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(2) 134 （636）. 横浜国際社会科学研究 第 12 巻第 4 ･ 5 号（2008年 1 月）. Asian Association for Regional Cooperation (SAARC) was formed. While the promotion of welfare and accelerated economic growth was one of the aims of SAARC, nearly a decade passed before further steps were taken to promote preferential trade among its members. In line with the ongoing trend of PTAs, the SAARC members have established the South Asian Free Trade Area (SAFTA)1), which only came into force on July 1, 20062). In the meantime, it has not only become obvious that the quality of interstate relations, which are loaded with conflict, makes regional co-operation in the region difficult, but also the prospect of regional trade integration is also often seen critically in terms of its economic effects. 1.1 Geopolitical Context Conflict has been a major feature of the state formation process in South Asia and continues to be an integral factor in the inter-state relations of the region. South Asian governments have had great difficulty in coping with conflict situations. In fact, there has been a continuous degradation of relations among countries in the region, which has contributed to preventing governments from getting their countries on track for much needed economic and social development. International trade is often believed by many economists to occur under the “gravity” model. According to the gravity model, distance heavily influences the destination of trade3). Conforming to the argument of this model, a big share of international trade indeed occurs within a radius of three thousand kilometers. This, however, is not true for South Asia. Members of the SAFTA export their goods mostly to the developed countries, especially to the United States and the European Union. Bangladesh, a least-developed member of the SAFTA, for example, is heavily dependent on its readymade garments, which it exports basically to the above-mentioned two destinations. This deviation from the gravity model of international trade is not because South Asia is structurally different from other regions of the world; rather it is because of the intense political hostility between the two largest players of the region, namely India and Pakistan4). This rivalry between India and Pakistan started immediately after the birth of the two countries, in particular with the dispute over the accession of the state of Kashmir in 1948. The trade war that started in 1948 has continued for more than half a century, which significantly crippled intra-regional trade in South Asia. Until the early 1990s, South Asian countries pursued a policy of import substitution of development. This strategy, which persisted over 40 years, has had a significant role in keeping this region’s trade-to-GDP ratio low. The situation changed during the early 1990s when the Sri Lankan government first abandoned this policy in favor of trade liberalization. Other countries also followed the instance. Since then there has been an increase in the region’s tradeto-GDP ratio. The progress, however, remains low and international trade constitutes less than 5 percent of the total. SAPTA, the predecessor of SAFTA, could hardly improve the situation partly because of the highly protective trade regimes most countries had in place5). 1.2 Evolution of Regionalism in South Asia Existing as an integrated region until 1947, integration and regionalism was not a new concept for the newly created countries of the Indian subcontinent. Rather this was merely an attempt to restore the unanimity that existed before 1947. The process began in the early 1980s when Bangladesh took the first initiative to establish an operational regional cooperation which led to the first South Asian foreign secretaries’ meeting in April 19816). The meeting decided to have an easy start by beginning with cooperation in non-contentious areas such as agriculture, telecommunication, rural development, meteorology and health. Gradually the countries institutionalized the ad hoc arrangements of technical cooperation and formally launched.
(3) Rethinking Regionalism in South Asia（Mustafa Moinuddin）. （637） 135. the Integrated Programs of Action (IPA) through the adoption of South Asian Regional Cooperation (SARC) in 1983. Since then the foreign ministers of the member countries began to meet on a regular basis, which improved the areas of technical cooperation among the countries and finally led to the establishment of the South Asian Association for Regional Cooperation (SAARC). The SAARC Charter was adopted in 1985 by its seven founding member countries (Bangladesh, Bhutan, India, Maldives, Nepal, Pakistan and Sri Lanka), and the first summit was held in Bangladesh in 1985. With the accession of Afghanistan, the total number of SAARC members now stands at eight7). The Dhaka Summit Declaration of 1985 reiterated the conviction that the Association would “…play an important role in accelerating the pace of economic and social development of their countries…”8). However, until the 1990s, the sectors of cooperation were limited to non-economic areas. The first attempt to move towards the direction of economic cooperation was taken by the SAARC Secretariat with the commission of a study on Trade, Manufactures and Services (TMS). The TMS Study considered “economic cooperation among the countries of the SAARC region as an inevitable imperative for promoting all-round development of the region”9). On its recommendation, the Council of Ministers set up a High Level Committee on Economic Cooperation (CEC) in 1991, which worked towards institutionalizing a framework for South Asian Preferential Trading Arrangement (SAPTA). The agreement on SAPTA finally became operational in December 1995 and was notified to the WTO to operate as a PTA. Since its launching, three rounds of preferential trade reductions have been implemented10): Concluded in 1995, the coverage of SAPTA-1 was relatively a modest one with only six percent of the traded goods (about 226 products at the 6-digit level of the Harmonized System of Tariffs) being covered. The important issue of tariff reduction was deferred in this round and the proposed tariff cuts were small compared to the relatively higher tariff rates in the region. SAPTA-2, concluded in 1997, was rather ambitious with larger product coverage and tariff cuts. Concessions were offered on around 1800 6-digit HS items and it incorporated provisions on easing some nontariff barriers. Signed in 1998, SAPTA-3 was the most ambitious agreement as concessions were granted on 2700 6-digit HS items. SAPTA-4, although was initiated in 1999, was postponed after the military takeover in Pakistan in October 1999. Although during the Male Summit in 1997, the member countries took the initiative to launch the South Asian Free Trade Area by 2001, progress towards achieving that was slow. The member countries again agreed in 2004 during the Islamabad Summit to launch SAFTA by January 1, 2006. A five-year delay was caused by deteriorating relations between India and Pakistan after nuclear tests by the two countries in May 1998, the military take-over of Pakistan in October 1999 and the near-war situation between India and Pakistan in 2001 and 2002.11) Tensions began to ease during mid-2004, which finally paved the way towards SAFTA coming into force in July 1, 2006. The evolution of regional integration in South Asia or chronology of developments depicts two facts: firstly, the hostility and volatile political situation halted the advance of regional integration a number of times and stood in the way of making timely progress; and secondly, SAFTA is the outcome of years of work amid hostility and uncertainty and by now has already become a reality from which none of the member countries seems to have any intention to roll back. Skeptics, however, have expressed serious doubts about SAFTA becoming an effective instrument for promoting regional trade. While regional cooperation and integration have proved to be very successful for the political and socioeconomic development in many geographical areas around the globe, it has never worked properly among the South Asian countries. From the very inception, SAARC has most unfortunately been a victim of distrust, suspicion and intraregional tensions. Considering the realpolitik of the region, there is hardly any strong indication that SAFTA is not going to embrace a similar fate..
