Not a free trade area

The long-pending South Asia Free Trade Area (SAFTA) pact finally came into force on July 1, sans fanfare. That should cause no surprise, since none of the seven countries (India, Pakistan, Sri Lanka, Bangladesh, Nepal, Bhutan and the Maldives) that constitute the South Asian Association for Regional Cooperation (SAARC), and thus the membership of SAFTA, anticipates any major economic benefits immediately, though these might well come in the medium to long term. One possibility is the development of a regional energy grid, as some of the member-countries are surplus in power and other forms of energy. In theory, SAFTA can also pave the way for cross-border movements of labour, services and investment.

Unfortunately, all this is a far cry at the moment as even the movement of goods is blocked by issues that are mostly unrelated to trade and commerce. As it is, the total trade between these seven countries accounts for less than 5 per cent of their combined international trade. This is in sharp contrast to the situation in Europe, where mutual trade is about 55 per cent of the total trade of the countries in the European Union (EU). As such, even if SAFTA leads to a doubling or even tripling of intra-regional trade, its impact on the economies of these countries will remain limited.

Under SAFTA, the process of trade liberalisation is scheduled to be completed in ten years, or by 2016. India has slashed customs duties on nearly 380 tariff lines to between 5 per cent and 100 per cent for imports from the least developed countries (LDCs), and between 5 per cent and 117.5 per cent as part of the first instalment of duty cuts. Some other countries have either done the same or are in the process of doing so. But while all this is fine, there are several factors which adversely impact the utility of SAFTA, rendering it almost meaningless for bilateral trade between some of the key countries of the region. For one, these countries already have bilateral free trade accords which go much beyond SAFTA in its present form. Where bilateral trade between India and Pakistan is concerned, it is constrained by mutual distrust that runs deep. Indeed, Pakistan, while announcing tariff reductions on over 4,800 goods and products from SAARC countries, has kept India apart and applied these cuts to only the 733 items included in the positive list for trade between the two neighbours. Taking this a step further, Pakistan has also linked free trade with India with the resolution of the Jammu & Kashmir and other disputes. Moreover, Pakistan has steadfastly refused to accord "most favoured nation" status to India for trade purposes though it is obliged to do so under both SAFTA and the World Trade Organisation's (WTO's) standard rules.

Such an attitude severely restricts the gains from regional trade agreements like SAFTA. India could drag Pakistan to the disputes settlement bodies of either SAFTA or the WTO, but going by the country's past record it is unlikely to take such a step. In fact, realising the paramount importance of international and regional trade in economic development, Pakistan needs to revisit its own trade policies and de-link them from extraneous, non-trade issues""in its own interest, and not as a favour to India. It is only then that instruments like SAFTA can benefit the countries of the region and, possibly, even rope in other neighbouring countries, such as China, or regional trade blocs such as Asean, to widen the horizon of economic cooperation.