The Emerging Trade Issues in South Asia Regional

Bilateral Domestic Multilateral

Gains from RTA/Bilateral FTA

Static vs. Dynamic gains When initial trade is very small or insignificant then the predictions about gains become problematic Trade diversion and trade creation

Informal sector: which are not properly taken into account because of lack of information

South Asian Free Trade Area (SAFTA)

In early 2004, the South Asia Free Trade Agreement (SAFTA) was signed. SAFTA has come into force from 1 July 2006, with the aim of reducing tariffs for intraregional trade among the 7 SAARC members.

Problems in SAFTA

Ineffective and slow tariff reduction.. Long negative lists..

Phasing out of the negative list or eliminating non-tariff barriers (NTBs)..

Rules of origin... Investment and Services.. Regional politics..

Country-wise Share (%) in Intra-SAARC Exports and Imports in 2003

Exports
Pakistan Sri Lanka 7.3% 7.5% Bangladesh 2.3% Nepal Maldives 5.4% 0.3%

Imports
Nepal 14.5% Maldives 2.6% India 12.8%

Pakistan 7.1%

India 77.2%

Sri Lanka 26.6%

Bangladesh 36.4%

India accounts for three-fourth of regional exports. Bangladesh accounts for less than 3 percent

Bangladesh is the single largest importer in South Asia

Raihan (2007): Trade Creation and Trade Diversion Effects of SAFTA Scenario: Simulation Using the GTAP Model
Trade Creation
RSA -129.6

Trade Diversion
93.7

Total

223.3 -38.7 106.5 145.2 87.1 -19.1

Pakistam

Sri Lanka

106.2 312.6

India -184.1 -204.5

-46.7

359.3

Bangladesh -300

20.4 -200 -100 0 100 200 300 400

Level of Protection in South Asia

The relatively high levels of protection among the SAARC economies increase the probability of Trade Diversion. If the country participating in a regional arrangement were itself open, it would not suffer from trade diversion even if it were tiny.
Average MFN Tariff Rate Bangladesh 15.2

Rank
27

Bhutan
India Maldives Nepal Pakistan Sri Lanka

22.1
19.2 20.2 13.9 14.3 11.2

6
10 7 32 30 62

Note: Number of Countries = 147 Source: WTO (2006)

Bilateral FTAs in South Asia

India Sri Lanka BFTA Sri Lanka Pakistan BFTA

India Nepal trade treaty

Bangladesh India BFTA (under negotiation) Bangladesh Pakistan BFTA (under negotiation)

Bangladesh Sri Lanka BFTA (under negotiation)

In South Asia, the access to Indian market is most important

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Why BFTAs in South Asia?

Because of slow progress in SAFTA, BFTAs are now reality

BFTAs are more attractive than SAFTA

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Concerns in BFTAs

The issue of trade diversion still remains However, dynamic gains can be significant It is important to have

Timely negotiation

Setting the terms of negotiation

Ensuring countrys interest Proactive role vs. passive role

The capacity of trade ministry is also important

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Raihan and Razzaque (2008) and Razzaque and Raihan (2008)

Trade Development Poverty Linkages Volume I and Volume II 13 Country Studies: 8 from Asia (Bangladesh,
Cambodia, China, India, Nepal, Pakistan, Sri Lanka and Vietnam) and 5 from sub-Saharan Africa (Kenya, South Africa, Tanzania, Uganda, and Zambia)

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Cockburn, Decaluwe and Robichaud (2006)

Six Country Studies: Bangladesh, India, Nepal, Pakistan, Benin and Senegal

Major Lessons Learnt:

Trade liberalization increases welfare and reduces poverty marginally Trade liberalization is pro-urban and may increase rural poverty

Industrial output increases relative to agriculture as a result of a stronger export response and greater input cost savings.
Relative wages increase, returns to capital fall. Nominal income tends to fall most in rural areas.

Nominal consumer prices fall more in industry than agriculture or services.

Cost of living effects vary.

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Concerns in Further Trade Liberalisation in South Asia

Trade liberalisation and anti-export bias Potential growth dividend arising from further tariff cuts

Overwhelming attention has been given to trade related instruments only

Reforms of the institutions as the key to the countrys growth-supporting strategy Difference between trade policy and policy of trade liberalisation for protecting some policy

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