ARTICLE to Non-LDC, issues related to the

 

 

 

 

ARTICLE SUBMITTED ON:

ANALYSIS OF SAFTA : ISSUES AND
PROSPECTS

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FOR TRIMESTER XI OF 2016-2017

IN THE SUBJECT OF INTERNATIONAL TRADE LAW

 

SUBMITTED TO –

PROF. RAHUL NIKAM

 

SUBMITTED BY-

POOJA AHUJA (A008)

TREYAMB PATHAK (A027)

BA.LLB (HONS.)

 

 

The
agreement created a free trade area of 1.6 billion people in Afghanistan, Bangladesh, Bhutan, India, Maldives, Nepal, Pakistan and Sri
Lanka. The main objective of the study will be to study the features of SAFTA
and investigate its implications on bilateral and regional trade. The
study will also try to assess the role of India in making SAFTA a
success especially in the context of multilateralism and emerging regionalism. The
key question would be whether SAFTA is beneficial or not in the
context of multilateral trade negotiations. This paper will also seep through
imminent issues and threats which are preventing success of SAFTA and effective
trade-led growth in India and the South Asian region.

 

                                                                                                                 
I.           
INTRODUCTION-WHAT IS SAFTA?

South
Asian Association for Regional Cooperation (SAARC) was established in 1985 as a
grouping of seven countries, namely, Bangladesh, Bhutan, India, Maldives,
Nepal, Pakistan and Sri Lanka. South Asia has great economic strength in terms
of its market potential (one third of humanity resides in this area) and in
terms of the rich natural resources and capable human resources. Recognising
the potential of the role of trade and investment flows in the process of
regional economic integration, a trade block among SAARC members was formed
with the signing of SAARC Preferential Trading Arrangement (SAPTA) in April,
1993. Four rounds of negotiations were held and tariff concessions were
exchanged by member countries on a number of products, however, the
intra-regional trade remained modest.1

The
decision to convert SAARC into a Free Trade Area (FTA) was taken in the 9 th
SAARC Summit in May 19972. Under
SAPTA about 226 items were identified for export at concessional duties where
io6 items were covered for India and 35 items for Pakistan. But the ambiguous
trade concessions mainly to Non-LDC, issues related to the NTBs imposed by
India, rules of origin, absence of provisions for antidumping, lead to a
further amendment when SAFTA or South Asian free trade agreement was to be
adopted which was hoped to pave a way for the customs union and a common market
at some later date which facilitated cross-border trade of goods. Also, the
member states are divided into least developed countries (LDCs) (Bangladesh,
Bhutan, Maldives and Nepal) and Non-LDCs (India, Pakistan and Sri Lanka).3
Under the Agreement, SAFTA will become fully effective for LDCs by 2016 and for
NON-LDCs by 2013.4

The
Objectives of this Agreement are to promote and enhance mutual trade and
economic cooperation among Contracting States by, inter-alia:

·        
eliminating
barriers to trade in, and facilitating the cross-border movement of goods
between the territories of the Contracting States;

·        
Promoting
conditions of fair competition in the free trade area, and ensuring equitable
benefits to all Contracting States, taking into account their respective levels
and pattern of economic development;

·        
Creating
effective mechanism for the implementation and application of this Agreement,
for its joint administration and for the resolution of disputes; and

·        
Establishing a
framework for further regional cooperation to expand and enhance the mutual
benefits of this Agreement.

 

                                            
II.           
WHAT DOES SAFTA OFFER?: KEY FEATURES OF THE
AGREEMENT

Article 4 states that The
SAFTA Agreement will be implemented through the following instruments:- 1.
Trade Liberalisation Programme 2. Rules of Origin 3. Institutional Arrangements
4. Consultations and Dispute Settlement Procedures 5. Safeguard Measures 6. Any
other instrument that may be agreed upon.

