Executive Summary

There is a growing evidence for the emergence of Regional Trading Arrangements (RTA) in
different parts of the world over the last two decades. The establishment of such an
arrangement in South Asia is no exception. The process of regional cooperation in South Asia
was initiated by establishing the South Asian Association for Regional Cooperation
(SAARC). n !""#$ the SAARC %referential Trading Arrangement (SA%TA) was initiated by
the SAARC member countries as the first step towards higher levels of trade and economic
cooperation in the region (SA%TA Agreement !""#). Some progress was achieved in the
economic area under the framewor& of SA%TA. Subse'uently$ the member countries of
SAARC launched the South Asian (ree Trade Area (SA(TA) in )**+ which came into force
on ,anuary *!$ )**-. The &ey motivation behind the creation of SA(TA was to enhance intra.
regional economic cooperation to maximi/e the potentiality of trade and development in the
region (SA(TA Agreement )**+).
The purpose of SA(TA is to encourage and elevate common contract among the countries
such as medium and long term contracts. The ob0ective of the agreement is to promote good
competition in the free trade area and to provide e'uitable benefits to all the countries
involved in the contracts.
1hen SA(TA agreement was signed in )**+$ a number of issues li&e finali/ing the sensitive
list$ criteria for rules of origin$ revenue compensation mechanism for 23Cs$ and areas for
technical assistance for 23Cs were left out. n order to finali/e the agreement$ a committee of
expert has been formulated to discuss and ta&e decisions about these issues before ,anuary
)**-. Subse'uently$ SA(TA came into force on ,anuary *!$ )**-$ after ta&ing decisions on
above issues. 4owever$ because of the delay in ratification of the agreement by the member
countries$ trade liberali/ation program came into force on ,uly *!$ )**-. n order to achieve
the ob0ective of SA(TA$ the framewor& agreement has set some instruments. The Agreement
on SA(TA has seven core instruments or elements5 trade liberali/ation %rogramme$ rules of
6rigin$ institutional Arrangements$ revenue Compensation 7echanism$ technical Assistance
for 23Cs$ safeguard 7easures and consultations and 3ispute Settlement %rocedures.
Although$ SA(TA seems to be attractive for 8angladesh in terms of potential intra.regional
export$ but a number of political and economic factors might hinder the regional cooperation
in this region. dentification and finding solutions for these political and economic factors
might pose challenges to successful implementation of SA(TA.
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9xportables li&ely to be stimulated by SA(TA are mainly labor.intensive manufactures.
Therefore$ if SA(TA succeeds in increasing 8angladesh:s exports$ employment opportunities
will increase. (urthermore$ because many commodities whose exports are expected to
increase are products of small.scale industries (e.g.$ melamine products$ home textiles$ food
items such as biscuits$ 0uice$ pic&les$ light engineering products)$ the employment.creating
effect of export expansion is li&ely to be stronger.
8angladesh has a comparative advantage;vegetables$ potato$ fruits$ and spices. SA(TA
offers 8angladesh the opportunity to export non.cereal crops. This will allow speciali/ation
in agriculture and bring about a structural change in crop agriculture. (urthermore$
calculations show that certain farm produce$ such as mil&$ vegetables$ fruits$ and flowers$
have scope for value addition through agro processing. SA(TA preferences may enable
8angladesh to export these products to other SAARC countries. Regional trade liberali/ation
under SA(TA will clearly affect the structure of 8angladesh:s industry.
8angladesh could benefit significantly from facilitating new mar&et accesses if SA(TA
would be more effective. As a less developed country$ 8angladesh is also eligible to get
special differential treatment and trade assistance under the SA(TA agreement from the more
advanced neighboring countries in the region.
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1.0 Introduction
There is a growing evidence for the emergence of Regional Trading Arrangements (RTA) in
different parts of the world over the last two decades. The establishment of such an
arrangement in South Asia is no exception. The process of regional cooperation in South Asia
was initiated by establishing the South Asian Association for Regional Cooperation
(SAARC). n !"<=$ the seven South Asian countries > 8angladesh$ 8hutan$ ndia$ 7aldives$
?epal$ %a&istan and Sri 2an&a formed SAARC to promote economic$ social and cultural
cooperation (SAARC Charter !"<=). The newest member of SAARC is Afghanistan which
has been included in )**=. n !""#$ the SAARC %referential Trading Arrangement (SA%TA)
was initiated by the SAARC member countries as the first step towards higher levels of trade
and economic cooperation in the region (SA%TA Agreement !""#). Some progress was
achieved in the economic area under the framewor& of SA%TA. Subse'uently$ the member
countries of SAARC launched the South Asian (ree Trade Area (SA(TA) in )**+ which
came into force on ,anuary *!$ )**-. The &ey motivation behind the creation of SA(TA was
to enhance intra.regional economic cooperation to maximi/e the potentiality of trade and
development in the region (SA(TA Agreement )**+).
