was thought, was the key to unlocking such growth.   

With the same thinking, the South Asian Free Trade Agreement (SAFTA) under the aegis of the regional body came into force in 2006. But it has not contributed much in intra-regional trade. 

With intra-regional trade at less than five percent of the eight countries’ total foreign trade, South Asia is the least integrated region in the world, heavily dwarfed by East Asia’s 35 percent and Europe’s 60 percent, according to a 2019 World Bank report.

Don McLain Gill, a resident fellow at Manila-based International Development and Security Cooperation, says SAARC’s creation in 1985 was the result of a new trend towards regional cooperation. 

“With SAFTA coming into force, there were hopes of maximizing economic cooperation in the region. However, today, South Asia remains arguably the least integrated region in the world despite its shared history, culture, and geography,” he says.

He says there are salient differences in intra-regional trade in the SAARC and the Association of Southeast Asian Nations (ASEAN). From 1992 to 2017, for example, ASEAN’s intra-regional trade grew exponentially, while SAARC’s pretty much stagnated. 

Unlike in SAARC, the asymmetry in size and capacity of member states was never an impediment to regional trade under ASEAN.

There are a host of reasons behind SAFTA’s sorry state. Tariff and non-tariff barriers, extensive sensitive list, poor connectivity, visa restrictions, lack of proper border infrastructure and booming informal trade are some of the major ones. 

Purushottam Ojha, a former commerce secretary, says one of the major hindrances to intra-regional trade are the extensive sensitive lists, which are lists of goods exempted from tariff concessions. 

The inventory of goods on the sensitive lists is very high. Despite the commitment to bringing them down, the member states haven’t been able to do so. 

“Nepal, Bangladesh, Bhutan, Sri Lanka have put 900 to 1,000 products under sensitive lists to collect revenue,” Ojha says. The basic principle of free trade is to liberalize trade by increasing investment and collecting taxes, he adds, but the least-developed countries of the region are loath to tweaking with their custom revenues.

He argues SAFTA cannot be implemented until and unless these countries review their sensitive list. 

Although there is a provision of reviewing the lists at least every four years, there hasn’t been much progress.

Similarly, unchecked informal trade has also hamstrung SAFTA. Although informal trade is not included in official government figures, the World Bank estimates nearly 50 percent of trade in South Asia is informal. For example, there is a large volume of informal trade between Nepal and India, and Nepal and Bangladesh. 

Para-tariffs also limit intra-regional trade. Para-tariffs are taxes levied on imports, but not on domestic products. SAARC member countries levy hefty border processing charges, much more than standard import-export tariffs. Bangladesh, Sri Lanka, and Pakistan are among the countries with high para-tariffs.

These para-tariffs, along with the sensitive lists, have rendered the region’s free trade agreement ineffective. 

According to the World Bank, average tariffs in South Asia were 13.6 percent compared to 7.3 percent in South East Asia. 

“Lack of comparative advantage, infrastructure issues, power asymmetry, and India-Pakistan security dilemma are other hindrances to intra-regional trade,” adds Gill. 

Poor connectivity is another big obstacle. There are no prominent connectivity projects in the region. Although India has been taking numerous bilateral initiatives to enhance connectivity, the capitals and major cities of South Asian countries are still poorly linked. 

Transport logistics and border infrastructure in the region are also poor, resulting in high import and export costs. It takes several weeks to clear goods at some border points. There hasn’t been any progress on product harmonization and quality control either.

The long-standing dispute between India and Pakistan, two largest SAARC member states in terms of population , is another big hindrance to intra-regional trade.  

For a long time there have been talks about making the SAARC region a visa-free regime, to no avail. Some member countries still have rigid visa systems, directly affecting traders in the region. In fact, these traders find it easier to do business with the rest of the world. 

The economic and geopolitical situation of South Asia has undergone a sea change since the SAARC member countries implemented SAFTA. With China’s rise, all South Asian states including India are more engaged with China on the economic front. 

“Today’s South Asia, through its individual sovereigns wants to harness open-ended regionalism or unbounded regionalism to keep it invested in groupings on its Eastern and Western flanks,” says Dattesh D. Prabhu-Parulekar, assistant professor at the School of International and Area Studies in Goa University, India.

In this regard, China's burgeoning trade and investment links with almost all South Asian nations can no longer be ignored, he adds. “These links undercut SAFTA.”

Moreover, over the past few years, countries in the region have been making good progress in terms of economic growth but their debts have increased as well.  

Parulekar says smaller South Asian economies are today bedeviled by debts brought on by profligate borrowing and serious liquidity crises. 

“Until these issues are urgently addressed, seamless trade-based regional cooperation and synergies appear unrealistic,” he adds. 

He instead suggests focusing on sub-regional mechanisms to enhance trade. 

With the SAARC showing diminishing returns for some of its members, he says South Asian nations have now bought into the propositions of ‘mini-lateralism’ and sub-regionalism.  “That undercuts SAARC and yet boosts regional integration. BBIN and BIMSTEC are cases in point,” he says.

Gill says the way forward is not to waste more resources on restructuring SAARC, but to strengthen sub-regional mechanisms. 

“Enhancing existing sub-regional arrangements such as BIMSTEC, BBIN, and the India-Sri Lanka-Maldives trilateral will help create stable conditions to maximize intra-regional cooperation, not just in trade, but also in areas like defense and socio-cultural exchanges,” he says. 

With the entire SAARC process in limbo, chances of SAFTA’s meaningful revival are slim. Better to accept the bitter reality, suggest experts, and move on.