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Meeting onRegional Economic Cooperation in South Asia

Kathmandu, 14-16 August 2006

by

Mohammed Ali Rashid

Professor of Economics

North South University

Dhaka, Bangladesh

SAFTA : Trade Liberalisation Programme (Tariff Measures) : Some Issues

Organised by CUTS-CITEE in association with Friedrich Ebert Stiftung-India (FES)

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I. Trade Liberalisation Programme (TLP) of SAFTA : Tariff Measures

A. Tariff Reduction Schedule of Non-LDC Member States

First Phase Reduction (preferably in equal annual installments) from

existing tariff rates to 20% within 2 years from the date of coming into force of the Agreement (i.e. 1 January 2006 to 1 January 2008).

Second Phase Subsequent reduction (preferably in equal annual

installments) from 20% or below to 0-5% within 5 years (6 years for Sri Lanka), beginning from the third year from the date of coming into force of the Agreement (i.e. 1 January 2008 to 1 January 2013).

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For LDC Member States tariffs will be liberalized to zero percent within 3 years from the date of coming into force of the Agreement (i.e. by 1 January 2009)

B. Tariff Reduction Schedule of LDC Member States

First Phase Reduction (Preferably in equal annual installments)

from existing tariff rates to 30% within 2 years from the date of coming into force of the Agreement (i.e. 1 January 2006 to 1 January 2008).

Second Phase Subsequent reduction (preferably in equal annual

installments) from 30% or below to 0-5% within 8 years, beginning from the third year from the date of coming into force of the Agreement (i.e. 1 January 2008 to 1 January 2016).

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C. Actual Date of Implementation of Tariff Liberalisation Programme

1 July 2006 by all Member States with the exception of Nepal which began implementation on 1 August 2006.

D. Option of Faster Tariff Liberalisation

Members have the option of immediately reducing their tariffs to 0-5% or to follow an accelerated tariff reduction schedule.

No Member state has yet notified that it will exercise any of the above options.

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Slow compared to trade liberalisation schedules set by the Uruguay Round.

Slow compared to tariff liberalisation under India-Sri Lanka bilateral FTA. Under the India- Sri Lanka FTA, which was operationalised in 2000, Sri Lanka had duty-free access to the Indian market (excluding items under the negative list) by 2003, that is, 3 years after the FTA became operative. In return, India will have duty-free access to the Sri Lankan market for its exports by 2008, that is, 8 years after operationalisation of the FTA.

II. Pace of Tariff Liberalisation Slow under SAFTA?

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Slow compared to tariff liberalisation under Pakistan-Sri Lanka bilateral FTA. The Pakistan-Sri Lanka FTA, which came into effect in June 2005, envisages fast-track liberalisation. The time- frame for tariff liberalisation is very similar to that of the India-Sri Lanka FTA.

Given the liberalisation time-frames of the FTAs involving the three non-LDC Member States of SAFTA, the more prudent and practical approach to tariff liberalisation under SAFTA would appear to be to adhere to the time-frame of reaching zero duty by 2009 for non-LDC Member states. LDC Member states could be given two more years for tariff phase-out. These objectives can still be achieved by utilising the SAFTA provision of option for accelerated tariff reduction.

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If the tariff liberalisation process is not speeded up, trade liberalisation under SAFTA may lose much of its meaning and effectiveness.

III. Rules of Origin (ROO) Criteria Under SAFTA

To avail of the preferential tariffs under SAFTA, the following ROO requirements have to fulfilled:- Change in tariff heading of the final product at the four-digit level (CHT) and six-digit level (CTSH) of the H.S. Code.-Minimum domestic value addition (DVA) of 40% in the FOB value of the exported product for non-LDC Member States and 30% for LDC Member States.