(4) 横浜国際社会科学研究 第 12 巻第 4 ･ 5 号（2008年 1 月）. 136 （638）. 2．South Asian Free Trade Area (SAFTA)12) 2.1 Objectives and Principles The overall goal of the SAFTA regime is “to strengthen intra-SAARC economic cooperation to maximize the realization of the region’s potential for trade and development for the benefit of their people＂13). The Agreement calls for promoting and enhancing mutual trade and economic cooperation among the contracting states by means of eliminating barriers to trade and facilitating the cross-border movement of goods between contracting parties, promoting conditions for fair competition and ensuring equitable benefit for all Contracting States, and establishing a framework for further regional cooperation. Governed by the principles of the Marrakesh Agreement Establishing the World Trade Organization (WTO), the Contracting States foresee SAFTA to be “based and applied on the principles of overall reciprocity and mutuality of advantages in such a way as to benefit equitably all Contracting States, taking into account their respective levels of economic and industrial development, the pattern of their external trade and tariff policies and systems＂14). The SAFTA Agreement reiterates the necessity to address the needs of the least-developed SAFTA countries, viz. Bangladesh, Nepal, Bhutan and Maldives15).. SAFTA involved the elimination of tariffs, paratariffs and nontariff barriers16), and entails. “adoption of trade facilitation and other measures, and the progressive harmonization of legislations by the Contracting States in the relevant areas＂17). 2.2 Institutional Framework For the purpose of the implementation of the SAFTA Agreement, the Contracting States established two institutions. The SAFTA Ministerial Council (SMC), the highest decision-making body consisting of the ministers of commerce or trade of the member states, “shall be responsible for the administration and implementation of this Agreement and all decisions and arrangements made within its legal framework＂18). The SMC is scheduled to meet at least once a year or more often. A Committee of Experts (COE), consisting of one senior economic official from each SAFTA member state, shall be formed to support the SMC. The COE shall meet at least once every six months to “monitor, review and facilitate implementation of the provisions of this Agreement and undertake any task assigned to it by the SMC＂19). Furthermore, the COE will also perform as the organ’s Dispute Settlement Body. 2.3 Trade Liberalization Program SAFTA’s trade liberalization program addresses both tariff reduction and non-tariff barriers. The Contracting States of SAFTA envisage a ten-year gradual phase out of tariffs starting from the date of coming into force of the Agreement, i.e. July 2006. SAFTA member states are committed to reducing tariffs in two stages, although the pace of reduction is different for Least Developed members and Non-Least Developed members. The reduction process is summarized below: ・Non-Least Developed Contracting States will reduce tariff, from existing rates, to a maximum of 20 percent. Tariffs already below 20 percent will be reduced on a Margin of Preference basis of 10 percent on actual tariff rates annually. This reduction will be executed over the first two years from the date of coming into force of the Agreement. In the second phase, Non-Least Developed Contracting States will reduce tariff to between 0 and 5 percent by the third year for products from Least Developed Contracting States and over a five years period for the reminder at a rate of no less than 15 percent annually. However, the period of subsequent tariff reduction by Sri Lanka shall be six years. ・Least Developed Contracting States will reduce tariff, from existing rates, to a maximum of 30 percent. Tariffs.
(5) Rethinking Regionalism in South Asia（Mustafa Moinuddin）. （639） 137. already below 30 percent will be reduced on a Margin of Preference basis of 5 percent on actual tariff rates annually. This reduction will be executed over the first two years from the date of coming into force of the Agreement. In the second phase, Least Developed Contracting States will reduce tariff to between 0 and 5 percent over eight years at a rate of no less than 10 percent annually. 2.4 Rules of Origin Rules of origin, which determine the eligibility for tariff preferences by specifying how a good is classified as being produced in a member state, were left in the SAFTA Agreement for further negotiations. The result of the rules of origin negotiations has been incorporated in the Agreement as an integral part. 2.5 Sensitive Products The SAFTA Agreement allows the restriction of trade in the interests of national security, public morals, health or historic value. The Agreement also contains provisions for exemptions of sensitive list products. According to these provisions, Contracting States may not apply the Trade Liberalization Program to the products of the sensitive lists. Although these lists should be reviewed every four years, the Agreement does not restrict the size or scope of these lists. This, however, is contrary to the requirements of the WTO, whereby PTAs are supposed to free “substantially all trade＂20) between member states. 2.6 Balance of Payments Measures Any SAFTA member state facing serious difficulties with balance of payments can suspend the concessions of the Agreement on a provisional basis. Any such measure is required to be notified immediately to the Committee of Experts (COE). The COE will monitor such situations and require that the suspension be phased out once the balance of payments situation has improved. Similar temporary suspension of concessions is also allowed, under the provision related to safeguard measures, when the quantities of imports of a specific good “cause, or threatens to cause serious injury to producers of like or directly competitive products”21). Such suspensions may exist for a maximum of three years. 2.7 Non-tariff Barriers The SAFTA Agreement requires that quantitative restrictions not consistent with WTO rules have to be abolished for products not on sensitive lists. Contracting States are required to notify all non-tariff barriers and para-tariffs to the SAARC Secretariat on an annual basis. The Committee of Experts (COE) is given the responsibility to monitor the WTO compliance of the measures at question, and may recommend their abolishment or amendment. The Agreement, however, does not provide any specific timeframe or mechanism as such for the compliance or elimination of these quantitative restrictions. 2.8 Special and Differential Treatment for Least Developed Contracting States “One of the salient features of the SAFTA Framework Agreement was that it accorded the LDCs an explicit recognition as a separate group of countries among the Contracting States; the framework mentions that the LDCs in the SAARC will be provided with special and differential (S&D) treatment”22). These S&D treatments include a longer implementation period, faster tariff reductions for Non-Least Developed Contracting States, favorable consideration for applying antidumping or countervailing measures, and flexibility for continuing quantitative or other restrictions or direct trade measures for enhancing sustainable exports from Least Developed Contracting States. The Agreement also.
(6) 138 （640）. 横浜国際社会科学研究 第 12 巻第 4 ･ 5 号（2008年 1 月）. provides for a mechanism for compensation of possible revenue losses for the Least Developed Contracting States23). 2.9 Consultations and Dispute Settlement The SAFTA Agreement provides for, similar to the WTO rules, adequate opportunities for bilateral consultations between any two Contracting States with respect to the operation of the SAFTA Agreement. The Agreement also elaborates the procedures for settlement of disputes. It provides for bilateral consultations to be initiated, in writing by the Contracting State making the complaint. Upon receipt of the complaint, the respondent has to reply within 15 days. If consultations fail, then the matter can be brought to the Committee of Experts (COE). In case of a continuation of the disagreement, the matter can be referred to the SAFTA Ministerial Council (SMC). One of the distinctive features of the SAFTA Agreement is that it recognizes that trade cooperation has to be complemented by some additional measures such as harmonization of standards, reciprocal recognition of test and accreditation; harmonization of customs clearance and customs cooperation; transit facilities, particularly for landlocked countries; removal of barriers to intra-SAARC investments; development of communication systems and transport infrastructure; rules of fair competition and promotion of venture capital; and simplification of procedures for business visas. 3．Current Status of SAFTA 3.1 Trade Cooperation The establishment of the SAFTA is no doubt a step forward from the South Asian Preferential Trading Area (SAPTA), and can be envisaged as a stepping-stone for deeper levels of economic integration among the SAARC countries24). The SAPTA, which was initiated in 1993, has had four rounds of negotiations, that, most unfortunately, did not prove to be effective enough in fostering intraregional trade within the SAARC region. However, SAARC member countries did liberalize over the last two decades, lowering their average tariff from 80─90 percent in the mid-1990s to about 20─25 percent at present25). Trade-to-GDP (export and import together) ratio stands at 35 percent. This shift from import substitution of development to trade liberalization, however, cannot be totally attributed to SAPTA as such. As observed by Husain (2004), the whole South Asian region experienced quite rapid unilateral trade liberalization during the 1990s26). Sri Lanka led the way by abandoning the import substitution policy in favor of trade liberalization, which was later followed by Pakistan and then by other countries of the region. But intra-regional trade is less significant in South Asia as compared to other regions of the world. The four rounds of SAPTA preferential market access negotiations resulted in tariff reductions ranging from 10 to 100 percent for about 3500 items, but it did not produce much change over the last ten years. Against a global SAARC export of about $100 billion, total intra-SAARC export accounted for only $5 billion. Rahman (2006) sees more than one reason behind this: “Many of the goods belonging to the offer lists submitted by various SAARC countries were not traded at all, or traded at very low levels. The product by product approach followed under SAPTA was cumbersome, depth of tariff cuts and coverage of products were shallow, non-tariff barriers had not been dealt with comprehensively and other complementary initiatives had not been taken… The result of all this was that SAPTA remained largely ineffective; itʼs impact in terms of tariff reduction was a paltry US$9.0 million＂27). 3.2 The Recent SAFTA Negotiations The SAFTA Committee of Experts (COE) recently held twelve rounds of crucial negotiations on three key areas that were left open in the SAFTA Agreement for further negotiations: a) Trade Liberalization Program, b) Rules of Origin, and c) Mechanisms for Compensation for Revenue Losses..