Article 6 discusses the
Trade Liberalisation Programme: While NLDCs are required to reduce existing
tariffs to 20 per cent in two years from the date of entry into force of the
agreement, the LDCs will bring down the tariff level to 30 per cent during the
same time frame. In the second installment, the NLDCs will take another five
years (except Sri Lanka, which has six years) to dismantle the tariff to o-5
per cent, while the LDCs will have eight years for the same purpose. Therefore,
the SAFTA will be fully operational only in 2016.

Article 8: Additional
Measures: The article lays down that Contracting States agree to consider, in
addition to the measures set out in Article 7, the adoption of trade
facilitation and other measures to support and complement SAFTA for mutual
benefit.

Article 10
Institutional Arrangements establishes SAFTA Ministerial Council (“SMC”) which
shall be the highest decision-making body of SAFTA and shall be responsible for
the administration and implementation of this Agreement and all decisions and
arrangements made within its legal framework. The SMC shall be supported by a
Committee of Experts (“COE”). Further, it states that The COE will also act as
Dispute Settlement Body under this Agreement.

Article 11 lists down
Special and Differential Treatment to be granted for the Least Developed
Contracting States.

Article 14 lays down
general exceptions. Firstly, it states that nothing in this agreement prevents
a contracting state party to adopt measures necessary for protection of its
national security and secondly that nothing in this Agreement shall be construed
to prevent any Contracting State from taking action and adopting measures which
it considers necessary for the protection of : (i) public morals; (ii) human,
animal or plant life and health; and (iii) articles of artistic, historic and
archaeological value.

Article 15 states that
notwithstanding the provisions of this Agreement, any Contracting State facing
serious balance of payments difficulties may suspend provisionally the
concessions extended under this Agreement.

Article 16 covers
provision regarding safeguard measures. It states that If any product, which is
the subject of a concession under this Agreement, is imported into the
territory of a Contracting State in such a manner or in such quantities as to
cause, or threaten to cause, serious injury to producers of like or directly
competitive products in the importing Contracting State, the importing
Contracting State may, pursuant to an investigation by the competent
authorities of that Contracting State conducted in accordance with the
provisions set out in this Article, suspend temporarily the concessions granted
under the provisions of this Agreement. The examination of the impact on the
domestic industry concerned shall include an evaluation of all other relevant
economic factors and indices having a bearing on the state of the domestic
industry of the product and a causal relationship must be clearly established
between “serious injury” and imports from within the SAARC region, to the
exclusion of all such other factors. Further, such suspension shall only be for
such time and to the extent as may be necessary to prevent or remedy such
injury and in no case, will such suspension be for duration of more than 3
years.

Article 20 discusses
the dispute settlement mechanism. Article 21 states that any Contracting State
may withdraw from this Agreement at any time after its entry into force. Such
withdrawal shall be effective on expiry of 14 six months from the date on which
a written notice thereof is received by the Secretary-General of SAARC, the
depositary of this Agreement. That Contracting State shall simultaneously
inform the Committee of Experts of the action it has taken.

                                                                                                                                       
III.           
PERSISTING ISSUES

All
recently established regional groupings provide not only for the freeing of
trade but also measures for deeper integration of the economies. However,
according to South Asia scholars, governance issues have proven to be its
Achilles’ heel.  Longstanding social
challenges have exacerbated economic difficulties—the presence of corruption,
inefficient government systems, incompetent bureaucracies in the larger South
Asian economies, domestic turmoil, and foreign conflict have all proved
detrimental.5
Various Hurdels that can be associated
to unsatisfied functioning may be enlisted as under:

1.      Failure
to follow EPG’s Recommendations:
The SAFTA Agreement indeed includes such provisions under the heading
“Additional Measures” under Article 8. But they do not measure up to
the Eminent Persons Group’s recommendations. Some of the important measures
recommended by the EPG and missing from the Agreement are: finalization of the
pending draft investment agreement, the creation of a SAARC Investment Area, a
South Asian Development Fund, a South Asian Development Bank, and an Asian
Energy Grid; vertical industrial integration, harmonization of fiscal and
monetary policies. A crippling drawback of the SAFTA Agreement is that it does
not provide for the creation of any mechanism for pursuing the “additional
measures” under Article 8. This casts doubts on the seriousness of the
contracting parties to pursue these measures. 6

