Will Safta get launched January 1?

WILL Safta get launched January 1? Will it become operational as stipulated? It’s a big question mark, even after years of preparations and rhetoric to get going and expand regional trade through South Asia Free Trade Agreement (Safta).

When the seven member nations of South Asian Association for Regional Cooperation—Bangladesh, Bhutan, India, Maldives, Nepal, Pakistan and Sri Lanka—had signed Safta in Islamabad January 1, 2004, all hopes were that it will become effective January 1, 2006. But, several members have been dragging their feet in arriving at a consensus on details that were left to a committee of experts (CoEs). That has not happened.

Dhaka Saarc summit deliberations will cover final negotiations on operationalization of Safta and Agreement on Promotion & Protection of Investment. “Emerging areas of cooperation including trade, energy, environment, health and tourism will also be taken up at Dhaka,” Foreign Office spokesperson MS Tasnim Aslam said.

Safta stuck in its tracks, more than 1.4 billion impoverished people of the region now look to its top leadership to take some bold decisions, bring the agreement back on rails, and get it moving.

Business is not the only stake. Pinned to trade and economic cooperation in Saarc are hopes that it will bring peace and stability to the region, and free its people from wars and tensions that have persisted for more than half a century.

The misfortune of South Asian people is, while their leaders,— civil, and military— were fighting each other, nearby Asean took big strides in development, investment, business, and cooperation in a wide range of fields. Asean is now a formidable force in the global market place, while neighbouring Saarc is still a victim of political indecision and tensions, deprived of the benefits of peace.

The 13th summit of Saarc leaders in Dhaka this week is staked on statesmanship that is expected of Prime Minister Sahukat Aziz, the current Chairman of Saarc, Prime Minister Manmohan Singh, and Bangladesh President Mrs. Khalida Zia, and their other four collegues from Sri Lanka, Nepal, Bhutan and Maldives. Their political and business acumen can make or mar, the prospects of the scheduled Safta launch.

Instruments: Article 4 of Safta had identified six instruments for its implementation, including: trade liberalization programme (TLP), rules of origin (RoO), institutional arrangements, consultation and dispute settlement procedures, safeguards measures, and any other instrument that may be agreed upon.

But, is it not amazing that out of four major issues, identified for more than two years, three key ones still are unresolved. These four areas, according to Pakistani official negotiators, are: preparation and tabling of sensitive lists (SLs) of items for which each country is demanding protection or safeguards. Finalization of RoOs, compensation for revenues loss (CRL) that each country, particularly, the least-developed (LDCs), will suffer when trade opens up and imports flow into each other’s country. And, technical assistance (TA) for LDCs to train their personnel for implementing Safta and handling freer trade.

Ironically, two years of talks by CoEs and other officials trying to negotiate a consensus have failed to produce results in the first three major issues—SLs, RoO, and CRL.

The seven have, so for, agreed only on technical assistance to be provided to LDcs, to help train their customs, trade, tax and communications people in handling larger trade flows when Safta gets going.

Pakistan is one of the foremost countries that has offered training to officials and personnel of LDCs in various fields. LDCs when the agreement was concluded wanted TA because their economies are small, their infrastructure, including ports, roads and communications were developing, and their personnel needed training in a range of areas, from customs procedures to WTO.

India and Sri Lanka also have offered TA. The agreement provides, “ special consideration shall be given by contracting states (CSs) to requests from LDCs for TA and cooperation arrangements, designed to assist them in expanding their trade with other CSs and in taking advantage of the potential benefits of Safta.”

Non-LDCs (NLDCs), according to the agreement, will bring their existing tariffs rates down to 20 per cent within two years of coming into force of the agreement, under trade liberalization programme (TLP). They will also reduce tariffs from 20 per cent or below to 0-5 per cent within a second period of five years. LDCs will reduce their tariffs from their existing rates down to 30 per cent within two years, and from 30 per cent or below down to 0.5 per cent in a second time frame of eight years.

CSs may not apply the stipulated TLP and tariff cutting to the tariff lines included in the sensitive lists (SLs) which will be negotiated and incorporated in the agreement. SLs will be reviewed after every four years, or earlier, as decided by Safta ministerial council.