(7) Rethinking Regionalism in South Asia（Mustafa Moinuddin）. （641） 139. 3.2.1 Trade Liberalization Program 28) The trade liberalization Program required each SAFTA country to prepare three lists of goods : i) a sensitive list. of goods which will remain outside the scope of the trade liberalization schedule; ii) a positive list for which duties on goods will be brought down to 0-5 percent at the very beginning; and iii) a residual list for 0─5 percent in a staggered manner29). This has been a time consuming and complex task; each of the SAFTA member countries needed to take into account their interests and concerns with regard to possible impacts on revenue, trade creation and trade diversion, interests of domestic industries and so on. At the same time, these countries needed to take into account the interests of SAFTA, and how to make it effective by respecting the interests of other countries. The agreed size of the sensitive list varies from country to country. Some countries have a single list for all others, while some countries sought separate sensitive lists for Least Developed Countries. However, the long lists of sensitive items prepared by the SAFTA members have, to some extent, restricted the potentials of SAFTA30). The long sensitive list declared by all countries raise the question whether the countries are really serious about free trade at all31). The sensitive lists contain important tradable items that had export interest to other countries. Bangladesh’s major export item, apparels, for example, continues to remain in India’s negative list. The SAFTA Agreement provides for reviewing the sensitive lists every four years, but the South Asian countries seem to have been eager to set up a rather restrictive reference point by way of long negative lists. 3.2.2 Rules of Origin There is hardly any product that is produced completely in one single place. A final product exported by one country can have components that were produced in another country. The question of rules of origin becomes important within a preferential trading arrangement because these rules impact trade in both inputs and final goods using these inputs32). Rules of origin were left in the SAFTA Agreement for further negotiations. The results of the COE level negotiations on SAFTA rules of origin were incorporated in the SAFTA Agreement as an integral part. Although the Least Developed members of SAFTA were keen to have flexible rules of origin, what came out after hard negotiations are quite stringent. These rules have been determined by a combination of value addition (40 percent) on f.o.b., and change of tariff heading (CTH). There is some derogation to this rule. Least Developed countries require a lower value addition of 30 percent, while for Sri Lanka the requirement is 35 percent33). 3.2.3 Mechanisms for Compensation for Revenue Losses Despite the unwillingness of the three developing countries (India, Pakistan and Sri Lanka) to compensate the least developed countries for possible initial revenue losses, a compensation formula was in fact agreed upon during the COE level negotiations. Debatable issues during the negotiation were the method of estimation of revenue loss, form of compensation, and the sunset clause34). The adopted revenue loss compensation mechanism, however, will not provide equal benefit for all the least developed countries. It does not provide for compensation for losses due to trade diversion. 3.3 Implementation Status th The SAFTA Agreement was signed on January 6, 2004 during the 12 SAARC Summit held in Islamabad,. Pakistan. The Agreement was scheduled to be operationalized from January 1, 2006, but the process was deferred until July 1, 2006 as Pakistan sought more time to ratify the Agreement. Although the Agreement became operational, rivalries between the two largest members, i.e. India and Pakistan, have clouded the prospect of SAFTA becoming an instrument of meaningful economic cooperation among the nations of the South Asian region35). As in the case of their political relations, trade relations between these two countries have never been easy. SAFTA is now facing a major hurdle in the form of soured relations between India and Pakistan over tariff concessions..
(8) 140 （642）. 横浜国際社会科学研究 第 12 巻第 4 ･ 5 号（2008年 1 月）. The problem stemmed from the Indian side accusing Pakistan of grossly violating provisions of SAFTA. According to India, Pakistan offered tariff concessions for India only on items on the existing bilateral positive list despite the fact that in the SAFTA Agreement the Contracting States agreed to offer tariff concessions on all items outside the sensitive or positive list. During the SAARC Standing Committee Meeting preceding the two-day SAARC Council of Ministers Meeting in Dhaka in August 2006, the Indian Government claimed that Pakistan violated Article 23 of the SAFTA Agreement36). India urged the Standing Committee to look into the matter, arguing that the success of the SAARC process, as well as all other aspects of cooperation among the SAFTA members, would be affected by Pakistanʼs violation of Article 23. Pakistan, however, raised serious objection from a procedural point of view to the Indian attempt to raise SAFTA issue in the Standing Committee. According to Pakistan, the SAARC Standing Committee has no jurisdiction to discuss this issue. Pakistan said that procedures for consultations and dispute settlement were incorporated in the SAFTA Agreement in Articles 19 and 20. For making complaints, India should follow appropriate procedures. Pakistan also raised counter allegations against India saying that India had departed from the spirit of SAFTA by maintaining paratariff, non-tariff and other procedural barriers37). 4．Is South Asia Ready for Preferential Trade Liberalization? The evolution of regional cooperation and integration in South Asia, starting with the South Asian Association for Regional Cooperation (SAARC), then South Asian Preferential Trade Area (SAPTA) and finally the establishment of South Asian Free Trade Area (SAFTA), has been more of a political process rather than an economic one. Trade analysts disagree on the question concerning the economic benefits of regional integration agreements as an alternative or complementary tool to multilateral liberalization. SAARC, the most important regional arrangement in South Asia, has produced insignificant achievements ever since it came to exist. Likewise, the establishment of SAFTA does not guarantee benefits for this region; rather the desirability of SAFTA has been questioned by some observers38). Whatever the economics of SAFTA might suggest, a roll-back to pre-SAPTA or pre-SAFTA arrangement does not seem likely. It is therefore more important to concentrate on how to make the best use of SAFTA to make the arrangement more beneficial for the countries of the region. In doing so, we first need to address some key questions: ・Does South Asia offer adequate pre-conditions for establishing and sustaining a preferential trading arrangement? ・Will the SAFTA regime create unequivocal gains for all its members? Would it be better to promote multilateral non-discriminatory trade liberalization in this region? ・Does a preferential arrangement in the like of SAPTA or SAFTA promote unilateral trade liberalization? Only after looking into these questions can we go into the deeper side of the SAFTA Agreement to see how much trade facilitation it actually offers and what other issues need to be addressed to make the arrangement beneficial so as to place the region, as well as the individual countries in a win-win situation. 4.1 Necessary Conditions for a Successful PTA The proliferation of PTAs enticed the scholars to think about the prerequisites of forging a PTA. A dialogue of the Centre for Policy Dialogue (CPD) of Bangladesh made a theoretical analysis of growth zones in South Asia to identify economic complementarity, geographical proximity, integrated infrastructure and political will as the most important prerequisites39). Later, Bandara and Yu (2001) summarized some of the conditions that need to be examined in order to analyze the desirability of forming a preferential trade arrangement within a region. A brief discussion of these conditions are discussed below..