 

2.      Irritants
in Bilateral Relations: One of the
primary hurdles in realizing a FTA and moving beyond is irritants in bilateral
relations of the countries of the region. At times it becomes difficult even
for the leaders to meet annually at the summit level owing to bilateral
tensions. SAARC has been especially hostage to “love-hate relations”
between India and Pakistan; and the shadow of suspicions spill over to economic
arena. The long sensitive list declared by all countries raise the issue not
addressed so far, whether the countries are really serious about free trade at
all.7 In
November 2006, India claimed that Pakistan was deviating from the SAFTA
Agreement and was refusing to implement it in letter and spirit. The Indian
Minister of External Affairs suggested that it would be difficult to
operationalize SAFTA unless Pakistan implemented it earnestly. The minister
accused Pakistan of applying conditions to trade with India under SAFTA, a step
that went against the essence of the agreement. India launched a formal
complaint to the SAARC Council of Ministers.8

 

3.      Issue
of Trade Creation: Another
concern that arises is the issue of’trade creation’. Economists like Jagdish
Bhagwati argue that a FTA in South Asia, due to its inherent characteristic of
‘trade diversion’ instead of ‘trade creation’, would in the long run hamper
liberalization of trade at the global level. Therefore, there is a need to
concentrate in ‘trade creation’, apart from increasing overall quality of goods
to global standards. In this regard, what is required on priority basis is
infrastructure linking all the countries to facilitate easy flow of goods and
making South Asia as transit point between East and the West. Cooperation in
energy sector is highly promising. In the long run, the SAFTA has to include
provisions for trade in services and investments. This would increase the
degree of complementarily in trade. On the whole, the SAFTA is promising in
taking SAARC – still in infancy compared to other arrangements – to new heights
and in the process passing on the benefits to its inhabitants. But, realizing
the status of an Economic Union is a distant dream.

 

4.      Leaves
out Trade in Services: A major
limitation of the Treaty is that it leaves out trade in services. Another major
deficiency and element of uncertainty in the Agreement is that it leaves
un-negotiated far too many things critical for the success of SAFTA. These
include the formulation of rules of origin, the preparation of the
“sensitive” or the negative list, the creation of a fund for
compensating the Least Developed Countries (LDCs) for loss of revenue from the
elimination of customs duties, and the identification of areas for providing
technical assistance to these countries. 9

 

5.      Non-tariff
Barriers: (NTBs) which had now
evolved as an area of serious concern to the developing countries had been yet
another major flaw of the Agreement. Distinct types of non-tariff barriers
which had been and is affecting SAFTA’s performance includes: import policy barriers;
standards, testing, labeling and certification requirements; anti-dumping &
countervailing measures; export subsidies and domestic support; services
barriers (including those on movement of natural persons); government
procurement; lack of adequate protection to intellectual property rights; and
other barriers, like investment barriers, language barriers, etc. Under the COE
Pakistan, Bangladesh and Nepal notified 50 NTMs/PTMs that they faced in
accessing the Indian market. Pakistan notified the maximum number of NTMs/PTMs
(31), while Bangladesh and Nepal notified 14 each. The notified NTMs relate to
TBT and SPS measures, cumbersome procedures, licenses and quotas, para tariff
measures, infrastructure constraints, interstate movement of goods and other
NTMs (related to valuation, trading through state enterprises and anti-dumping
measures).10

 

6.      Special
and Differential Treatment to the LDCs:
The Agreement makes a number of provisions for according special and
differential treatment to the LDCs of the region – Bangladesh, Bhutan and
Nepal. These provisions do not go far enough to ensure that the LDCs will be
able to derive equitable benefits from SAFTA. At the penultimate stage of the
negotiations, the Agreement got held up because Bangladesh wanted it to go
further towards securing special and differential treatment to the LDCs. At the
final stage of the negotiations, a compromise was reached that only partially meets
the demands of the LDCs.

