Home ›› 28 Sep 2021 ›› Opinion
Since the Second World War there have been many examples of groups of countries joining together for the purpose of stimulating trade between them and to obtain other benefits of economic co-operation. The global economy witnessed an acceleration of Regional Trading Arrangement (RTA) from Mid-Eighties. Trade negotiation among countries at times failed or slowed down under Multilateral Framework of Uruguay Round of Negotiation.
With expansion of RTA in Europe and expansion of European Union, rearrangement of NAFTA and the East Asia Co-operation (ASEAN), put South Asian economies into the group of marginalization as a region in the global economy. With the dim possibility of joining into these dynamic regional bodies, the best option left to them is to co-operate among themselves in the hope that it would generate greater economic benefits in the medium and long run. Therefore, the option of SAARC Preferential Trading Arrangement (SAPTA) was accepted by all Seven member countries of South Asian Association for regional Co-operation (SAARC) in 1993 and thereafter in 1995 SAPTA came into operation with ratification of tariff concession. To further strengthen SAPTA, the member states enacted South Asian Free Trade Area (SAFTA). Despite apparent progress with SAPTA negotiations, the actual trade impact on the region’s economies remain unsatisfactory and unnoticeable. Analysis of the trade data of the last 25 years will support this observation.
While insignificant reduction in tariff was made, other non-tariff barrier and bureaucratic behaviour by big brothers towards poor member LDCs posed an hindrances and have constrained countries from benefiting from SAFTA. It has been observed that SAARC member countries have not been trading among themselves to any significant extent. It has been known to everyone that unofficial trade with India is three times higher than official trade.
The low complementarity of products of the region’s economies as well as trade policy regimes followed by South Asian countries acted as an inhibiting factor. In order to comply with WTO provision for establishment of free trade area, the Treaty will not only have to adhere to Article XXIV of WTO, but will also need to incorporate Article I and III of the GATT, which include the Most Favoured Nation (MFN) status and National Treatment. Article XXIV states that any preferential / free trading arrangement should cover” substantially all trade”; free trade area should be achieved “ within a reasonable period of time” and regional trading arrangement should not result in creating a higher/ more restrictive trade regime to non-members of the arrangement than what existed prior to the formation of the arrangement.
Beside the directives of WTO, the free trade area should incorporate guidelines for modalities of tariff reduction, Rules of Origin, Non-tariff barriers, Trade facilitation, Safeguard measures, Dispute Settlement Mechanism, Special measures for LDCs and Small economy etc. In this paper an attempt has been made to review the impact of SAFTA so far and assess what lies ahead. We leave the transition proposal to decide to the readers.
We very often talk about Free Trade and duty free and quota free market entry into foreign markets. Actually what it means. A Free Trade Area consists of a group of countries which have abolished tariff and quotas on trade between them.
RTA proliferation witnessed unprecedented surge upon setting of GATT after the Second World War. But with the passage of time many of them have revised their previous agreements and forwarded explanation that protracted nature of negotiation. With heightened global competition, access to enlarged markets and sources of capital become vital elements for economic development and is a driving force behind renewed interest in regional integration.
Over the years the enthusiasm for FTA seemed disproportionate to the possible gains / benefits to member countries. An argument against regionalism is that it will impede multilateral trade reform efforts terming it to be “stumbling block” more than “building block” in the efforts at global trade liberalization. At the heart of this argument lies the concern that preferential tariff cause to flow in inefficient way, a process known as “Trade Diversion” Trade diversion takes place when a country moves from buying goods from a low-cost producer to buying them from a high cost producer. This will have a negative impact on “Trade Creation” Trade creation takes place when a country moves from buying goods from a high cost country to buying the from a lower cost country.
It has been observed over the years that an FTA generally leads to Custom Union. Custom Union is a closer form of economic integration. There is free trade between member states where all member states are obliged to operate a common external tariff on imports from a non-member country.