(9) Rethinking Regionalism in South Asia（Mustafa Moinuddin）. （643） 141. Table 1 Direction of South Asia’s Trade (Constant US$ Million, 1995) South Asia’s Trade with:. Imports. Exports. Share (percent) of total trade. 1981. 1990. 1998. 1981. 1990. 1998. 1981. 1990. 618. 733. 3,293. 556. 837. 2,814. 3.2. 2.4. 5.0. 2,084. 4,764. 15,000. 688. 2,198. 5,548. 7.5. 10.8. 16.7. Other Developing. 11,579. 11,868. 21,529. 5,624. 8,100. 12,523. 46.7. 31.1. 27.8. Industrial Countries. 11,091. 20,201. 29,702. 4,593. 15,549. 32,281. 42.6. 55.6. 50.5. South Asia East Asia. 1998. Source: IMF Direction of Trade Statistics, cited in Pitigala (2005). 4.1.1 Geographical Proximity Many economists subscribe to Krugman’s (1991) natural trading blocs argument, which was later supported by Frankel (1997) and othersʼ empirical works using “gravity” models of international trade. According to these concepts, neighboring countries naturally engage in trade with each other, and geographical proximity works as an important determinant of international trade. South Asia, however, deviates from this model as a rare case. South Asia behaves against the natural blocs argument not because it is structurally different from other regions of the world, but because of the intense historical political differences between India and Pakistan, the largest economies of the region40). Frankel and Wei (1997) estimate that bilateral trade between these two neighboring countries is 70 percent lower than two otherwise identical economies41). Lahiri (1998) identifies it as a case of “inverse regionalism＂42). All these studies suggest that although natural trade argument works in most of the regions of the world, “geographical proximity is not necessarily in favor of creating a PTA in South Asia＂43). Table 1 provides a picture of the direction of South Asia’s trade, demonstrating that industrial countries constitute a major share of the region’s trade, while intra-regional trade remains low. 4.1.2 High levels of pre-PTA Tariffs Until recently, all the countries in South Asia pursued quite stringent protectionist trade policies. High tariff rates and other protection measures have been typical features of these countries for decades. Sri Lanka was the first country to abandon protectionism in the 1970s, gradually followed by Bangladesh, India and Pakistan during early 1990s. Despite the recent initiatives in favor of trade liberalization, the three large economies of the region, i.e. Bangladesh, India and Pakistan, still maintain tariff rates higher than the Southeast Asian countries. Below is an illustration (Figure 1) that shows the average nominal tariff reduction process in South Asia since opening up two decades ago. The figure also demonstrates that the South Asian average, despite reduction efforts, still stands higher than the averages of other parts of the world. Figure 1 clearly shows that the high pre-PTA tariff as a precondition for forming preferential trading arrangement does exist in South Asia. 4.1.3 Level of Intra-regional Trade Available trade data indicate that the South Asian countries do not trade as much with each other as many other countries with similar levels of income and geographical proximity do. In general, a country of this region trades less with a trading partner in South Asia than with an outside partner. Since the 1980s, intra-regional trade as a percentage of total trade volume in South Asia has remained around 2 percent44). The low level of intra-regional trade in South Asia, as compared to the high level of intra-regional trade in other regions, does not provide positive signs for a successful preferential trading arrangement within the SAARC region..
(10) Figure 1 : Simple Average of Regional Import Tariff Rates, percent 横浜国際社会科学研究 第 12 巻第 4 ･ 5 号（2008年 1 月）. 142 （644） 70. 60. 50. 40. 30. 20. 10. 0 1980-85. 1986-90. Developed Countries Mid East & N. Africa Asia & the Pacific S. Asia. 1991-95. 1996-98. E. Europe & C. Asia Sub-Saharan Africa L. America & Carribean. Source: World Bank (2001), cited in Bandara and Yu (2001) Source: Figure World Bank (2001), cited Average in Bandara and Yu (2001) 1 Simple of Regional. Import Tariff Rates, percent. Figure 2 compares South Asian intra-regional trade with some other regions. The SAFTA member countries prove to be the least integrated when measured as a share of GDP; intra-regional trade being only 0.8 percent of GDP as compared to East Asia’s almost 27 percent of GDP45). Another important trend, which is evident from the Table 2, is India’s growing trade surplus with other SAARC countries. India is the largest economy of the region which has experienced a continuous increase in its exports to other SAFTA member countries with the exception of Pakistan46). While India’s intra-regional exports have increased (from 3.9 percent in 1970 to 5.5 percent in 1999) over the last few decades, its import share has significantly declined (from 1.4 percent in 1970 to 0.9 percent in 1999). In other words, Indian imports from other countries of the region have only been of limited nature. Several factors contributed to the low level of intra-regional trade in South Asia. They include, according to Roy (2005), suspicion towards India’s sheer size and economic might, a limited export basket, relatively inefficient and uncompetitive production structure, high barriers to investment, large scale informal-illegal border trade, ensuing IndoPak tensions, poor cross-border trading infrastructures and failure of SAPTA. 4.1.4 Trade Complementarity, Difference in Economic Structures and Competitiveness One of the important issues related to South Asian economic integration is the production pattern of the countries of this region. According to Kemal et al.(2000) prospects of regional trade expansion are likely to be weak for.
(11) Figure 2: South Asia lags behind in the integration process Rethinking Regionalism in South Asia（Mustafa Moinuddin） Intra-regional trade as a share (percent) of GDP, 2002. 30. （645） 143. 26.5. 25 20. 15.3. 15 10. 6.4. 3.5. 5. 5.3 0.8. 0 East Asia Europe and Central Asia. Latin America. Middle East South Asia & N. Africa. SubSaharan Africa. a share (percent) of GDP, 2002in Roy(2005) Intra-regional trade as Source: COMTRADE, Cited Source: COMTRADE, cited in Roy(2005). Figure 2 South Asia lags behind in the integration process Table 2 Share of Intra-regional Trade in South Asia (percent) Country Exports Bangladesh India Nepal Pakistan Sri Lanka South Asia Imports Bangladesh India Nepal Pakistan Sri Lanka South Asia Total Trade Bangladesh India Nepal Pakistan Sri Lanka South Asia. 1970. 1975. 1980. 1985. 1990. 1994. 1995. 1999. n.a 3.9 61.9 1.5 3.2 3.7. 2.4 3.7 81.1 6.8 9.0 5.1. 9.1 3.5 38.1 6.3 6.8 4.8. 7.7 2.9 38.5 5.3 3.7 4.0. 3.6 2.7 6.9 4.0 3.1 3.1. 2.3 3.9 4.6 3.2 2.3 3.5. 2.6 5.0 8.7 3.3 2.7 4.4. 2.2 5.5 27.7 3.3 2.6 4.9. n.a 1.4 73.6 0.5 12.4 3.3. 7.9 0.9 62.0 2.8 6.9 3.2. 3.7 1.0 48.0 2.1 6.3 2.3. 1.3 0.7 32.5 1.7 6.3 1.7. 7.0 0.4 11.5 1.6 6.6 1.8. 13.3 0.5 19.2 1.6 9.0 3.1. 17.7 0.6 9.9 1.3 10.3 3.6. 14.7 0.9 33.4 1.8 13.8 4.3. n.a 2.7 70.3 0.9 8.1 3.5. 6.9 2.0 67.0 4.1 7.8 3.9. 4.9 1.9 45.7 3.5 6.5 3.2. 3.0 1.5 34.4 2.9 5.2 2.6. 5.9 1.4 10.0 2.6 5.1 2.4. 9.3 2.1 13.8 2.3 6.3 3.3. 10.1 2.8 9.3 2.3 6.5 4. 8.5 3.2 30.6 2.6 8.2 4.6. Source: Bandara and Yu (2001).