There have been some strong arguments for the regional economic integration in South Asia$
as this integration is thought to generate significant intraregional trade and welfare gains for
the South Asian countries. There are also aspirations among the policy ma&ers and business
community in 8angladesh about the positive impacts SA(TA might have on the 8angladesh
economy. t is expected that the SA(TA mechanism$ when fully implemented$ will provide
8angladesh improved mar&et access$ help boost its exports to the region$ and improve the
country@s intraregional trade balance. SA(TA is expected to generate substantial new trade .
the so.called static gains. The dynamic gains could be even higher than the static gains due to
the possible expansion in the scale of operation by getting access to the mar&ets of the
relatively larger member countries.
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1.1 Statement of the Research Problem
Analy/ing various aspects of SA(TA and understanding its impact in the Context of
8angladesh.
1.2 Scope and Objectives of the Study
Objectives of the Study
The objectives of this research are as follows:
To fnd out the problems and challenges of SAFTA
To understand the implications of SAFTA on the economic
development of Bangladesh
Scope
The research includes features! activities and other aspects related to the
South Asian Free Trade Area " also have the scope to stud# about SAFTA$s
implication on the development of Bangladesh econom#
1.3. Methodology of the Study
%ethodolog# comprises of all the activities that is re&uired to conduct the
stud# and generate it into a report "n the following sections the
methodolog# of the research have been described on the basis of t#pe of
research! research design! data collection methods and data anal#sis
1.3.1. Type of research
From the viewpoint of function! it is an e'plorator# research as
the research was underta(en to get an initial understanding of
the topic and its related aspects
From the view point of )bjective! it is an Applied *esearch as the
research was underta(en to answer some specifc &uestion
From the view point of +ature of ,ata! the research was mainl#
based on &ualitative data and partl# on &uantitative data
From the view point of *esearch Place it was -,es( *esearch$
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1.3.2. Research design
*esearch design is a vital part of the research There are di.erent t#pes of
data collection methods Among them this research is conducted on the
basis of mainl# secondar# data anal#sis
1.3.3. ata collection
,ata was collected from the secondar# source
Secondary data collection! For an e'plorator# research di.erent o/cial
documents are the major source of data Secondar# data were obtained
from the following sources
Publications on SAFTA
Articles related to activities of SAFTA
)nline sources
1.3.4 ata "nalysis
There is no certain anal#0ing tool used to anal#0e the data of the
e'plorator# research As it is a research based full# on secondar# sources!
all the &uantitative data are found in the anal#0ed format done b# the
respective researchers of the sources
1.4 #i$itations of the Study
,ue to time constraints! the research could not done on an
e'tended basis
The researcher has limited (nowledge about the topic which is a
constraint incase of accurac# of the research
The researcher needed to depend onl# on secondar# data available
online The original sources are di/cult to reach due to restriction
and securit# reasons because of the sensitivit# of the data
2.1 Historical Bac!round of S"#$"
2.1.1 Establishment of S""R%
n ?ovember !"<*$ the Aovernment of the %eople:s Republic of 8angladesh sent a proposal
to the 4eads of the States of seven South Asian countries to thin& about a platform of
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regional cooperation. (ollowing that proposal$ (oreign Secretaries of seven South Asian
countries met for the first time in Colombo in April !"<!. That meeting was followed by the
foreign ministers: meeting in ?ew 3elhi in August !"<#$ the adoption of the 3eclaration on
South Asian Regional Cooperation$ as well as the launching of the ntegrated %rogram of
Action (%A)$ which initially addressed five areas of cooperation5 (i) agriculture$ (ii) rural
development$ (iii) telecommunications$ (iv) meteorology$ and (v) health and population. Two
additional areas$ covering (vi) scientific and technological cooperation and (vii) sports$ arts
and culture were added to the %A at a later stage.
