Caged Regionalism – The disappointment of SAFTA and BIMSTEC

In order to take advantage of the global trade regime, countries of Southasia must first develop trade between each other.

It was in 1958, with the signing of the Treaty of Rome, that the Europeans embarked on regionalism, albeit in the relatively narrow economic sense of trade liberalisation. They knew that regionalism would drive international relations in the future, and could foresee the economic benefits that would pour from efficient and productive use of available resources, an expanded market, specialization, rapid technology transfer, use of comparative advantages, and the spur of competition. In a region engulfed by mistrust and division, the pioneers of European regionalism could see ahead the peace dividend, ushered by political stability. That political stability, in turn, would be assured through increased intra-regional trade and economic exchange.

For the countries of Southasia, economic regionalism means much more than what it meant for those European pioneers. Beyond the obvious importance of trade within the Subcontinent, the additional incentive for us is that it can be a potent tool to bolster negotiating strength vis-à-vis developed countries.

Globally, economic regionalism has become a centrepiece in the commercial policy landscape, particularly after the advent of the World Trade Organization (WTO) and the multilateral trade regime it supports. The debate over whether regional blocs are 'stumbling blocks' or 'building blocks' for multilateral liberalization has already ended in favour of the latter argument. Today, WTO rules provide a passage for the formation of regional blocs and Southasia would be wise to take full advantage of the facility.

There are about 235 regional trade blocks at present, and between them, they make up nearly half of global trade. A further 70 such groups are at the negotiation/ proposal stage. An overarching view of regional economic combines, scattered across continents and among countries at different levels of development, reveals a confusing 'spaghetti bowl' scenario of crisscrossing and overlapping trade relationships. The majority of the arrangements wade in shallow waters, focusing only on trade liberalization. Very few have deep integration programmes targeting harmonisation of economic policy for a common market.

Theoretically, formation of a regional trade bloc is the second-best option to unilateral or multilateral trade liberalisation. However, such blocs are the only option amidst the existing complex environment, marked by countries with vested interests and discriminatory external environments. Economists are supported by empirical evidence when they argue that regional economic groups have a positive impact on the member state's living standards, with inconsequential effects on the living standards within non-members.

Economic association within the various parts of the Subcontinent was, of course, a part of the historical evolution of the region. But the formal process of regional cooperation in the modern era, among this basket of developing and least developed countries, was initiated only in the late 1980s, with the establishment of South Asian Association for Regional Cooperation (SAARC). Thereafter, the conviction among regional policy-makers on the role of intensified intra-regional trade for overall development is seen in the signing of framework agreements for the establishment of South Asian Free Trade Area (SAFTA) in January 2004 and the Bay of Bengal Initiative for Multi-Sectoral Technical and Economic Cooperation (BIMSTEC) Free Trade Area six months later. The two agreements assert that open, transparent and competitive markets among the parties will be the key drivers of economic efficiency, innovation, wealth-creation and consumer welfare for a region that houses more than a fifth of all humanity.

Divided Loyalties

But rhetoric apart, the effort to concretise the vision of a Southasian fraternity through mutual trade expansion has been fraught with divided loyalties and fractured commitments. In fact, BIMSTEC, in terms of geographical composition, is SAARC minus Pakistan and Maldives, and plus Myanmar and Thailand. What this means is that, rather than looking inwards, most of Southasia is looking at East Asia as a prospective trading partner. The success of BIMSTEC Free Trade Area will naturally translate into a slowing down of SAFTA.

Another significant trend has emerged with India, the centrifugal powerhouse of regional trade and commerce, moving towards bilateral agreements with member countries of SAFTA and BIMSTEC, or with non-members beyond Southasia and East Asia. This has been followed by some of the other regional countries as well, putting the very concept of a Southasian economic bloc in a quandary.

Perhaps it is the weakness in the implementation of free trade agreements thus far that has encouraged some of these countries, including India, to run astray. Where, after all, do we stand in the wake of eight meetings of the SAFTA Committee of Experts and five meetings of the BIMSTEC Trade Negotiation Committee? Detailed negotiations on trade liberalisation, rules of origin, and a dispute settlement mechanism have been under way in both groups, and in SAFTA, the added dimension of a revenue compensation mechanism is also being discussed. But agreement has been lacking on all of these issues, despite the objective – as in the case of SAFTA – of starting implementation by 1 January 2006.

The list of sensitive products within SAFTA

–           products exempted from liberalization – had been initially brought within 20 percent of tariff lines. The draft provisions on 'rules of origin' – a system for determining whether goods are eligible for preferential treatment in the importing country

–           end up making the system unworkably stringent. The revenue compensation mechanism has been put on the back burner. To top it all off, the dispute settlement mechanism that is being worked on is virtually toothless.

Much of the developments on the SAFTA and BIMSTEC fronts have been counter-productive. There have been sceptics from the start who have argued that regional economic cooperation can be successful only among natural partners that already have high intra-regional trade at the outset. Therefore, say the sceptics, regional trade blocs among SAFTA and BIMSTEC countries are doomed to failure because existing trade within them is less than five percent of their total.

Taking this criticism in a positive spirit, while philosophically standing in favour of the concept of regional blocs as a way to countenance the new global regime for the sake of the larger population, it is obvious that the negotiation between the countries of Southasia should move towards expansion of trade. No stone should be left unturned in seeking to devise ways to lead towards such an expansion. The negotiators' instinct should be guided by the need to enhance exports between Pakistan and India, Nepal and Bangladesh, Bangladesh and India, Sri Lanka and Pakistan, and so on. At the same time, intra-industry complementarities between the countries must be buttressed, not dismantled by protectionist interest groups. However, one can sense that such vested interest groups have already predisposed the on-going negotiations. One can expect anything but trade expansion by putting 20 percent tariff lines on the lists of sensitive products, as agreed to by both the SAFTA Committee of Experts and the BIMSTEC Trade Negotiation Committee, when 90 percent of the region's trade is concentrated within 10 percent of the tariff lines.

It is not only the tariff barriers that obstruct free flow of goods within Southasia. Non-tariff barriers, including sanitary and technical standards as well as various administrative procedures, are even more significant obstacles that require immediate action. If we are serious about expanding intra-regional trade, it is important to address both tariff and non-tariff barriers simultaneously. Meanwhile, countries at a higher level of development will need to show magnanimity towards the less well-off members. They should be willing to be liberal on rules of origin and to address transitional losses in the adjustment process. A prosperous neighbor is always an asset, and India, as the regional economic powerhouse, should be the first to recognize this basic truth.

There is much to do in opening trade within Southasia, but too little is being done, and too slowly. Trade liberalization is like a resplendent bird that everyone views with awe, but it is in a cage. Trade thrives on the absence of rules or the ability to circumvent them. This is true in the rest of the world, and it is true in the Subcontinent. What we need are less rules and more commitment to a liberal regime.

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Himal Southasian