All the seven countries have already tabled, but not finalized, their Sensitive Lists, they need to protect or safeguard from imports from the region and the competition under Safta. The lists are long and contain all imaginable items that may be hit by perceived competition. Pakistani list of SLs comprises 1,210 items, on import of which it will not lower its tariffs or give concessions. Bangladesh and LDcs have tabled longer SLs, on which they don’t wish to lower their tariffs, as of now.

They also demand protection from imports for longer periods, than originally envisaged. When the technical committee finalizes SLs, and strikes a consensus, the lists will be appended to the main Safta agreement.

According to Article 18, RoOs will be negotiated by the CSs, and incorporated in the agreement as an integral part. These rules cover questions like value addition (VA) and change of tariff heading (CTH) over each tradable item among the member countries. Pakistani negotiators, indicating the views of their other colleagues from member countries are of the opinion that once matters relating to Rules of Origin are agreed, it will help a quick finalization of SLs, and their incorporation in the agreement.

Compensation for CLR is, perhaps, the most tricky point in negotiations. Bangladesh is a hard liner, while Pakistan and India wish to go along the actual provisions of Safta agreement. Negotiators are stuck over identification and definition of loss of what categories of customs and other taxes are to be calculated to determine the revenue loss. They have also failed to finalize modalities and establish a “mechanism” to compensate for the revenue loss.

The agreement provides that “LDCs may face loss of customs revenue due to the implementation of the trade liberalization programme (TLP).” “Until alternative domestic arrangements are formulated to address this situation, the CSs agree to establish an appropriate mechanism to compensate LDCs for their loss of customs revenue.” It clearly means “loss of customs revenue,” alone. Bangladesh disagrees with it. “The mechanism and regulations will be established prior to the commencement of the TLP.” Neither the formula to calculate the “revenue loss” has been agreed nor the “mechanism” or instrument to pay the loss has been established.

Bangladesh insists that LDCs should be compensated not only for “the loss of customs revenue,” when tariffs, as envisaged in Safta agreement, are lowered but also for loss of revenue on several internal taxes, VAT and duties already levied on domestically manufactured items.

The domestic production of these items, Bangladesh maintains, will be reduced or eliminated in the face of imports from member countries. Pakistan and India are among the countries that have refused to accept this very enlarged and inflated definition of “revenue loss,” because the definition provided in the agreement is only based on customs revenue. This has turned into an unsettling argument between NLDCs versus LDCs. The negotiators also are unable to decide as how, and who, will pay the compensation. And what should be the ‘mechanism.

The agreement had left these decisions for experts to take after negotiations.

Various modes have merely been discussed, but there is no consensus on the proposed Compensation Mechanism. These include the proposal to establish a new fund. The unresolved questions are: will the governments of exporting countries pay the compensation? Will governments, exporters, and business of exporting countries pool their resources to pay it to the importing country? Will exporters and businessmen alone be responsible to pay an importing country?

Each of the smaller countries is also worried about the future prospects of one or two of its own key items. Maldives for its fish and seafood, Bangladesh for its ready-to-wear garments, and Bhutan for its timber export. Pakistan wishes to protect its textiles, engineering and autos.

However, Safta members will go along the G-20 policy on agricultural products at WTO forum, that was reflected at the Group’s recent meeting at Islamabad.

Pakistani negotiators and exporters have to take into view other elements of the future business prospects and competition in the region, too. They have to brace for a good deal of competition from India, especially, as far as exports to the region, and especially Bangladesh, are concerned. They will have to lower their cost of production on a large number of items, improve efficiency, and offer a greater variety of consumer products. Freight is an element that already goes against them. It roughly costs Rs1,000 for one-ton freight from India to Bangladesh, overland, compared to something like $60 or Rs3,600 for shipping from Pakistan to that country.

They will have to add more for land transport from the port to inland points and other costs. India also has a freight advantage in exporting overland to Sri Lanka from the South.

Saarc countries will sign two agreements at Dhaka summit. These are: cooperation in customs matters, and avoidance of double taxation.

While everyone fervently hopes for Saarc and Safta to move forward swiftly, the snags, the agreement still faces, will have to be removed. The burden now lies on the shoulders of the Summit leaders. Will statesmanship prevail at Dhaka?

Courtesy: The DAWN

Muhammad Ramzan Rafique
Muhammad Ramzan Rafique

I am from a small town Chichawatni, Sahiwal, Punjab , Pakistan, studied from University of Agriculture Faisalabad, on my mission to explore world I am in Denmark these days..

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