At a meeting of 4eads of State of Aovernment$ held in 3ha&a on B.< 3ecember !"<=$ a
Charter was adopted that formally established SAARC. The !"<= meeting in 3ha&a is
subse'uently &nown as the first SAARC Summit. 8esides the ob0ectives of SAARC provided
in 8ox ! below$ SAARC:s general provisions are that (i) decisions at all levels in SAARC
shall be ta&en on the basis of unanimity and that (ii) bilateral and contentious issues shall be
excluded from the deliberations of the Association. SAARC also adopted three principles.
(irst$ the cooperation within the framewor& of the Association is based on respect for the
principles of sovereign e'uality$ territorial integrity$ political independence$ non.interference
in the internal affairs of other States and mutual benefit. Second$ such cooperation is to
complement and not to substitute bilateral or multilateral cooperation. And third$ such
cooperation should be consistent with the bilateral and multilateral obligations of its 7ember
States.
2.1.2 #rom S""R% to S"P$"
At the beginning of its 0ourney$ SAARC focused its wor& mostly in soft areas li&e health$
population$ cultural exchange$ and sports. n the fourth SAARC Summit in slamabad$ held
on )".#! 3ecember !"<<$ the 4eads of States were passed a study report on the cooperation
in the areas of trade$ manufactures and services. The recommendations of that study led
SAARC leaders to thin& about a preferential trade arrangement within SAARC.
A consultant was commissioned to carry out a study on Trade$ 7anufacture and Services
(T7S) in the SAARC region. According to the consultant:s recommendations three years
later in !""!$ further initiatives were ta&en towards a preferential trade arrangement at the
sixth SAARC summit in Colombo on 3ecember )!$ !""!. t was recogni/ed that a specific
agreement on an institutional framewor& is needed under which specific measures for trade
liberali/ation among SAARC 7ember States can be ta&en. At the seventh SAARC summit in
3ha&a$ held from April !*.!! !""#$ the 4eads of States of the %eople:s Republic of
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8angladesh$ the Cingdom of 8hutan$ the Republic of ndia$ the Republic of 7aldives$ the
Cingdom of ?epal$ the slamic Republic of %a&istan and the 3emocratic Socialist Republic
of Sri 2an&a agreed to establish the SAARC %referential Trading Arrangement (SA%TA) to
promote and sustain mutual trade and the economic cooperation among them.# n the eighth
SAARC summit held in ?ew 3elhi on ).+ 7ay !""=$ the SA%TA agreement was discussed
in depth. mportance was given to technical meetings and the finali/ation of all necessary
modalities so that SA%TA could start its 0ourney by the end of !""=. ndeed$ SA%TA entered
into force on the Bth of 3ecember !""=.
The main ob0ectives of SA%TA were to promote trade relations among the member states
and to identify and remove trade barriers. SA%TA wor&ed with four main tas&s5 tariff$ para.
tariff$ non.tariff$ and direct trade measures. 1hile SA%TA adopted four ma0or negotiation
approaches (on product by product basis$ across the board tariff reductions$ sector wise$ and
direct trade measures)$ all leaders agreed that the main negotiations should be underta&en on
a product.by.product basis. They also agreed that tariff$ para.tariff and non.tariff barriers will
be identified step by step and removed successively and gradually. The agreement also
includes special attention for the less developed countries (23Cs) in Article !*. Tariff
concession offered by different countries indifferent rounds of SA%TA are reported in table
!(Appendix).
2.1.& #rom S"P$" to S"#$"
1ithin SA%TA$ Contracting States had agreed to underta&e measures for developing and
improving communication systems$ transport infrastructure and transit facilities for
accelerating the growth of trade within the region. There were three rounds of negotiations
about how much concessions will be given to each other. There were two scales for
approving concessions li&e for 23Cs and non.23Cs. (rom a technical perspective$ these
rounds were the steps towards SA(TA. ?egotiations were conducted mainly on a product by
product basis$ even though 8angladesh$ ndia and %a&istan have also exchanged their tax and
tariff concession list chapter.wise. The 7aldives have granted tariff concession for all
member states for #-< products. 8y early )**+$ the negotiations had progressed to the point
that the SA(TA agreement paper was signed by SAARC leaders in slamabad on ,anuary -$
)**+.+ The main ob0ectives of SA(TA are to facilitate regional trade without any barriers and
to share each country:s strategic advantage with others. 4ence$ at least from a legal point of
view$ SA(TA has emerged as a regional trade bloc& with its currently eight member states
namely$ Afghanistan$ 8angladesh$ 8hutan$ ndia$ the 7aldives$ ?epal$ %a&istan$ and
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Sri2an&a. Consistent with the )**+ agreement$ SA(TA started to function on ,anuary !$
)**-.
