Bi-lateral FTAs, RTAs and Unilateral Liberalization:

The South Asian Trade Highways

Presented at the ARTNeT-PEP Policy Forum on “Trade, Investment and Domestic Policy Coherence for Inclusive Growth”, December 9, 2008, Manila

Selim Raihan

Associate ProfessorDepartment of Economics

University of Dhaka

The Emerging Trade Issues in South Asia

Regional

Bilateral

Domestic

Multilateral

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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

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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.

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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..

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

Bangladesh 2.3%

Sri Lanka7.5%

Pakistan7.3%

Nepal5.4%

India77.2%

Maldives0.3%

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

Maldives2.6% India

12.8%Nepal14.5%

Pakistan7.1%

Sri Lanka26.6%

Bangladesh 36.4%

Bangladesh is the single largest importer in South Asia

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Exports Imports

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

20.4-204.5

-184.1

359.3-46.7

312.6

106.2-19.1

87.1

145.2-38.7

106.5

223.3-129.6

93.7

-300 -200 -100 0 100 200 300 400

Bangladesh

India

Sri Lanka

Pakistam

RSA

Trade Creation Trade Diversion Total

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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 Rank

Bangladesh 15.2 27

Bhutan 22.1 6

India 19.2 10

Maldives 20.2 7

Nepal 13.9 32

Pakistan 14.3 30

Sri Lanka 11.2 62

Source: WTO (2006)

Note: Number of Countries = 147

Level of Protection in South Asia

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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 country’s interest

Proactive role vs. passive role

The capacity of trade ministry is also important

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Trade liberalization, economic growth and poverty: empirical evidences Studies using CGE and econometric techniques

Raihan (2007), Razzaque, Khondker, Ahmed (2003)

Annabi, Khondker, Raihan, Cockburn and Decaluwe (2005), Khondker, Mujeri and Raihan (2008), Raihan (2008)

Siddiqui and Kemal (2006)

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

Cockburn, Decaluwe and Robichaud (2006)

Domestic Trade Liberalisation in South Asian Countries

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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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Uganda

South Africa

Tanzania

ZambiaKenya

Pakistan

Vietnam

Sri LankaNepal

China

Cambodia

BangladeshIndia

-2.0

0.0

2.0

4.0

6.0

8.0

10.0

12.0

14.0

0 5 10 15 20 25 30 35Average tariffs in 2001

Ave

rage

GD

P gr

owth

(199

5-20

02)

Avg. grwoth of developing countries

Avg. tariffs of developing countries

Tariffs and Growth: TDP and Developing Countries

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Pakistan (1991-2001)

Kenya (1992-97)

South Africa (1996-2001)

Cambodia(1993-2004)

Nepal(1991-2001)

Zambia(1998-2004)

Tanzania(1991-2001)

Sri Lanka(1991-2002)

Bangladesh(1992-2004)

Uganda(1992-2003)

India(1990-2000)

Vietnam(1993-2004)

China(1982-2001)

y = 0.7349x - 1.843

R2 = 0.5402

-3.0

-2.0

-1.0

0.0

1.0

2.0

3.0

4.0

5.0

6.0

0.0 2.0 4.0 6.0 8.0 10.0Avg GDP growth (%)

Ann

ual r

ate

of p

over

ty re

duct

ion

(%)

Growth and Poverty in TDP Countries

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Bangladesh

-4.0

-2.0

0.0

2.0

4.0

6.0

8.0

10.0

12.0

14.0

0 5 10 15 20 25 30 35 40

Average applied tariff rate (%)

Ave

rage

GD

P g

row

th r

ate

(%)

Countries with tariffs and average (1995-02) growth rate lower than Bangladesh

For a number of 135 countries, only 25 countries have lower tariffs but higher GDP growth than Bangladesh.

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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 country’s growth-supporting strategy

Difference between trade policy and policy of trade liberalisation for protecting some policy

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Issues at the Multilateral Level

Agriculture Net Exporting and net importing countries.

NAMA Concern for domestic manufacturing industries in the

DCs in South Asia Preference erosion for LDCs

DFQF for LDCs Services: Mode 4

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Thank you

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