Let us now look into the benefits of FTA: Economies of Scale:-Gains from trade creation are static. Creation of FTA leads to creation of greatly enlarged ’home’ market enabling more efficient producers to achieve a much larger scale of production at a lower cost.
Greater Competition:- The removal of trade barriers allows more scope for the operation of the Principle of Comparative advantage. Regional cost differentials will reveal themselves as differences in market prices. These differences will enable the efficient firms to expand at the expense of the less efficient who will no longer enjoy the protection afforded by tariff and quotas. As such allocation of resources will be determined by the relative efficiencies of the producers within the state.
Increased exports:-The increased efficiency of the producers will bring about more competition and larger scale production will enable to compete more effectively in the world markets.
More investment: If the formation of a custom union from FTA is achieved, it will generate faster rate of economic growth, then the rising prosperity of the group as a whole will make it possible to provide more funds to help the less developed members of the FTA and to provide more aid to developing countries in other parts of the world.
The dynamic effects: Many economists believe that one important advantage of forming an FTA is its dynamic effect. Economic activity is influenced very much by the expectation of entrepreneurs. The prospect of much larger potential market and of increased competition could act as a stimulant to investment both for modernization and expansion. Further there can be transfer of real resources from member country to member country
However, countries which have lower growth rates are likely to suffer net capital outflow and lose some of their best workers to other economies. This might lead to higher regional disparities making the rich country even richer. On the other hand some Neo-Classical economic theories suggest that free market forces would equalize the differences between regions. An unsuccessful region will have cheap labour and land. So firms will be attracted into the region to take advantage of these.
Impact on Monetary and Political union:- An internal free trade market where there are different currencies in each country impose costs upon producers. Therefore, at times a common market may lead to a common currency, thereby a common Fiscal and Monetary Policies.
A number of economists are advocating for a freer trade on the basis of benefits only. In that case they should keep in mind that there is a negative side of FTA. It has been observed that SAARC member countries have not been trading among themselves to any significant extent .The low complementarity of products of the region’s economies as well as trade policy regime followed by South Asian countries have acted as inhibiting factor. In order to comply with WTO provisions for establishment of a Free Trade Area, the Treaty will not only have to adhere to Article XXIV of WTO, but will have to incorporate Article I and Article III of GATT, which include the Most Favoured Nation (MFN) status and Nation Treatment. It has been observed that liberalization of world trade has generally benefited the wealthier industrialized countries and done little to narrow the gap between the rich and the poor. In this regard one should take into account the role of powerful members. At times the role played by powerful member state negatively impacted poor member LDCs. A number of cases could be cited in case of Bangladesh. Unless the attitude of powerful members be co-operative rather than controlling policy options, chances of a successful FTA may be a distant hope. Demeaning attitude of some member states may lead to trade disputes, hampering the free flow of goods between states. Trade dispute on empty jute bags exports to India or duty free RMG exports discourage exporters to have a successful SAFTA. Delay in releasing goods at borders of member states at time becomes real headache.
From the analysis and deliberation made here, it is clear that SAARC countries have a number of problems among them . Unless those issues are resolved amicably and bilateral consultation, smooth flow of goods will face trade barriers. SAFTA being a Free Trade Arrangement is faced with many hindrances. Unless SAFTA is fully operational without any stumbling block transition of FTA to Custom Union is a Utopian idea. Issues that are impacting SAFTA are mainly FDI, Domestic investment, Relaxation and removal of all NTBs, Removal of non-co-operation of Administrative forces of powerful members. As long as they are there, they will appear as a stumbling block in the way to a true free trade area. Leaders of the member states should use their good offices to remove and relax the issues plugging SAFTA for a better future for the people of the member state. Common currency is may have serious negative implication. In the meantime Bangladesh should have at least some bilateral MOU with China and other South East nations. On the other hand, enhance diplomatic efforts to get into ASEAN will be a way out to prosperity.
The writer is former Director General, EPB and Adjunct Associate Professor at ULAB, Primeasia, South East and BGMEA University of Fashion & Technology