2.2 Pur'ose and (b)ective of S"#$"
2.2.1 Pur'ose
The purpose of SA(TA is to encourage and elevate common contract among the countries
such as medium and long term contracts. Contracts involving trade operated by states$ supply
and import assurance in respect of specific products etc. t involves agreement on tariff
concession li&e national duties concession and non.tariff concession.
2.2.2 (b)ective
The ob0ective of the agreement is to promote good competition in the free trade area and to
provide e'uitable benefits to all the countries involved in the contracts. t aimed to benefit the
people of the country by bringing transparency and integrity among the nations. SA(TA was
also formed in order to increase the level of trade and economic cooperation among the
SAARC nations by reducing the tariff and barriers and also to provide special preference to
the 2east 3eveloped Countries (23Cs) among the SAARC nations.
2.& #eatures of the "!reement
1hen SA(TA agreement was signed in )**+$ a number of issues li&e finali/ing the sensitive
list$ criteria for rules of origin$ revenue compensation mechanism for 23Cs$ and areas for
technical assistance for 23Cs were left out. n order to finali/e the agreement$ a committee of
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expert has been formulated to discuss and ta&e decisions about these issues before ,anuary
)**-. Subse'uently$ SA(TA came into force on ,anuary *!$ )**-$ after ta&ing decisions on
above issues. 4owever$ because of the delay in ratification of the agreement by the member
countries$ trade liberali/ation program came into force on ,uly *!$ )**-. n order to achieve
the ob0ective of SA(TA$ the framewor& agreement has set some instruments.
$he "!reement on S"#$" has seven core instruments or elements*
!. Trade liberali/ation %rogramme
). Rules of 6rigin
#. nstitutional Arrangements
+. Revenue Compensation 7echanism
=. Technical Assistance for 23Cs
-. Safeguard 7easures
B. Consultations and 3ispute Settlement %rocedures
2.&.1 $rade +iberali,ation Pro!ram
2.&.1.1 Schedule of $ariff Reduction
The schedule of tariff reduction is described in Article B in the agreement. According to this
article$ all member countries of SA(TA will reduce tariff to *.= percent in two phases$
namely SA(TA (irst %hase and SA(TA Second %hase. The countries agreed on the timeframe
to reduce the tariff are different for 23C and ?on.23C+ member countries. The
reduction of tariff is as follows.

$able 2* Schedule of Tariff Reduction under SA(TA
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Table ) illustrates that$ in SA(TA (irst %hase$ ?on.23C member countries reduced tariff up
to )* percent (for 23Cs #* percent) on its imported commodities which are not included in
the sensitive list$ and was applied from ,anuary *!$ )**-$ within two years. f the existing
tariff rates were below )* percent (for 23Cs #* percent) on ,anuary )**-$ then there was an
annual reduction of !* percent (for 23Cs = percent) on margin of preference basis for each of
these two years. n SA(TA Second %hase$ all the member countries will reduce tariff to *.=
percent which is applied from ,anuary *!$ )**<. The time schedule is = years for two of the
?on.23C member countries$ ndia and %a&istanD and - years for another ?on.23C member
country$ Sri 2an&a. (or 23C members$ the time schedule is of < years. Therefore$ ndia and
%a&istan will fully implement SA(TA on )*!#$ Sri 2an&a on )*!+ and Afghanistan$
8angladesh$ 8hutan$ ?epal and 7aldives on )*!-.
2.&.1.2 Sensitive +ist
The SA(TA Agreement provides a provision to maintain a sensitive list for every member.
The products$ included in the sensitive list$ are exempted from tariff reduction. There is a
maximum ceiling of the number of products and some flexibility for 23Cs which were
mutually agreed. The sensitive list will be reviewed in every four years$ in order to eliminate
the number of commodities included into it. The si/e of sensitive list for each member
countries is presented in Table #.

$able &* Sensitive 2ists of 7ember Countries under SA(TA
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2.&.1.& -on.$ariff and Para.$ariff /easures
n order to free movement of goods$ SA(TA Agreement re'uires gradual elimination of all
'uantitative restrictions$ non.tariff and para.tariff measures which are not permitted under
AATT or ma&ing them non.restricted. To facilitate this process$ a sub.group has been
established.
