ASSIGNMENT

ON International Marketing SAFTA

Submitted To:

Prof. Dr. S. M. Kabir

AHANULLAH UNIVERSITY OF SCIENCE & TECHNOLOGY SCHOOL OF BUSINESS

Submitted by: MD. HABIBUR RAHMAN ID: 05.01.02.003 WILLIAM CHOWDHURY ID: 05.01.02.012 4th year 1st semester

Date of submission: 12th July, 2008

The South Asian Free Trade Agreement

The Agreement on the South Asian Free Trade Area is an agreement reached at the 12th South Asian Association for Regional Cooperation (SAARC) summit at Islamabad, capital of Pakistan on 6 January 2004. It creates a framework for the creation of a free trade zone covering 1.4 billion people in India, Pakistan, Nepal, Sri Lanka, Bangladesh, Bhutan and the Maldives. The seven foreign ministers of the region signed a framework agreement on SAFTA with zero customs duty on the trade of practically all products in the region by end 2016. The SAARC Preferential Trading Arrangement (SAPTA), with concessional duty on sub-continent trade, went into force on 7 December 1995. The new agreement i.e. SAFTA, came into being on 1 January 2006 and will be operational following the ratification of the agreement by the seven governments. SAFTA requires the developing countries in South Asia, which is, India, Pakistan and Sri Lanka, to bring their duties down to 20 percent in the first phase of the two year period ending in 2007. In the final five year phase ending 2012, the 20 percent duty will be reduced to zero in a series of annual cuts. The least developed nations in South Asia consisting of Nepal, Bhutan, Bangladesh and Maldives have an additional three years to reduce tariffs to zero. Pakistan has signed but not ratified the treaty, though there is hope in India that it will sometime in 2008. After the Second World War, significant protectionist sentiment compelled the economies of South Asia to pursue import-substituting industrialization (ISI). While intra-regional trade is not a novel concept for the region, the economies of South Asia are new to the ideas of regionalism and regionalization. Several factors combine to make a negative case for a viable free trade agreement in the short-term. Even so, a reasonable case exists for the creation and gradual strengthening of SAFTA, as there are few benefits to dwelling on historical ill will. As these economies grow and economic complementarities begin to develop, the countries of South Asia may find that SAFTA can offer a potentially significant contribution to their progress.

Main Features of SAFTA

Key instruments
The SAFTA Agreement has 25 articles describing its objectives, institutional arrangements, liberalization programmed and other provisions. As stated in the preamble, the main objective of the agreement is to promote and enhance mutual trade and economic cooperation among the SAARC Member states. The Agreement has clearly identified several interconnected mechanisms to achieve economic integration in South Asia. The most critical of these are:

ELIMINATION OF BARRIERS TO TRADE FACILITATION OF CROSS-BORDER MOVEMENT OF GOODS PROMOTION OF FAIR COMPETITION.

There are five key instruments of implementation, namely, TARIFF LIBERALIZATION, RULES OF ORIGIN, INSTITUTIONAL ARRANGEMENTS, CONSULTATIONS AND DISPUTE SETTLEMENT PROCEDURES, SAFEGUARD MEASURES.

1. Additional Measures
There are several additional measures that have been incorporated into the Agreement to take care of various concerns of the Member states, namely, trade facilitation, customs cooperation and dispute resolution, investment promotion and foreign exchange and payments. Provisions related to trade facilitation include harmonization of standards, reciprocal recognition of tests and accreditation of testing laboratories and certification of products, simplification and harmonization of customs clearance procedure, harmonization of national customs classification based on the HS coding system, simplification and harmonization of import licensing and registration procedures, simplification of banking procedures for import financing, transit facilities, development of communication systems and transport infrastructure, and simplification of procedures for business visas.