(12) 横浜国際社会科学研究 第 12 巻第 4 ･ 5 号（2008年 1 月）. 144 （646）. Table 3 Comparison of trade complementarity indices for different regions Region. Trade Complementarity Index. South Asia. 1.3. Region. Trade Complementarity Index. MERCOSUR. 28.6. European Community. 53.4. Canada-USA FTA. 64.3. NAFTA. 56.3. LAFTA. 22.3. Andean Pact. 7.4. Source: Pitigala (2005) Note: Pitigala defines the complementarity index as follows: The index of complementarity in country i’s exports to country j is the weighted sum of the products of each commodity’s share in country i’s exports and in country j’s imports, with commodities weighted by the inverse of their shares in world trade. The weighting is necessary because country j is more likely to buy commodity k from country i if other countries are simply not exporting much of commodity k. The index ranges from zero (when none of the goods exported matches with imports of the other countries) to 100 (when export shares perfectly correspond with imports).. countries that either have comparative advantage in similar products, or have trade structures that show low trade complementarity47). In their study, the authors check the trade complementarity indices48) using time series trade data. The study finds that there is lack of trade complementarity in South Asian bilateral trade structure. Exports from Bangladesh, Nepal, Pakistan and Sri Lanka represent very weak compatibility with Indian exports. In a more recent study, Pitigala (2005) observes similar low level of trade complementarity among the South Asian countries49). In addressing the question whether the existing trade complementarity is encouraging in terms of achieving SAFTA, he makes a comparison of complementarity indexes for a set of successful regional arrangements at the inception of their respective agreements. Table 3 shows this comparison50). The low complementarity ratios give a rather discouraging picture with regard to the prospects of South Asian regional integration. Moreover, the SAFTA member countriesʼ comparative advantage is also almost identical, concentrating on a relatively narrow band of commodities. These two structural factors have played a negative role inhibiting the growth of intra-regional trade in South Asia. 4.1.5 Political Harmony in the Region The fact that economic integration and political harmony is mutually reinforcing is endorsed by all. Integration efforts in South Asia have always been a victim of suspicion, mistrust and intra-regional tensions. Political tension between India and Pakistan, the largest economies of the region, is the main hindrance towards regional integration. The fact that the SAARC, initiated in the mid-1980s, has had only partial success is also to a large extent because of these political stresses. The hostility, which began with the dispute over the accession of the state of Kashmir in 1948 followed by a trade war, continued for over five decades51). There has been some progress over the last couple of years towards easing up the tensions, which is reflected by, among other things, operationalizing the SAFTA Agreement. However, at present SAFTA is facing a major hurdle because of an Indo-Pakistan rivalry over tariff concessions. It is important to underscore here that SAFTA would bring nothing if the political momentum for integration is not maintained. To summarize, it can be said from the above discussion that South Asia lacks many of the generally accepted preconditions for creating a successful PTA. 5．Economics of Regional Integration in South Asia The effects of South Asian economic integration have not been investigated extensively, because, economic integration was not much considered within SAARC until the 1990s. Some qualitative studies are available on SAARC.
(13) Rethinking Regionalism in South Asia（Mustafa Moinuddin）. （647） 145. and the South Asian Preferential Trade Area (SAPTA, which eventually has been replaced by SAFTA), but quantitative studies on economic integration in the region are very limited. 5.1 The Debate: Which Approach to Choose─Non-Discriminatory or Preferential? Trade analysts disagree on the question concerning the relationship between a non-discriminatory, multilateral approach under WTO rules and regional integration on preferential basis. For South Asia, available studies are divided on the issue of the economic benefits of regional integration agreements as an alternative or complementary tool to multilateral liberalization. In a way, this critical view is shared by the designers of the General Agreement on Tariffs and Trade (GATT) law and is, therefore, not specific to the region, although GATT permits PTAs under specific conditions: the Most Favored Nation (MFN) clause in Article 1 of the GATT forbids Member states from pursuing discriminatory trade policies against each other. Preferential trade arrangements, however, are permitted in WTO law under Article XXIV that allows Members to form such arrangements provided that they eliminate, rather than just lower, withinunion trade barriers on “substantially all trade＂. These provisions together legalize PTAs in which Member states do not raise their tariffs on goods from third countries and Customs Unions (CUs) in which the Common External Tariff (CET) is chosen so as to leave the average external tariff unchanged. Partial PTAs are ruled out. PTAs in services are similar, and are introduced under Article V in the General Agreement on Trade in Services (GATS). Furthermore, the Enabling Clause provides for forming RTAs among developing countries. SAPTA has been notified to the WTO under the Enabling Clause. Advocates of regional arrangements suggest that the SAFTA will result in significant economic gains, especially for the smaller economies of the region. Politicians of the region in general hold this view. Some empirical studies support this viewpoint. Govindan (1994) found that a preferential arrangement in South Asia would lead to a welfare increase in the region through expansion of intra-regional trade52). Multilateralists, such as Panagariya (1999) on the contrary, believe that the SAFTA is highly undesirable, as it will lead to trade diversion and efficiency reductions and will slow down unilateral trade liberalization53). For example, Baysan et al. (2006) believe that the economic case of SAFTA is “quite weak” because of the absence of the most efficient suppliers within the region, and because of too stringent sensitive list and rules of origin54). Rodriguez-Delgado’s (2007) quantitative analysis concludes that the region is likely to achieve higher economic gains from extending to other integration areas55). 5.2 Trade Creation vs. Trade Diversion 56) According to the analytical studies conducted by Panagariya (2003) , preferential trading arrangements like. SAFTA run substantial risk of trade diversion. With only less than one percent of the world’s production, South Asia is unlikely to hold a considerable share of the most efficient and competitive producers of the large majority of the products within this region. The author offers a hypothetical trade scenario between two SAFTA members, India and Sri Lanka. Assuming that the initial tariff on the product under consideration is higher in India, the author identifies three distinct possibilities. i) Total supply falls short of the demand in the high tariff country in the post-FTA equilibrium. In this scenario, India and Sri Lanka form an FTA. The author assumes that total supply of the product within the FTA is too small to supply the entire market. Thus, India and Sri Lanka eliminate tariffs on each other but maintain it on imports from other countries. Since imports from third countries continue to come into each country, price cannot fall below the pre-FTA price even after the formation of the FTA. As a result, Sri Lanka sells its entire quantity into the Indian market and satisfies its domestic demand through imports from outside. For India, imports from outside world decline. However, the decline of India’s imports from the outside world is larger than the rise of Sri Lanka’s imports.
(14) 146 （648）. 横浜国際社会科学研究 第 12 巻第 4 ･ 5 号（2008年 1 月）. from the outside world. Thus, the combined imports of the FTA from outside countries decline. This declined quantity measures the extent of trade diversion, imposing a welfare cost on the FTA. India, the high tariff country, suffers a net loss that is equal to the tariff revenue loss in the post-FTA equilibrium. The net benefit for Sri Lanka equals the difference between the tariff revenue loss of India and the deadweight loss from trade diversion. ii) The high-tariff country ceases to import from outside while the low-tariff country does not sell any of its output in its own market. Like the previous scenario, the formation of the FTA leads Sri Lanka to sell its entire supply to India. However, in this scenario, Sri Lanka’s supply at the pre-FTA Indian price exceeds India’s demand. Consequently, the price in India declines until it reaches a new equilibrium. Sri Lanka, however, continues to divert its supply to India as long as the price in India remains higher than its own market. Supply from outside the country gets completely eliminated and Sri Lanka expands its supplies, incurring a cost higher than previously incurred by the rest of the world. It creates a deadweight loss, but at the same time the FTA generates some new trade. India gains from the new trade but also faces loss on tariff revenue on the old trade. The net effect becomes ambiguous for India. Sri Lanka, on the other hand, benefits as it expands its supply. Sri Lanka also benefits from additional tariff revenue as it imports all its domestic demand. The net effect of the India-Sri Lanka FTA is ambiguous; it can be negative, zero or positive depending on the loss or gain of India and Sri Lanka. iii) The high-tariff country ceases to import from outside and the low-tariff country sells part of its output in its own market. In the third scenario, Sri Lanka’s supply is sufficiently large in the post-FTA equilibrium to cause a decline in the price in India. The new price in India equals the price in Sri Lanka. Therefore, Sri Lanka sells part of its output in its own market. As long as Sri Lanka continues to import from outside, price remains the same. In case that imports from outside countries stop completely, then the price falls below Sri Lanka’s price. In this situation price in Sri Lanka serves as the borderline case where internal supply equals internal demand. There is a positive effect on joint welfare, as the price does not rise for producers and consumers in Sri Lanka whereas it declines in the Indian market. The distributional effects, however, do exist. As a result, Sri Lanka gains but India could lose. In the scenarios above, both India and Sri Lanka are importers. However, the same analysis applies if one country is importer and the other exporter. If Sri Lanka is an exporter of the product, logically Sri Lanka’s internal price will equal world price. The formation of an India-Sri Lanka FTA will make India’s higher internal price available to Sri Lankan producers and Sri Lanka will sell its entire supply to India. Panagariya, a strong protagonist of multilateral trade liberalization, portrays how preferential trade liberalization might hurt high-tariff countries within a PTA. He further argues that given the tariff structures of the two South Asian countries in the example, i.e. India and Sri Lanka, it is unlikely that imports from outside countries will be completely eliminated. Therefore the likelihood of scenario (i) is high, which suggests that an FTA between India and Sri Lanka will hurt the former, benefit the latter and hurt them jointly. 5.3 Bandara and Yu’s Quantitative Economic Analysis One of the most comprehensive studies addressing the desirability of SAFTA has been conducted by Bandara and Yu (2007)57). Their quantitative economic analysis uses trade data and a global computable general equilibrium (CGE) model. Although the Global Trade Analysis Project (GTAP) model and database are widely used by researchers to quantify the effects of preferential trading arrangements, it has rarely been used for analyzing such arrangements in South Asia. Bandara and Yu use GTAP version 5 to address the question of the desirability of SAFTA..
