SAFTA: Walk the talk

The fifth Ministerial Council meeting on SAFTA took place recently in the Maldives. As at previous meetings, speeches referred to the need to improve intra regional trade. While most decisions at the meeting centred round further pruning of the sensitive lists, concrete steps as to how to develop trade have not been spelt out, except for Bangladesh agreeing to take steps to prepare a paper on how to increase LDC exports to non LDC members.

It was noted that Sri Lanka’s trade under SAFTA still remained very modest. Sri Lanka’s trade with its two largest partners in the agreement continued to improve under separate bilateral agreements while trade with the other SAFTA partners remained negligible.

The SAFTA agreement was concluded in 2004, whereby the signatories agreed to reduce customs duties of all traded goods by 2015. Towards this end, progressive reduction of customs duties was envisaged. In addition to reducing the tariffs, all partners agreed to reduce their sensitive lists, meaning the items which are considered to be too sensitive to warrant tariff reductions. As of now, most of the items which could be traded are on the sensitive lists of the members.

SAARC countries together offer a huge market of over a billion people. At a time when the importance of the Western markets is dwindling, the South Asian region with immense natural resources and a growing middle class consumer population, even in the Least Developed Countries, offers its members huge prospects for intra regional trading.

However, for reasons more than one, intra regional trade remains disappointingly low. If a similar basket of exports is the reason, how does one account for intra regional trade increases in other regional agreements?

SAARC has a lot to learn from other such regional groupings. They have managed to utilise their similarities to complement each other effectively by moving production bases to where it’s most cost effective, established regional value chains so that production bases are spread throughout. Gone are the days when inefficient productions are sustained at high costs. The advantage of regional groupings allows such productions to be relocated to cost efficient locations within the region. This is the road that SAARC countries should also take if they want to benefit from the intra regional agreement.

Political differences between the two largest partners have been one of the main deterrents to the expansion of intra SAARC trade. Lack of sufficient direct transport links among the eight countries leading not only to high transportation costs that are uncompetitive, but limiting people to people contact which are essential for business people to get to know each other have also been causes for the insufficient growth.

However, merely mentioning the constraints and not taking sufficient steps to overcome at least some of the problems is also a constraint to development of intra SAARC trade. The first trade focused strategy report released by the World Bank in mid June has specific programmes to improve intra SAARC trade.

The South Asia Strategy highlights “the significant potential gains from regional integration” and aims at strengthening regional cooperation in trade and backbone services (water,electricity and transport). The implementation of the strategy will be through lending, technical assistance and knowledge to support strategic priorities and partnerships. Since the World Bank has a significant presence in the region, implementation of this first trade strategy paper might help in improving the regional trade.

Reducing the sensitive lists of any of the members is no easy task, particularly at this stage of the development of the individual economies. It would be more beneficial to look at export diversification and find new products for investment and trading. The services sector is an area for growth in regional trade.

Similarly, the increasingly sophisticated young middle class population offer a sophisticated market for each other. Some enterprising young companies in Sri Lanka have ventured into regional trade with non traditional products effectively. Such efforts should be encouraged without only looking at the traditional products.

Participation in SAARC trade fairs should be encouraged and the SME sectors of the member countries must be made more aware of the opportunities available to them through SAFTA tariff reductions. Instead of merely making statements at regular meetings on the need to increase intra regional trade, it would be more useful if further efforts are made to ‘walk the talk’.

(Manel de Silva holds an Honours Degree in Political Science from the University of Ceylon, Peradeniya and has engaged in professional training in Commercial Diplomacy at ITC and GATT. She has served as a trade diplomat in several Sri Lankan Missions overseas and was the first female Head of the Department of Commerce as Director General of Commerce.)