2. Special and Differential Provisions for the LDCs

The existence of four LDCs in South Asia Bangladesh, Bhutan, Nepal and the Maldives adds another critical dimension to the importance of SAFTA from the development point of view. For, these countries have special development needs due to their low per capita income, low development of human assets and economic vulnerability. Regional integration is likely to assist the LDCs only if it expedites the process of their economic development, which requires them to undergo necessary structural change to enable increasing returns to scale and external economies, faster human capital accumulation, and faster acquisition and absorption of technologies already in use in other countries.28 If implemented properly, the special and differential treatment (S&DT) provisions guarantee that trade liberalization under SAFTA will not jeopardize their ability to achieve the general developmental objectives.

3. Institutional Mechanism:

The SAFTA Agreement has specified an institutional mechanism and a system to deal with problems that are likely to arise in the process of implementation. The main architecture of this process is the SAFTA Ministerial Council (SMC) which will have wide powers to take decisions. The SMC is supported by a Committee of Experts (COE) with specific functions: monitoring, reviewing and facilitating implementation of the Agreement provisions; submitting a report to SMC every six months; and coordinating the process of dispute settlements between Member states.

Constraints in Achieving Regional Integration

This paper recognizes several inter-related constraints that limit regional integration in South Asia. Identification of these constraints and finding solutions to these challenges is central to promoting regional integration. This section makes an attempt to identify the main constraints, their possible implications and the ways of overcoming them.

Geo-Political and Institutional Issues

South Asia, as many other regions in the world, has its own geo-political tensions and institutional issues. Some interlinking relationships like language, culture and arts bring South Asian countries closer to each other, while geo-political tensions force them far apart. Many of these tensions enter into the domain of economics and interstate and international relations.

Indias Role in South Asia

India being the largest country in terms of land area, population, and the size of its economy and being the most advanced country considering its industrial base can play a pivotal role in regional integration. But so far India has been reluctant to play the lead role, perhaps due to her dilemma over such a role because of the possible Conflict that it may create in the SAARC process and the anticipated negative reaction to such a role by other members. As an editorial of the Economic and Political Weekly (EPW) stated: It is for India to ensure that smaller members of the region have a growing stake in regionalism. This responsibility India has not taken seriously.

Process of Trade Liberalization

South Asia could not achieve adequate progress in the SAPTA initiative due to the limited preferences offered in the commodities actually traded. The liberalization process under SAFTA is not too different from the previous attempt as far as tariff liberalization, the approach towards non-tariff barriers, and other outstanding issues are Concerned. The present tariff liberalization process allows some countries to maintain high tariffs in some products, leading to tariff peaks and tariff escalation until the Agreement becomes fully operational.

Eliminating Non-Tariff Barriers

This section reviews South Asias non-tariff barriers (NTBs) regime and its impact on regional integration.
For example, Bangladesh alleges that India maintains a costly NTB regime that includes high documentation requirements, varying methods of assessing duties, expensive mandatory certificates on technical and health standards that need to be collected from distant locations such as Kolkata and Delhi, the closure of northeastern ports to Bangladesh for importing various products, and the non-recognition of Bangladeshi Certification and testing laboratories.

 Multiple and Overlapping Memberships

South Asia is becoming, if not already, a spaghetti bowl of trade agreements with each country having simultaneous membership in a number of regional, sub-regional and bilateral PTAs.38 There are two views prevailing on the acceptability of such a spaghetti bowl for regional integration. According to one view, such arrangements are not conducive for regional integration as each arrangement tends to develop its own miniature trade regime, while a single country may develop different rules applying To different trading partners. Traders costs in meeting multiple sets of trade rules can hamper trade flows.39 However; those subscribing to the other view see the multiple and overlapping memberships in trade agreements in a positive light.

Supply-Side Constraints

Production Structure and Trade Complementarities

Weak Regional Demand Transaction Costs

Effectiveness of Safta (South Asia Free Trade Area) largely depends on removal of nontariff barriers.

The success of SAFTA will depend on the extent to which all the SAARC Member countries could expand their intra-regional trade. The possibility for expanding trade within the region crucially depends on a number of factors. The existence of complementarities, the existing production structure and the diversification of trade profiles are the key.