(15) Rethinking Regionalism in South Asia（Mustafa Moinuddin）. （649） 147. 5.3.1 Policy Scenarios The study aggregates the GTAP database into 12 regions, keeping India, Sri Lanka, Bangladesh and rest of South Asia as separate regions and 17 industries. It creates six hypothetical policy scenarios involving 100 percent tariff cut, offering a quantitative analysis and providing a comparison of the differential impact of unilateral and preferential trade liberalization within the South Asian region.. Scenario 1: Unilateral Trade Liberalization by South Asian Countries All the South Asian countries unilaterally remove all their tariffs against all other countries in the world, while the rest of the world retains its tariff against South Asia. Scenario 2: Preferential Trade Liberalization in South Asia All the South Asian countries remove their bilateral tariffs, while the tariff rates against countries outside of the region remain unchanged, i.e. the case of a SAFTA. Scenario 3: Preferential Trade Liberalization between South Asia and ASEAN Preferential trade liberalization in Scenario 2 is extended to the ASEAN countries, i.e. a SA-ASEAN FTA. Scenario 4: Preferential Trade Liberalization between South Asia and NAFTA Preferential trade liberalization in Scenario 2 is extended to the NAFTA countries, i.e. a SA-NAFTA FTA. Scenario 5: Preferential Trade Liberalization between South Asia and EU Preferential trade liberalization in Scenario 2 is extended to the EU, i.e. a SA-EU FTA. Scenario 6: Multilateral Trade Liberalization Each of the countries in the study cuts its tariff rates by 100 per cent to all the other countries in the world. The study performs two composite policy simulations. The first one assumes that the four regions of South Asia remove all import tariffs and export duties and subsidies. In the second one, the South Asian trading partners remove all import tariffs and export duties among each other on a preferential basis, keeping the same variables against the rest of the world. In the other scenarios, effects of preferential trading with ASEAN, NAFTA and EU are analyzed separately. In the final scenario the effects of multilateral trade liberalization are considered. 5.3.2 Welfare Results Table 4 and Table 5, developed from the experiments in the study using the GTAP model, show the aggregate welfare results with regard to allocation efficiency and terms of trade. Welfare effects are measured in Equivalent Variation in million US dollars. Under unilateral liberalization, the biggest gainer is India, while Sri Lanka and Bangladesh would gain considerably. For the rest of South Asia, and for SAFTA, unilateral trade liberalization will prove harmful since these two regions are the main competitors of South Asian export markets. The preferential arrangement, i.e., the SAFTA scenario, represents rather negative results. In this scenario, India will gain significantly ($756 million, or 0.2 per cent increase in utility) while smaller countries of the region will gain only marginally. Bangladesh is likely to lose ($41 million, or －0.1 per cent decrease in utility) from this preferential liberalization. Considering the direction of trade within the SAFTA regime, this result is not unexpected. Over the last thirty years Indian exports to other countries in the region increased significantly, but other South Asian countriesʼ exports to India decreased. The regions outside South Asia face marginal loss resulting from trade diversion and negative terms of trade. Preferential trading with other regions demonstrates quite significant welfare changes. A SAFTA-ASEAN preferential arrangement, which eventually widens trade liberalization from SAFTA to SAFTA plus ASEAN, will adversely affect all the South Asian countries including India. ASEAN countries produce some advanced manufactured.
(16) 横浜国際社会科学研究 第 12 巻第 4 ･ 5 号（2008年 1 月）. 148 （650）. Table 4 Welfare changes under unilateral and preferential trade liberalization (in $million) Unilateral Liberalization Regions Australia NAFTA Japan Rest E Asia ASEAN India Sri Lanka Bangladesh Rest S. Asia EU EIT Rest of the World. Efficiency 1 1519 29 －824 －231 4523 150 542 1333 204 －44 428. TOT 97 1759 58 －261 203 －2370 －108 －519 －1001 767 －78 1481. Total1. SAFTA Utility2 (%) Efficiency. 147 2509 439 －1092 95 2332 84 174 －511 1125 －124 2344. 0.0 0.0 0.0 －0.1 0.0 0.6 0.6 0.4 －0.8 0.0 －0.0 0.1. －1 －4 －7 －3 －1 81 －5 －6 2 －22 －3 －38. TOT. Total. －5 －33 －55 －53 －45 323 8 －28 39 －95 －11 －47. －12 －114 －157 －123 －70 756 4 －41 52 －170 －20 －114. Utility (%) －0.0 －0.0 －0.0 －0.0 －0.0 0.2 0.0 －0.1 0.1 －0.0 －0.0 －0.0. Note 1: Sum of allocation efficiency and terms of trade does not add up to the “total” column as total welfare also includes other components. Note 2: Percentage change in regional utility. Source: Bandara and Yu (2001). Table 5 Welfare Effects under Alternative Liberalization Scenarios: Allocation Efficiency and Terms of Trade Effects (in $million) Unilateral Liberalization AUS NAFTA JPN REA ASE IND LKA BGD RAS EU. Efficiency. TOT. Total. 1 1518 29 －823 －231 4523 150 542 1333 204. 97 1759 58 －261 203 －2370 －108 －519 －1001 767. 147 2509 439 －1092 95 2332 84 174 －511 1125. SAFTA Efficiency －1 －4 －7 －3 －1 81 －5 －6 2 －22. SA−ASEAN FTA Efficiency AUS NAFTA JPN REA ASE IND LKA BGD RAS EU. －1 93 －23 －92 66 －323 －8 3 －282 －9. TOT. －27 －216 －116 －287 2138 －412 －15 －80 －326 －340. Source: Bandara and Yu (2001). Total. －26 －42 －33 －378 3039 －1313 －30 －152 －791 －396. TOT. －5 －33 －55 －53 －45 323 8 －28 39 －95. Multilateral Total. －12 －114 －157 －123 －70 756 4 －41 52 －170. Efficiency 59 8435 14834 14968 3147 4483 204 543 1392 14317. SA−NA FTA Efficiency －14 96 －64 －1007 －246 3156 68 187 －141 －496. TOT. －8 2448 －565 －985 －442 1475 196 55 175 －1250. TOT. Total. 2631 －11905 6248 5545 3934 －1250 －3 －451 －540 2306. 3635 －6091 33638 27345 7324 3521 274 289 97 9097. SA−EU FTA Total. －96 1295 －2011 －3309 －1059 10064 416 551 110 －2687. Efficiency －13 －149 －59 －172 －57 －280 －32 186 －318 670. TOT. －35 －546 －417 －455 －322 404 165 178 －39 2952. Total. －72 －1089 －1088 －1076 －518 1355 211 776 －525 4212.
