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

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LDCs' concerns in BIMSTEC FTA
Published: The Kathmandu Post, 4 March 2005
By: Ratnakar Adhikari

The Bay of Bengal Initiative for Multi-Sectoral and Technical Cooperation Free Trade Agreement (BIMSTEC FTA) is once again in the news, thanks to the upcoming meeting of its Trade Negotiating Committee (TNC) to be held during March 7- 10 in Kathmandu. The meeting would discuss/negotiate trade in goods agreement. Since issues like rules of origin as well as dispute settlement mechanism are also integral part of the goods agreement, they too would figure during the meeting. Against this backdrop, the objective of this column is to critically assess the draft trade in goods agreement and propose some alternatives, not only to make the FTA more acceptable to all the constituencies but also to protect the vital interests of least developed country (LDC) members.

The major flaw in the draft is the inclusion of Article XXIV of the General Agreement on Tariffs and Trade (GATT) as the legal instrument guiding the functioning of the agreement. This is despite the existence of a non-reciprocal agreement within the World Trade Organisation (WTO) aquis, viz., Differential and More Favourable Treatment to the Less Developing Contacting Parties (popularly known as Enabling Clause).

As per the multilateral rules, every regional trade agreement has to be notified to the WTO. While it is mandatory for all the regional trading arrangements - where a developed country is a member - to be notified under Article XXIV, agreements signed exclusively amongst developing countries could be notified either under Article XXIV or the Enabling Clause.

The South Asian Preferential Trading Agreements (SAPTA) and ASEAN Free Trade Agreement (AFTA) have not been notified under the Enabling Clause without reasons. While Enabling Clause allows participating countries to provide special and differential treatment (S&DT) to LDCs, such a facility is not provided under the Article XXIV, which is a perfectly reciprocal arrangement. Article XXIV has been categorically mentioned upfront within the proposed draft on trade in goods, despite the fact that the earlier meeting of TNC, held in Delhi in December 2004, had decided to notify the Agreement to the WTO under the "Enabling Clause", while agreeing to cover "substantially all the trade" in accordance with Article XXIV of GATT 1994.

As a fallout of the above-mentioned arrangement, the S&DT provisions within BIMSTEC FTA are weak. If one considers this FTA with respect to S&DT and make a comparison with South Asian Free Trade Agreement (SAFTA) or the WTO, it may be concluded that they are non-existent in the former case. The only major S&D provision is to allow transition period to the LDCs for reducing tariffs. This is particularly disturbing in a region where countries never get tired of blaming developed members of the WTO for not making S&DT provisions operational, binding and effective in the multilateral system.

A comparison between SAFTA and BIMSTEC FTA is a telling pointer to the lack of sensitivity on the part of developing member states towards their LDC counterparts. First, whereas there is a revenue compensation mechanism within SAFTA, which is of tremendous importance to the countries that are going to lose revenue due to tariff reduction or trade diversion, BIMSTEC FTA has been silent on this issue ever since the framework was drawn. To make matters worse, the Agreement on Trade in Goods contains no provision for providing technical assistance to the LDCs at all. If the FTA is to serve as an engine of regional growth, mere market opening commitments are not going to be sufficient. Given the fact that LDCs in the region are still going to be constrained by the lack of supply capacity, technical assistance is vitally important for them.

Second, SAFTA contains a generous provision on safeguards for LDCs, which prevents developing countries from anti-dumping action against LDCs, if their share of imports causing "serious injury" does not exceed 5 percent of the total import per country or 15 percent for all the LDCs put together. Such a provision is non-existent in the case of BIMSTEC FTA.

Third, despite the speed and depth of trade liberalisation, there is no mention of balance of payment (BoP) measures in the entire text; ignoring that countries have differing BoP (deficit or surplus) situations. Readers would recall that such a measure exists not only in the WTO, but also in SAFTA as well as SAPTA.

Fourth, BIMSTEC FTA, which was signed by Nepal and Bhutan, without considering its implication on the domestic economy, envisages complete free trade in goods after 2017. By virtue of its wording, tariff "elimination" as opposed to "reduction", which is the standard format followed by the WTO as well as most FTAs, all the countries are obliged to reduce tariffs eventually to "zero" by 2017. This could tantamount to countries being stripped of the possibility of providing any form of trade protection even to agriculture and small and medium enterprises, if circumstances so dictate.

Even the "sensitive list" nomenclatured "negative list" in the proposed draft agreement only provides temporary protection, given the provision that tariffs would eventually be eliminated. SAFTA does not envisage complete elimination of tariffs; it only calls for bringing tariffs between 0 percent and 5 percent by the end of the trade liberalisation program. SAFTA, while respecting the requirements of the Contracting States, has made an in-built provision for maintaining sensitive list by each member. Although a final decision is yet to be made, LDCs are going to receive flexibility in terms of maintaining the sensitive list as well.

Given this scenario, LDC members of BIMSTEC FTA are required to form a common position and negotiate their terms during the forthcoming negotiations. Unfortunately, there is a North-South divide in all the agreements and this agreement is no exception.

It may not be possible to undo the harm already caused, however with better preparation losses could still be contained, and gains maximised. As a bare minimum, LDCs should demand that the FTA be notified under the Enabling Clause in order to maintain non-reciprocity; technical assistance be provided to them to strengthen their supply capacities; a tiered safeguards provision be included to help protect vulnerable industries; a BoP provision be included to hedge against possible BoP crisis; and a sensitive list - with specific provisions designed for the LDCs - be maintained to protect sensitive sectors of the economy.

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