SAFTA to have positive impact for S Asia: ADB-UNCTAD

Written by ASHOK B SHARMA | New Delhi, March 28 | Updated: Mar 30 2008, 00:37am hrs
The study conducted by the Asian Development Bank and UNCTAD-India has observed that the full implementation of the South Asia Free Trade Agreement (SAFTA) would contribute to stronger economic growth in the region. While there would be losses in some sector in the region, there would be gains in other sectors the net effect on economic output being positive.

The agreement on SAFTA was signed on January 6,2004 during the 12th summit of the South Asia Association for Regional Cooperation (SAARC) in Islamabad. SAFTA came into force on January 1, 2006 in a limited way. Currently, the sensitive lists of products, rules of origin, technical assistance as well as a mechanism for compensation of revenue loss for least developed member states are under negotiation. It is proposed to have a complete trade liberalization programme by 2016.

The study suggested that in order to maximize welfare gains, it would be important to give flexibilities to protect employment intensive manufacturing sectors in the smaller least developed countries (LDCs) in the region. The adoption of a transparent and effective regional safeguard mechanism for agriculture products could help to take care of sensitivities in the farm sector that were bound to exist, it said.

Much higher gains for the region can be secured, the study said if SAFTA would be simultaneously implemented with measures to reduce transaction costs and create more efficient regional transportation and infrastructure networks. Increasing the scope for intra regional trade in energy, improving road, rail and air links within the region, building modern customs and border crossings, developing sophisticated telecommunications links like optic fibre were vital to this endeavour, it said.

Using the CGE modeling, the study said that the welfare gains for Bangladesh would be one of the highest for South Asian countries, which may be attributable to complete liberalization of high MFN tariffs which generates consumption benefits for both user industries as well as household consumers. Bangladesh also can increase in global exports by a very significant 4.31% by 2016 on account of SAFTA. Export gains for Bangladesh in SAFTA market in phase-I of liberalization (2008-09) would be significant (38.08% to South Asia), but not as high as the peak export growths to SAFTA seen by other countries.

The ADB-UNCTAD study said that the lack of strong export growth in Bangladesh may be attributed to India's sensitive list, but if a situation of full liberalization where all countries liberalise tariffs even on sensitive list items were considered, Bangladesh would not make any significant regional export gains.

A disaggregated look shows that Bangladesh's wearing apparel sector would grow by 6% due implementation of the second phase of SAFTA. Its global exports of wearing apparel would increase by $ 500 million, out of which $ 6 million would be to South Asian countries. SAFTA would induce a relocalisation of output with major production increase in wearing apparel ( 5.5%) and leather sector (3%), leading to an increase in employment. Bangladesh's output in chemicals, rubber and plastics would rise by 2%, while its global exports would go up by 10% - an indication of Bangladesh emerging as a competitive producer in chemicals, pharma plastics and ceramics.

Regarding India, the study said that a full SAFTA would help it to nearly double its exports to South Asia, but the export gains would be limited to a few agriculture commodities and auto sector. India can gain significantly in exports of poultry and sugar. Pakistan would be the main market for Indian sugar exports. India's highest output gains would be in poultry sector (over 100%). In sugar sector output gains would be 1.33% and the auto sector would grow by one to 4%, with its regional exports expected to increase by 10% to 40%. India's global wearing apparel output would decline by 2.5% and its imports would increase by 7%, due to increased competitiveness of Bangladesh.

In 2008-09, India's exports to South Asia would increase by 3.41% and its exports to other countries by 0.09%, while its global imports would increase by 0.11% on account of the implementation of the first phase of SAFTA. By 2016 India's total output would increase by 0.08%, its exports to South Asia would increase by 90.44%, its exports to other countries would increase by 1.19% and its global imports would increase by 1.68%.

For Pakistan a full SAFTA would double its exports to South Asia and would have good results on its important employment intensive agriculture sectors like wheat, horticulture, poultry and other food products. It output in textile sector would increase by 0.5%, but would lose out in wearing apparel and leather sectors. Pakistan lose in sugar sector due to increased imports from India.

In 2008-09, Pakistan's total output would increase by 0.01%, its exports to South Asia would increase by 5.52%, its exports to other countries would increase by 0.17% and its global imports would increase by 0.19%. By 2016, Pakistan's total output would increase by 0.02%, its exports to South Asia would increase by 102.41%, its exports to other countries would increase by 0.77% and its global imports would increase by 1.54%.

According to the ADB-UNCTAD study more than 60% of the increase in exports to the region by India and Pakistan would be directed to Bangladesh. More than 50% of Pakistan's gains from SAFTA would be from increased exports to Bangladesh in textiles alone.

Sri Lanka would not gain much in the first phase of SAFTA implementation as it already has close to free access to the Indian market and other countries in the region have not committed substantial liberalization vis--vis Sri Lanka in the first phase.

"Sri Lanka's gains are more improved in the second phase, when all countries participate fully and remove their negative lists. The increase in output in vegetable oils corroborates empirical evidence of duty structures that favour manufacture of edible oils. The textiles sector which contributes to about 5% of the total output in Sri Lanka sees a growth of about 4%. While relative changes in some of the products are quite high, their absolute outputs are quite low compared to the total output of the Sri Lankan economy. Negative employment and output effects are seen for wearing apparel and some agricultural products," the study said.

In 2008-09, Sri Lanka's total output would increase by 0.1%, its exports to South Asia would increase by 2.52%, its exports to other countries would increase by 0.05% and its global imports would increase by 0.14%. In 2006, Sri Lanka's total output would increase by 0.55%, its exports to South Asia would increase by 58.78%, its exports to other countries would increase by 0.72% and its global imports would increase by 1.98%.

The ADB-UNCTAD study has grouped Afghanistan, Bhutan, Maldives and Nepal together as ABMN countries and said that though these countries get zero duty access to the developing countries in the region by 2009, its gains were limited on account of its inability to access agricultural products markets, blocked by sensitive lists of developing countries. However with completed liberalization in 2016, there would be gains for the ABMN group in agriculture and primary commodities

A full SAFTA would be beneficial to the ABMN group as its employment intensive agriculture and forestry sector accounted for 50% of the domestic output. However the manufacturing sectors in ABMN were uncompetitive and would suffer output and employment loss, the study said and added that these countries might want to preserve its sensitive list flexibility for a longer period, particularly in apparel.

The ADB-UNCTAD study entitled Quantification of Benefits from Regional Cooperation in South Asia has also worked out the welfare benefits and revenue loss in different countries in the region on account of the full implementation of SAFTA. It has also worked out the impact of SAFTA on inward foreign direct investments, transport facilitation and trade in services.