(17) Rethinking Regionalism in South Asia（Mustafa Moinuddin）. （651） 149. goods, and additionally many of the ASEAN countries are producing competing goods against South Asian countries. Preferential trading with EU and NAFTA is expected to be beneficial for South Asia, with welfare gains even bigger than unilateral trade liberalization. This is not surprising because EU and NAFTA are the most important export destinations for the SAFTA countries. The effects of full multilateral trade liberalization, as per the results of the simulation, will be beneficial for almost every region in the study. The South Asian countries will gain substantially from this multilateral approach. However, from a strictly South Asian point of view, gains will be relatively higher in SAFTA-NAFTA or SAFTA-EU preferential trading arrangements than in the multilateral trade liberalization. The study thus asserts a pessimistic view about SAFTA, showing that SAFTA would not benefit South Asia economically. As the authors mention, the representation of this study is quite crude, and there are certain limitations to this study. It does not take into account some of the major issues, such as the implementation of the Agreement on Textiles and Clothing (ATC), economies of scale effects, quantitative restrictions, and potential productivity gains. Furthermore, while in the simulation the authors assume a 100 percent tariff removal, in reality tariffs under SAPTA and now under SAFTA are being reduced under different rounds over time. Nevertheless, the study offers some interesting policy simulations with important findings that might prove beneficial in regional integration efforts in this region. 6．Challenges and Tasks Ahead Although most of the available economic analyses do not predict very encouraging prospects for preferential trading arrangements in the South Asian region, the SAFTA Agreement has been endorsed by the SAARC member countries and the Agreement has already come into effect since July 1, 2006. As identified by Baysan, Panagariya and Pitigala (2006), the creation of SAFTA, even when its economic case is weak, has been motivated by several political considerations. First and foremost, the rapid proliferation of preferential trading arrangements around the world comprising almost all the countries of the world created a sense in the South Asian region that it is falling behind. Moreover, the creation of FTAs in the Americas and EU and South Asia’s neighbors generated adverse trade diversion effects on South Asia. In response to this, the leaders of the region sought to form FTAs of their own. For the politicians, the difference between discriminatory and non-discriminatory liberalization is not always evident, and sometimes they even consider bilateral liberalization as a more formidable option as it generates reciprocal liberalization in the partner countries. Politicians are also motivated by opportunities to be in the focus through summits, signing the deals, making speeches and so on. A final reason for the endorsement of SAFTA is the concept that this would promote political harmonization in the region. In an analogous comparison with the history of France and Germany and the claimed role of the European Economic Community (EEC) to join the two European countries together in a strong economic union, a commonplace argument in favor of SAFTA is that it could work as an instrument promoting political harmony in the region, particularly between the archrivals India and Pakistan. Even if the prospects of preferential arrangements were positive, the mere endorsement of the SAFTA Agreement itself would not guarantee its success. The challenges and tasks ahead for the SAFTA members are therefore difficult and numerous. Supporters of SAFTA suggest that a properly implemented SAFTA would generate both economic and political gains. But, what has been endorsed so far is a Framework Agreement. The seven member countries of SAFTA need to keep the ball rolling and finalize their position with regard to a number of key areas concerning SAFTA through further negotiations. The following part of this paper discusses some of the areas that are of critical importance for the future of SAFTA..
(18) 150 （652）. 横浜国際社会科学研究 第 12 巻第 4 ･ 5 号（2008年 1 月）. 6.1 Trade Facilitation With the reduction of tariff rates, other costs of cross-border trade become more important. These costs, often referred to as transaction costs, may include the time and administrative costs for customs purposes, meet product standards, and comply with cross-border transportation regulations58). Economic benefits under the formation of SAFTA very much hinge upon the trade facilitation measures to reduce transaction costs. While the political commitment to trade facilitation is explicit in the SAFTA agreement, it lacks a creative and effective framework for doing so. What is needed is an output oriented continuous process of trade facilitation59). Article 3.2 of the SAFTA Agreement expressively refers to the following principles with regard to trade facilitation: … d) SAFTA shall involve the free movement of goods, between countries through, inter alia, the elimination of tariffs, para-tariffs and non-tariff restrictions on the movement of goods, and any other equivalent measures; e) SAFTA shall entail adoption of trade facilitation and other measures, and the progressive harmonization of legislations by the Contracting States in the relevant areas; … To make use of these principles, SAFTA needs to develop an operational definition of trade facilitation keeping in mind the needs of the region. Within the WTO, trade facilitation is referred to as “the simplification and harmonization of international trade procedures＂, which include “activities, practices and formalities involved in collecting, presenting, communicating and processing data required for the movement of goods in international trade＂ 60). . In the context of South Asia, trade facilitation measures that could produce tangible benefits at least include61):. ・Harmonization of standards; ・Simplification of customs clearance procedures; ・Simplification of banking procedures for import financing; ・Transit facilities for intra-SAARC trade; ・Removal of barriers to intra-SAARC investment; ・Development of communications systems and transport infrastructure; and ・Simplification of procedures for business visas. South Asia faces a number of obstacles to trade transactions as well as weaknesses in port and transport infrastructure, regulatory environment, standards harmonization etc.62) The indicators of the Global Competitive Report 2004─2005 of the World Economic Forum suggest that the SAFTA member countries have greater scope for trade related transaction costs, which would help improve the competitiveness of firms throughout the region63). For South Asia, facilitating trade by reducing trade-related transaction costs is equally important compared to tariff reduction. Robertson (2005) finds the present course of trade facilitation in SAFTA to be inadequate to ensure substantial economic benefits from this regional arrangement. As a starting point, he suggests a six-point strategy that includes the establishment of strong political support, setting up of a regional trade facilitation council as well as national trade facilitation working groups, establishment of a regional customs committee, undertaking a regional communications program and the establishment of response mechanisms. Robertson emphasizes that these should be a good beginning, but the SAFTA should keep trade facilitation as an ongoing process. It is to be noted additionally that although facilitation of trade in services is not mentioned here, liberalizing transportation, financial and other services related to the cross-border movement of goods is important in the process of reducing transaction costs. Lessons from other regional arrangements demonstrate that the much sought after gains from such arrangements.
(19) Rethinking Regionalism in South Asia（Mustafa Moinuddin）. （653） 151. are hard to attain without effective trade facilitation measures. There is no generally accepted template for trade facilitation. The SAFTA policymakers need to examine closely the patterns used in other regions and then consider how their experience can be suitably adapted in the South Asian context. In doing so, they must keep in mind that an approach used in another regional arrangement years ago may not be the most suitable one for South Asia. 6.2 Services and Investment The SAFTA Agreement omits two important areas, services and intra-regional investments. The Agreement merely provides entering into negotiations in these two sectors in future. As services and investment are the two most important growing sectors in international trade, SAFTA should find ways to address these issues. The region has a fast and growing services trade64), and there are immense opportunities for collaboration in service sectors such as information technology, education, health, and banking65). As far as investment is concerned, SAFTA will be meaningless without the acceleration of stimulating investment particularly for the smaller economies of the region. As Sobhan (2004) correctly points out, “the substantive point of a free trade area is for small economies with narrow markets, such as Bangladesh, Nepal and Sri Lanka, to be able to use the incentive of the larger South Asian and particularly Indian market to stimulate enhanced investment from within and without the country＂66). 6.3 Size and Geographic Design of Integration Area While most of the successful regional arrangements include provisions for expansion, the SAFTA Agreement lacks any mechanism for the admission of new members, nor does it cover the question how to work with other regional arrangements. For example, SAFTA is likely to be strengthened by the inclusion of Afghanistan67). Baysan, Panagariya and Pitigala (2006) argue that SAFTA makes sense only in the context of a larger preferential trade area in the region that specifically would encompass China and the member nations of the Association of South Asian Nations (ASEAN). According to them, an Asian bloc could be a potential instrument to change incentives for the trade blocs in the Americas and Europe and to force multilateral freeing of trade. Their view, however, is not supported by all. As the policy simulations conducted by Bandara and Yu (2001) represent (discussed in earlier part of this paper), a SAFTA-ASEAN preferential trading arrangement is not a good idea as all the South Asian countries would be adversely affected. On the contrary, preferential trade between SAFTA and EU or NAFTA is expected to be beneficial for all the countries of South Asia. As NAFTA and EU are the two most important export destinations for South Asian goods, SAFTA membersʼ access to these two markets will generate welfare gains for them. Another reason for this result is that trade between South Asia and EU or NAFTA are complimentary. The rationale for such North-South preferential trade lies in the notion that developed and developing countries specialize in the production of different commodities and hence benefit from trade68). The SAFTA members should open up the possibilities for expansion and develop mechanisms for working with other regions. More studies should be done to properly identify regions with which preferential trade will be beneficial for SAFTA. 6.4 Other Regional or Sub-regional Trade Agreements The preface of the SAFTA Agreement clearly stipulates its intention to improve the economic performance of the SAFTA member countries: …[P]referential trading arrangements among the SAARC member states will act as a stimulus to the strengthening of national and SAARC economic resilience, and the development of the national economies of the Contracting.
