What is Safta What are its benefits

Updated: Nov 14 2005, 05:30am hrs
World over, regional and free trade agreements (RTAs and FTAs) are becoming the norm, even as the WTO is in the throes of reconciling differences among member-countries to institute a freer multilateral trade regime. Trade and investment among member-countries of the South Asian Association of Regional Cooperation (Saarc) compares poorly with those within Asean or the EU in the absence of an RTA. Despite the political conflicts in the region, Saarc countries are going ahead with plans to sign an RTA, namely Safta. fe takes a Closer Look.

What is Safta

It is an abbreviation for the South Asian Free Trade Area. It is a proposed FTA between the seven members of the Saarc group. These include Bangladesh, Bhutan, India, Maldives, Nepal, Pakistan and Sri Lanka.

What is its ultimate goal

It will replace the earlier South Asia Preferential Trade Agreement (Sapta), which was limited in its scope. The ultimate aim of Safta will be to put in place a full-fledged South Asia Economic Union on the lines of the EU. Safta is scheduled for launch in January 2006 and will lead to reduction of tariffs for intra-regional trade among Saarc countries.

What falls within the ambit of Safta

The agreement incorporates trade in goods. Services and investment are not part of the agreement.

What are the objectives guiding Safta

Among its aims are: promoting and enhancing mutual trade and economic cooperation by eliminating barriers in trade, promoting conditions of fair competition in the free trade area, ensuring equitable benefits to all and establishing a framework for further regional cooperation to expand the mutual benefits of the agreement.

What other benefits can Safta bring to member-countries

It could lead to enhancement of foreign investment among Saarc nations. The visible spurt in foreign investment within Asean cou-ntries and the increase in investments by India in Sri Lanka and vice versa following the India-Sri Lanka FTA bear testimony to the potential of such agreements in boosting investments.

The agreement can be structured to ensure that such investments dont harm the domestic industries of member-nations. RTAs, like the proposed Safta, can also catalyse beneficial industrial restructuring in member-countries through cross-border corporate marriages and acquisitions.

Does the experience of FTAs/RTAs suggest higher economic growth in the countries concerned

World Bank studies reveal that developing countries that have embraced open-market strategies in the past decade have grown much faster than those that have not. The EU trade bloc, for instance, led to the formation of the single European market and substantial restructuring of industry on a pan-European basis. The EU also enabled member-countries to exploit economies of scale, scope and specialisation.

According to one estimate, Safta could lead to the near trebling of the proportion of intra-regional trade.

What is the share of intra-Saarc trade in the total external trade by Saarc countries at present

Regional trade in south Asia accounts for less than 6% of the total external trade of the region at present. This compares poorly with 22% within the Asean free trade area, or 65% within the EU.

Are there any special provisions for the least developed country (LDC) members

The agreement provides for a clear recognition of the special needs of LDCs by allowing them to adopt concrete preferential measures in their favour on a non-reciprocal basis.

Are there any differences of opinion among the developing and LDC members of Saarc on the agreement

There is a serious area of disagreement which is yet to be resolved. The LDCs, especially Bangladesh and Nepal, are pushing for the incorporation of a tariff compensation mechanism in the agreement.

This would make developing country members responsible for compensating LDCs for the revenue that they forego by reducing tariffs on goods. Developing country members, which include India, Pakistan and Sri Lanka, have argued that while some kind of compensation can be worked out, the proposed tariff compensation mechanism cannot be a formal part of the agreement.