2.&.2 Rules of (ri!in
Rules of origin are one of the most powerful trade policy instruments in any (TA. n case of
SA(TA$ the rules of origin are not complex. There are general rules of origin for all products
except !""! products for which the member countries agreed on product specific rules. n
order to get tariff concession under SA(TA$ a product must satisfy the criteria of change in
tariff heading at four.digit level and at least a value addition of +* percent of fob value. There
are concessions of value addition criteria for Sri 2an&a and 23C members$ which are #=
percent and +* percent respectively.
.
2.&.& Institutional "rran!ements
The member countries of SA(TA established two institutional bodies$ namely SA(TA
7inisterial Council (S7C) and Committee of 9xperts (C69). S7C is the highest decision
ma&ing body of SA(TA which consists of CommerceETrade 7inisters of member countries.
S7C is responsible for administration and implementation of SA(TA Agreement$ meets
once in a year or more. C69 comprises of senior economic officials$ with expertise in trade
and meets once in every six months.
C69 is responsible for Freview and facilitate implementation of the provisions of SA(TA
Agreement and underta&e any tas& assigned to it by S7CG (SA(TA Agreement$ Article !*).
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2.&.0 Revenue %om'ensation /echanism
SA(TA established a revenue loss compensation mechanism to compensate 23C member
countries due to revenue loss as a result of reducing import tariff. The revenue compensation
mechanism came into effect when trade liberali/ation program has been implemented. The
compensation will be maximum = percent of the revenue collected from import duties on
non.sensitive list items from non.23C member countries in year )**= (SA(TA Agreement$
Annex #).
2.&.1 $echnical "ssistance for +2%s
n order to assist 23Cs and to expand the trade with other member countries of SA(TA the
following areas are identified for technical assistance.
FTrade related capacity buildingD
3evelopment and improvement of tax policy and instrumentsD
Customs procedures related measuresD
2egislative and policy related measures$ assistance for improvement of national
capacityD
Conduct StudiesD
Research and 3evelopmentD
9xport %romotionD
nvestment %romotionD
Training and human resource development in trade related areas such as product
development$ mar&eting etc.D
Support for product development and mar&et promotion in export.oriented sectors.G
(SA(TA Agreement )**+$ Annex ).
2.&.3 Safe!uard /easures
SA(TA safeguard measures permit member countries to withdraw the tariff concession to
protect domestic industry from serious in0ury due to increase in import form free trade under
SA(TA. Tariff withdrawal is allowed to prevent or rebuild such economic damage and the
duration of these measures is not more than three years. This safeguard measures are not
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applicable against any products of 23Cs if the import of a product from an 23C does not
exceed = percent of the import share of importing country (SA(TA Agreement )**+$ Article
!-).
2.&.4 %onsultations and 2is'ute Settlement Procedures
There is a specific Article in SA(TA Agreement which provides the essentials to dispute
settlement mechanism. The Article )* describes the provision for consultation$ review$ appeal
and further implementation$ including withdrawal of concessions. SA(TA 7inisterial
Council (S7C) and Committee of 9xperts (C69) are the administered body of the dispute
settlement procedures.
&.1 Problems and %hallen!es of South "sian #ree $rade "rea
Although$ SA(TA seems to be attractive for 8angladesh in terms of potential intra.regional
export$ but a number of political and economic factors might hinder the regional cooperation
in this region. dentification and finding solutions for these political and economic factors
might pose challenges to successful implementation of SA(TA. This section tries to identify
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some of these political and economic factors.
&.1.1 India5s He!emonic Po6er
n South Asia$ ndia is the giant comprising B# percent of the regional territory$ B= percent of
regional A3%$ B< percent of regional export and -* percent of regional imports. Regarding
military power$ ndia:s superiority is not comparable with any other South Asian countries .n
terms of socio.cultural and religious system there are obvious similarities between ndia and
other South Asian countries. 8ut except ndia other South Asian countries do not share this
type of similarities among themselves. 1ithout active participation of ndia$ a free trade area
in South Asia is inconceivable. 3ue to ndia:s superior power compared to its neighboring
countries$ it can be argued that Fndia constitutes the core while all its neighbors form a
periphery of the South Asian regionG. According to the economic literature$ the success of an
(TA is higher with the presence of a hegemonic power while (TA among more e'ual states is
li&ely to be wea&. The argument in favor of this statement is that the hegemonic power can
act as an institutional focal point to implement the agreement of an (TA. 4egemonic power
can also play a substantial role to minimi/e the tension that might arise from the une'ual
distribution of gains from (TA. n case of (TA among more e'ual states$ i.e.$ in the absence
of hegemonic power there might be a presence of coordination dilemma which is not easy to
resolve. 3espite ndia:s superior power in the region$ the member countries of SA(TA do not
accept ndia as the leader of South Asian region. 7oreover$ the dominant position of ndia
has created a distrust and suspicion among its neighbors. n the presence of such distrust and
suspicion against ndia$ sometime it is not possible for South Asian countries to wor& towards
a common strategy. (urthermore$ %a&istan poses constant challenges against ndia:s
hegemonic power in the region. The lac& of consensus$ regarding ndia:s hegemonic power
and leadership in South Asia$ has two conse'uences against successful implementation of
SA(TA.