(20) 152 （654）. 横浜国際社会科学研究 第 12 巻第 4 ･ 5 号（2008年 1 月）. States by expanding investment and production opportunities, trade, and foreign exchange earnings as well as the development of economic and technological cooperation… It is important for SAFTA members and policymakers to understand that SAFTA is expected to operate under a larger context. Not only have the South Asian countries their standing commitments under the WTO, but also some of them have entered into other bilateral and multilateral arrangements such as the Bay of Bengal Initiative for MultiSectoral Technical and Economic Cooperation (BIMSTEC). The proliferation of these agreements may complicate the implementation of the SAFTA Agreement. For example, the relevance of SAFTA will decline without acceleration of tariff reduction. The countries of the region have to deal with a multitude of bilateral and regional agreements, what is often referred to by many economists as a “spaghetti bowl” of overlapping trade arrangements69). This will also mean less cohesion in marketing South Asia as a region. This is equally important in relation to trade facilitation measures. As it has been the case under NAFTA in certain instances, too many rules and procedures may cause SAFTA, or any other preferential agreements, to fall short of its potential70). South Asian countries must take into account that their commitments under SAFTA do not conflict with their other commitments. 6.5 Cooperation in Infrastructure Although SAFTA is neither necessary nor sufficient for cooperation in infrastructure, it may play a facilitating role71) if SAARC countries make joint plans for regional transport networks, including broader areas of transport including telecommunication and energy flows. Such projects should be done after proper cost-benefit analysis, taking into account their opportunity costs. 6.6 The Need for Unilateral and Multilateral Liberalization Experiences from ASEAN show that despite forming an FTA, members of this region have undertaken virtually all liberalization on a non-discriminatory basis72). For South Asian countries, it is even more important to continue to liberalize their trade barriers both on a unilateral basis and within the multilateral context. High trade barriers pose serious risk of trade diversion effects within SAFTA73). Regional trading arrangements, as many people believe, can create more trade openness, strengthen trade facilitation and are often complementary to unilateral and multilateral policies74). The process, however, is not automatic. The Latin American countries virtually abandoned their unilateral trade liberalization once they started acting on the bilateral track. A similar situation in South Asia will be most unfortunate. The SAFTA countries, with higher external trade barriers in comparison with the Latin American countries, can hardly afford to give up their unilateral liberalization programs75). While bilateral and regional agreements are expected to remove impediments to trade expansion and cooperation, active promotion of the multilateral negotiations should also continue for further market access to developed countries. 7．Concluding Remarks The economic case for SAFTA, both from a qualitative argument and quantitative assessment point of view, is significantly weak. Regional integration in South Asia under SAFTA is likely to produce unequivocal (even if, depending on the membership, overall small) trade benefits for the member states as a whole. As the quantitative analysis conducted by Bandara and Yu (2001) demonstrate, SAFTA will prove beneficial for some countries, while harmful for others. SAFTA members must take this issue into consideration and do their best to minimize SAFTAʼs adverse effects and maximize the benefit effects. The region needs to make policy decisions to minimize sectoral/product exceptions, have liberal, simple, transparent rules of origin, have clear rules against tariff rate quotas, and make the two large economies (India and Pakistan) move to MFN-based trade as soon as possible76)..
(21) Rethinking Regionalism in South Asia（Mustafa Moinuddin）. （655） 153. Countries in a regional arrangement can accrue benefits arising from motives other than trade, and the spill-over effects of economic regionalism can create considerable benefits in many other sectors. For instance, peace is what the European integration is all about77). Over the last five decades, the European countries have witnessed the development of a complex mechanism of regionalism incorporating and benefiting diverse sectors, which eventually turned the EU into the strongest and most successful integration area of the world. A strong intra-European leadership towards integration played the defining role in this regard. Leadership questions have also played a significant role in other areas such as Southeast Asia. Southeast Asia has also demonstrated that while leadership of some kind is needed, competing claims on leadership may stall the integration process at times. In addition to this, the Southeast Asian example also demonstrates the cause for integration benefits that go beyond trade creation. The aim to assert the Asian position in a world of three trading blocs played a significant role in maintaining momentum for regional integration in Asia. A strong and motivated leadership within the countries of South Asia is required to play the pivotal role in stimulating an efficient and beneficial integration in the region. By virtue of its size both in a geographical and trade context, India has to be the key player to offer leadership in the region. Integration efforts in South Asia have to be evaluated in terms of the quasieconomic benefits.. The fact that regional trade arrangements in different regions have different impacts is accepted by almost all trade analysts. While analogical comparison can be done between South Asia and other regions, the dynamic political and security situation in South Asia makes it unique in terms of regional integration. The age-old Kashmir issue, nuclearization of two of the most important members (India and Pakistan) as well as border disputes, among other things, are inseparable from regional integration. Efforts to promote regional economic integration are not likely to succeed without political harmony in the region. SAARC and SAFTA have to go beyond their current shape to address the dynamic situation in South Asia. In determining the steps and strategies towards regional cooperation and integration in South Asia, the complex layers of interstate relations have to be taken into account. Notes 1) SAFTA has been established under the Agreement on South Asian Free Trade Area (SAFTA), hereinafter referred to as the SAFTA Agreement. The SAFTA Agreement was signed by the Member countries on January 6, 2004. The document is available at http://www.saarc-sec.org/data/agenda/economic/safta/SAFTA%20AGREEMENT.pdf. 2) Tariff reductions in SAFTA are scheduled to take place over a ten-year phase out period. Therefore, although the SAFTA Agreement came into force since July 1, 2006, it will be fully operational only in 2016. 3) USAID, “ South Asian Free Trade Area: Opportunities and Challenges＂, Washington, D.C.: U.S. Agency for International Development, October 2005. 4) Ibid. 5) Ibid. 6) SAARC Secretariat Publication, ＂A Brief on SAARC＂, available at: http://www.saarc-sec.org/main.php?id=76. 7) For the purpose of this study, Afghanistan will not be considered as a member of SAARC. 8) Paragraph 13 of the Declaration of the First Dhaka Summit of the SAARC, available at: http://www.saarc-sec.org/main. php?id=47&t=4 9) SAARC Secretariat Publication, ＂Regional Economic Cooperation＂, available at: http://www.saarc-sec.org/main. php?id=43&t=3.2 10) Burki, S.J., ＂Potential of the South Asian Free Trade Area＂, in USAID (2005) 11) Ibid. 12) Information in this part of the paper has been taken from the SAFTA Agreement. 13) Preamble of the SAFTA Agreement. 14) Article 3.2(c) of the SAFTA Agreement..
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