 

7.      Jurisdiction
of Dispute Settlement Mechanism:
A primary concern is whether the SAFTA
agreement’s dispute settlement mechanism will be the sole and exclusive basis
for remedying violations of the agreement, or whether Contracting States can
simultaneously approach multilateral organizations, such as the WTO, to resolve
trade-related disputes, utilizing concurrent jurisdiction. Additionally, the
agreement does not discuss instances of violations of the SAFTA agreement and
its Contracting States’ obligations under the WTO, giving rise to multiple
claims under both mechanisms.11

 

                                                                                                                                                    
IV.           
CONCLUSION

The question whether SAFTA is yielding benefits has
remained unanswered respite numerous empirical studies. They have concluded
that the socio-economic pressures and tensions coupled with internal issues of
countries such as low income per capita, abundant labour in manual work etc poses
immense hindrance in success of a regional trade agreement. They are of the
opinion that the countries would be better off liberalizing trade unilaterally.
However, these studies do succumb to the fact that SAFTA is a step in positive
direction.

India is the most important player in the South
Asian Integration. Almost 90% of the trade with Bangladesh, Nepal and Maldives
is with India.  For SAFTA to be rewarding,
it is imperative that India and Pakistan ease tensions between them which is
possible only if socio-political issues between them are resolved through
amicable dialogues. Further, other contracting parties of SAFTA need to
liberalize their policies and remove items from “sensitive list” which poses
restricting on imports. Only those goods which are highly necessary should be
placed under the list and the rest should be subjected to the concessions
offered under the said Agreement. In the absence of progress on the fronts
mentioned in this paper, it is apprehended that SAFTA will stagnate or worse
fragment as countries pursue more and more bilateral trade than regional cooperation.

 

1 M. S. S Perera, The South Asian
Free Trade Area: an Analysis of Policy Options for Sri Lanka, Journal of
Economic Integration 24(3), September 2009; 530-562

2 Selim Raihan and M. A. Razzaque,
Welfare Effects of South Asian Free Trade Area (SAFTA) Regional Trading
Arrangements (RTAs) in South Asia: Implications for the Bangladesh Economy,
UNDP Regional Centre Colombo, (2007)

 

3 R. S. Ratna and Geetu Sidhu, Making
SAFTA a Success: The Role of India, CUTS International, Jaipur, available at http://www.cuts-citee.org/pdf/RREPORT08-AP-03.pdf

4 Sadiq Ahmed, Saman Kelegama, Ejaz Ghani, Promoting Economic Cooperation in South Asia:
Beyond SAFTA, Sage India; 1 edition (18 January 2010)

 

5 Vipan and Mohit Kumar, PROBLEMS
IN SOUTH ASIAN FREE TRADE AREA (SAFTA), CONTEMPORARY RESEARCH IN INDIA (ISSN
2231-2137): VOL. 5: ISSUE: 2

 

6 Badar Alam Iqbal, Is SAFTA a
Myth or Reality, 13 J. World Investment & Trade 103 (2012) hereinafter “Badar”

 

7
Yasir Hussain, SAFTA: Potential and Challenges, Epitome
Books; 1 edition (March 26, 2012)

 

8 Mohit Kumar Vipan (2015); Problems In South Asian Free Trade
Area (Safta) Int. J. of Adv. Res. 3 (7). 72-76 (ISSN 2320-5407).

9 Badar, Supra Note 6

 

10 Nisha Taneja et al, India’s Role
in Facilitating Trade under SAFTA, INDIAN COUNCIL FOR RESEARCH ON INTERNATIONAL
ECONOMIC RELATIONS, Working Paper 263, (2013), available at http://icrier.org/pdf/working_paper_263.pdf

11 Amala Nath, The SAFTA Dispute
Settlement Mechanism: An Attempt to Resolve or Merely Perpetuate Conflict in
the South Asian Region, 22 Am. U. Int’l L. Rev. 333 (2007)