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

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Tapping regional potential
Published: The News, 29 February 2004
By: Bhaskar Sharma

Year 2004 began with an encouraging note for the South Asian countries, in terms of new potentials for increasing intra-regional trade and investment. Thanks to two free trade accords that were signed within a span of a little over one month. First, South Asian Free Trade Area (Safta) treaty was adopted by seven member states of South Asian Association for Regional Co-operation (Saarc) during the 12th Saarc Summit in Islamabad, Pakistan in January. And second, Bimstec (Bangladesh, India, Myanmar, Sri Lanka and Thailand-Economic Co-operation) inducted Nepal and Bhutan as new members, and subsequently concluded a free trade pact (Bangladesh is yet to be a part of the free trade pact).

The signing of the two pacts can be viewed as important milestones in fostering better and meaningful economic and political ties amongst the Asian nations. In fact they are major landmarks towards greater free trade in Asia, which is witnessing unprecedented growth in sub-regional co-operation frameworks. While Safta, slated to be launched in 2006, can be hoped to play a role in increasing intra-Saarc trade, which stands at below 5%, Bimstec FTA that, too, comes into force in 2006 can be developed as a major link between South Asia and Southeast Asia. Because four South Asian countries are part of Bimstec agreement, one question that now needs to be answered is, what is the structure of the Bimstec agreement; and how does it stand against Safta?

Unlike the Safta treaty, the Bimstec grouping has moved ahead ambitiously on many fronts. The Bimstec framework agreement is not merely for trade in goods, but includes services, investment and other issues of economic importance as well. The agreement clearly articulates measures to increase investment and open services sector for intra-regional trade, both of which are missing in the Safta treaty. So much so that in the case of trade in services, Article 4 states "...expansion in the depth and scope of liberalisation of trade in services beyond those undertaken by the Parties under the GATS (General Agreement on Trade in Services)". This is clearly a very ambitious target. Likewise, Article 5 dealing with investment concocts that the aim is to promote investments and to create a facilitative, transparent and competitive investment regime. But, considering the fact that investment was one of the primary reasons responsible for the collapse of the fifth Ministerial Conference of the WTO in Cancun, Mexico last September, is this aim actually practical? A huge debate is possible on this question alone.

Besides, on the economic co-operation front, a number of areas were agreed upon as is stated under Article 6. They include technology, transportation and communication, energy, tourism and fisheries. In addition, the Bimstec ministerial meet launched Visit BIMSTEC Year 2004, which is geared towards promoting joint marketing programmes and combining destinations. To ensure co-ordination, a Technical Support Facility is to be set up in Bangkok (in the absence of a Secretariat) as a two-year pilot project. Further, India will undertake a feasibility study on developing a deep sea port in Dawei on Myanmar's southwest coast, an extremely strategic area only 300kms (185 miles) from Bangkok and long eyed by regional powers. These decisions are praiseworthy.

Apart from greater economic co-operation and the inclusion of services and investment under the Bimstec framework, one of the fundamental differences between the two FTAs--Safta and Bimstec FTA--relate to the tariff reduction target. For the purpose of trade in goods, the Bimstec treaty has stipulated tariff reduction to zero percent by 2017 under two different tracks--fast track and normal track, while the same for Safta is between 0-5%. The timeframes for tariff elimination under fast trace and normal track differ, and so does that for developing and least developed members.

Under the Bimstec accord, the three developing members--India, Sri Lanka and Thailand--plan to do away with tariffs on each others' goods and services by July 2012. The three less-developed members--Myanmar, Bhutan and Nepal--will have another five-year grace period to tear down tariff walls. Tariffs would begin to be reduced in mid-2006 with products designated for 'fast-track' treatment to be traded on a zero-tariff basis by mid-2009 for the three developed members, and by mid-2011 by the other countries. The last reduction under the normal track would be done before 2017.

Besides, compared to the Safta treaty, the Bimstec agreement is relatively much more articulate in its provisions. For example, Article 7 of the agreement deals exclusively with timeframes for negotiations on trade in goods and services, as well as investment. Likewise, Article 9 on dispute settlement clearly states that necessary mechanism for dispute settlement would be evolved by December 2005. On the other hand, the Safta treaty does not have timeframes for many issues that are debatable and have the potential of wrecking initiations towards a free trade arrangement. Such issues are those on sensitive list, revenue compensatory mechanism (an issue left out in the Bimstec accord prompting Bangladesh not to sign), special and differential treatment, technical assistance to least developed countries and rules or origin.

However, there are several shortfalls in the Bimstec agreement as well. A number of provisions are shrouded in ambiguity, while some others are debatable. One such area is the overlapping membership of Saarc and Bimstec. Pakistan and Maldives do not have Bimstec membership, while Thailand and Myanmar are not a part of Saarc. This may create complications in the concurrent operation of two different FTAs that have different levels of tariff reduction targets. This is likely to create technical snags when trading is carried out between countries that are a part of one of the agreements with countries that are part of both agreements. The issue here in question would be on the modalities for granting Most Favoured Nation treatment.

One of the formidable challenges faced by Bimstec relate to tariff elimination. Downscaling tariff to the level of zero percent may in itself be a noble idea for the operationalisation of a free trade regime in the true sense. But this raises the danger that the list of negative and sensitive products would be long, and the use of safeguard measures would be more arbitrary. A long sensitive list is certainly undesirable, and hence it may always be a better idea to leave some room for tariff adjustment as the Safta treaty does by stipulating the range of 0-5%. This is exactly the reason why even the WTO has a system of binding the tariff ceiling rather than explicitly stating the level of tariff to be imposed on specific commodities. This zero-tariff challenge is more pronounced for countries that are least developed and whose products are not able to compete even at the international level.

Likewise, there are issues that will probably make Bimstec FTA negotiations a tough one. Bangladesh, for instance, declined to sign the FTA just because the contracting members did not, and could not, agree on the modalities for revenue compensation to LDCs. There are many other issues that are of crucial importance to least developed country members. Say, for example, technical assistance. Article 6(4) of the Bimstec agreement reads '...Parties further agree to provide technical support, to the extent possible, to the LDC Parties'. Phrases such as 'to the extent possible' are very vague and non-binding in nature. Furthering negotiations on the basis of such ambiguous phrases would be a difficult one. These are contentious areas and tough negotiations on them can potentially do more harm than good.

Notwithstanding the inherent difficulties and challenges, the initiation towards an FTA, is laudable. For with a combined market of over 1.3bn consumers in the Bimstec area and an aggregate GDP of almost $800bn, the setting up of an FTA can be expected to greatly increase both inter-regional and intra-regional trade. Perhaps it would be in the interest of all to include Pakistan, Bangladesh and Maldives into the Bimstec FTA, which can potentially reduce the apparent complexities related to regional overlapping. But first, the shortcomings need to be identified, and constructive measures have to be taken to overcome and rectify them.

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