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- Regional Cumulation : (a) aggregate content (i.e., value of inputs originating in SAARC Member States plus domestic value addition) should not be less than 50% of the FOB value of export; (b) domestic value content (value of inputs originating in the exporting Member States plus domestic value addition in further manufacture in the exporting Member State) should not be less than 20% of the FOB value of export; and © change in tariff heading at the four-digit and six-digit levels of the H.S. Code.- There are detailed certification procedures for implementation of the ROO.- Rules may be reviewed as and when necessary.

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SAPTA ROO requirements : minimum DVA of 40% for non-LDC and 30% for LDC Member States. Experience has shown that these have proved relatively restrictive, given the limited resource base and manufacturing capacity of the LDC Member States in particular, and have eroded the effectiveness of tariff preferences extended under SAPTA.

Under AFTA, local and ASEAN cumulative value addition stands at 40%.

The India-Sri Lanka FTA has minimum DVA requirement of 35%. Moreover, those Sri Lankan exports having a minimum 10% content of inputs originating from India will qualify for preferential market access under a reduced total DVA of 25%.

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Thus, ROO requirements are more restrictive under SAFTA than under SAPTA, India- Sri Lanka FTA, and AFTA.

SAFTA ROO requirements should be relaxed (through utilising the provision of review) to gain greater benefits from tariff liberalisation. The objective should be to strike a balance between the needs of trade liberalisation and minimizing trade deflection.

IV. Sensitive Lists The tariff liberalization programme will not be applicable

to tariff lines included in the Sensitive Lists negotiated by Member States.

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Flexibility is provided to LDC Member States to seek derogation in respect of products of export interest to them.

The Sensitive Lists shall be reviewed after every four years or earlier.

Given the across-the-board liberalization approach adopted in SAFTA, the provision for maintaining Sensitive Lists by Member States appears to be pragmatic.

However, the size of the Sensitive Lists of Member States (separate Sensitive Lists have been given for non-LDC and LDC Member States by each Member State) under SAFTA appear to be relatively large.

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For example, in the India-Sri Lanka FTA, India submitted a Negative List of 429 items, and Sri Lanka’s Negative List consisted of 1180 items. However, under SAFTA, India’s Sensitive List consists of 763 items for LDC Member States alone. Bangladesh’s Sensitive List consists of 1254 items for non-LDC and 1249 for LDC Member States.

Adoption of a fast-track approach to liberalisation would require reducing the size of the Sensitive Lists and also reducing the time for review (from 4 years to say 2 years).

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V. Some Other Issues Tariff Peaks : The Agreement specifies the rate and

range of average tariff reduction, but individual Member States are free to decide the peak tariff and distribution of tariffs. Peak tariffs and unfavourably distributed tariffs (such that a partner country’s export(s) face high tariffs) will reduce the benefits of tariff liberalisation.

Standards : Stringent technical and health standards under the WTO Agreements on Technical Barriers to Trade (TBT) and Sanitary and Phytosanitary Measures (SPS) may reduce or even negate the benefits of tariff liberlisation.

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Regulatory harmonisation and reciprocal recognition of tests and certification of products (in accordance with the Additional Measures as laid out in Article 8 of the Agreement) can be helpful in this regard. Above all, a sincere commitment to the goal of trade liberalisation will matter most.

Para-tariff and Non-tariff Measures : Existence of para tariff and non-tariff barriers may totally negate the benefits of tariff liberalisation. Hence, to achieve meaningful trade liberalisation, para-tariff and non-tariff measures must be eliminated in a short and definite time-frame. However, the SAFTA provision on withdrawing para-tariff and non-tariff measures [Article 7(4)] is a “best endeavour” clause. It does not specify a time-frame for identifying and eliminating these barriers. This issue needs to be taken up seriously at once.

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Safeguard Measures : Article16 of the Agreement contains provisions for adoption of safeguard measures which are similar to those of the WTO Agreement on Safeguards. The multilateral experience shows that safeguard measures may often be used as instruments of “disguised protection”. SAFTA member States must make sure that this does not happen.

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THANK YOU