South Asia Watch on Trade, Economics & Environment (SAWTEE)

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Dangerous fast track
Published: The Kathamndu Post, 20 February 2004
By: Ratnakar Adhikar

Nepal has signed yet another free trade agreement (FTA) this month – the Bangladesh, India, Myanmar, Sri Lanka, Thailand – Economic Cooperation (BIMST-EC) FTA. During the year 2060 BS, Nepal has not only secured membership of the World Trade Organisation (WTO), but also signed another FTA – South Asian Free Trade Agreement (SAFTA). Looks like Nepal has adopted a fast track approach to signing free trade deals little realising that signing of FTAs without adequate homework and consultation at the national level is an open invitation to disaster. Surprisingly, it is learnt that the Nepali delegation that left for Phuket to participate in the BIMST-EC Summit only had a mandate to obtain the membership but not to sign the FTA.

When one of the founding members of BIMST-EC, namely Bangladesh refused to sign the FTA citing non-mention of revenue compensation mechanism as the reason, Nepal and Bhutan saved the day by readily agreeing to sign the deal. Nepal, together with Bhutan, must have received applause from all the members of the regional arrangement. However, looking at the text of the treaty, it seems that Nepal has done a great deal of hurry to sign the agreement, because of the reasons mentioned below.

First, BIMST-EC is not likely to provide tremendous business opportunities for Nepal. Since Nepal has already signed SAFTA, it would have received market access concessions from Bangladesh, Bhutan, India and Sri Lanka anyway. BIMST-EC only provides incremental market access opportunities in two more countries, namely Myanmar and Thailand. Since Myanmar is also a least developed country (LDC) like Nepal, the opportunities are not going to be of tremendous significance.

The only market left then is that of Thailand. In this market too, opportunities are at best limited because Thailand is already a liberal economy. Its most-favoured nation (MFN) tariff is already 14.84 percent, which is not very high when compared with our South Asian neighbours. Moreover, Thailand, being a relatively freer economy, does not maintain many non-tariff barriers. Therefore, it is clear that our inability to export to Thai market is not because of trade barriers but because of the lack of our supply capacity.

Second, BIMST-EC talks of services and investment liberalisation on top of the liberalisation of goods sector. Nepal would be able to derive some benefits from the liberalisation of tourism sector by promoting itself as a birth place of Lord Buddha. However, even for this Nepal does not need to enter into a FTA with Thailand. Further, an investment agreement within this FTA could prove disastrous for Nepal, particularly at a time when Nepal has, together with other developing countries, been opposing an investment agreement even at the multilateral level.

Readers would recall that investment and competition were the two major Singapore contentious Issues, which led to the collapse of the Cancun Ministerial Conference of the WTO. If we are not prepared to negotiate investment agreement at the multilateral forum, where Nepal could maintain a concerted position together with other developing countries, how could we sign onto an investment accord within an FTA?

Third, unlike SAFTA, BIMST-EC contains two tracks for the liberalisation of goods sector – fast track and normal track. And it has been left on the accord of the country concerned to decide which goods to liberalise under which track. This might create a problem at the time of implementation of the treaty because every country will try to backload liberalisation – by keeping only limited item under fast track.

Fourth, BIMST-EC talks of going all the way to zero tariff, unlike SAFTA which contains provision to reduce tariff to zero to five percent on an average. While SAFTA provides an opportunity for the country concerned, including Nepal, to protect hyper sensitive sectors of its economy through higher tariff while maintaining zero tariff on certain sectors, BIMSTC-EC forecloses that option. Moreover, Ministry of Industry, Commerce and Supplies (MoICS) had worked very hard to maintain the agriculture tariff to 42 percent and industrial tariff to 24 percent at the time of accession to the WTO. However, by agreeing to reduce the tariff to zero, Nepal is likely to weaken its bargaining position at the WTO, when the negotiations under non-agricultural market access (NAMA) begin.

Fifth, Bangladesh did not agree to sign FTA under BIMST-EC citing revenue compensation as the major reason. Nepal, together with Bhutan, by signing the FTA without making any reservation, is likely to weaken its negotiating position during SAFTA negotiations on this issue.

Sixth, the provision for much touted technical support for LDCs is not likely to materialise, because of the use of the non-binding language (such as to the extent possible) on Article 6.4 of the Framework Agreement. This is no better than SAFTA on that respect.

I am not trying to argue here that the BIMST-EC FTA does not contain any positive features. It is indeed a bold initiative to free trade among countries in two of the fastest growing sub-regions of Asia. It can also be hoped that this FTA will act as a bridge between two different emerging economic groupings of Asia – SAARC and ASEAN. In the context of 'look east' policy of the ASEAN and their ambition to rope in three major economic superpowers of Asia (China, South Korea and Japan) through what is known as ASEAN plus three initiative, there is a prospect for a much larger Pan-Asian economic cooperation arrangement in the long run, which could even rival the European Union.

The Agreement also talks of mutual recognition arrangements, customs cooperation, trade finance, e-commerce and easing of business visa requirement in order to facilitate trade between constituent member countries. Moreover, unlike SAFTA, BIMST-EC does provide deadlines for most issues agreed under the Framework Agreement on the FTA.

The point I am trying to make here is that signing of an FTA, which is not merely confined to goods but also covers services and investment, could have severe repercussions on the life and livelihood of millions of poor, marginalised and vulnerable segments of the Nepali population. In addition, it could have a deleterious impact on economic development prospects. It is exasperating to note that decision on such a serious issue was taken by a handful of 'experts' claiming to represent the interests of Nepal, without any legitimate political mandate.

Having closely observed/heard of protracted and acrimonious negotiations on trade deals, the latest ones being the failures of WTO Ministerial Conference at Cancun last September and the Free Trade Areas of Americas (FTAA) negotiations at Miami last November, I would like to argue that economic, social and political analyses at home, followed by consultation with the stakeholders should precede the signing of an FTA.

Our bureaucrats are justifying the signing of the BIMST-EC FTA by saying that it is only a Framework Agreement and modalities shall be developed later in consultation with the stakeholders. Sirs, I would beg to differ. Even a Framework Agreement is capable of severely circumscribing the policy space for the government to pursue its development objectives. Moreover, it leaves extremely limited options for maneuvering while deciding the modalities for negotiations.

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