(irst$ ndia might be reluctant to act as an institutional focal point to implement the
rules and regulations of SA(TA agreement. Second$ ndia might be unwilling to ease the
tension among the member countries that could arise from the distributional problems
associated with SA(TA.
&.1.2 Inter.state %onflicts
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South Asia is one of the most conflict prone regions of the world. ndia$ the largest country in
this region has bilateral dispute with most of its neighbors. The dispute between ndia and
%a&istan over Cashmir$ since their independence in !"+B$ is considered as one of the most
difficult constraints to SA(TA. The relations between ndia and %a&istan have become
permanently tensed after !""<$ when both countries tested nuclear weapons. 3ue to the
dispute between ndia and %a&istan$ some SAARC summits had been delayed and many
decisions of regional cooperation have not been implemented. Similarly$ despite ndia:s
support to 8angladesh during its liberation war in !"B!$ the relations between these two
countries are not so good. 3ispute between ndia and 8angladesh began before 8angladesh:s
independence in !"B!$ when ndia constructs a barrage on Aanges River at (ara&&a$ !<
&ilometers from 8angladesh border. Since then ndia has been diverting Aanges water during
the dry season. ndo.8angladesh relations deteriorated further when ndia has ta&en initiative
to construct Tipaimu&h dam on 8ora& River$ 0ust one &ilometer from 8angladeshi border. The
construction of the dam is expected to be completed by )*!) and 8angladesh is concerned
about desertification of its north.eastern region. 8esides these$ some other disputed issues
between 8angladesh and ndia are border demarcation$ exchange of enclaves and illegal
migration. Similarly ndo.Sri 2an&a and ndo.?epal relations are not so satisfactory. The
main issue of ndo.Sri 2an&a conflict is ndia:s support to the militant 2iberation Tigers of
Tamil 9elam (2TT9). Although ndia and ?epal have outstanding territorial disputes$ most of
the conflicts between these two countries are grounded in economic concerns. 6n the
contrary$ the inter.state relations between other South Asian countries are tension free. There
are different theories over the relationship between RTA and conflict. According to classical
trade theory$ since RTA is beneficial for its member countries$ it leads to political stability by
increasing economic incentives. RTA in 9uropean countries is a good example in favor of this
argument where conflicts between member countries have substantially declined. Conversely$
the international relation theory opposes This argument stating that RTA is not sufficient to
ease the inter.state conflicts. 7oreover$ very often it intensifies the conflicts. 9vidence
shows that in less developed region li&e South Asia$ RTA does not generally ease conflicts$
rather worsen the situation. 8arbieri ()**)) analy/es the relationship between RTA and
conflicts$ and found a high positive connection between them. 4e also argued that RTA
among conflict prone region might lead to militari/ed inter.state disputes. n these bac&drops$
the inter.state conflicts in South Asia might pose a threat to future prospects of SA(TA.
&.1.& -on.$ariff Barriers
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F?on.tariff barriers present nowadays the most important and dangerous barriers to trade
which fragment mar&ets in a more successful way than tariffs have ever doneG. n South Asia$
ndia imposes high non.tariff barriers in order to prevent exports to ndia from other countries
in this region. %olicy ma&ers and business communities in 8angladesh believe that there are
some commodities which have huge export potential in ndian mar&et. 8ut export of these
commodities will be impossible if ndia maintains a costly non.tariff barriers regime$ even
after eliminating tariff barriers under SA(TA. (or example$ in early )***$ 8angladesh had
huge export potentiality in cement in ?orth.9astern part of ndia. 8angladesh was exporting
cement worth of HS dollar !.!) million$ in every month until (ebruary )**#. 8angladeshi
cement had a high demand in ?orth 9astern part of ndia because it was cheaper than ndian
domestically produced cement and because of the high transportation cost associated with
domestic cement to supply in that part of ndia. n such a moment$ ndian authority
announced a rule that 8angladesh must ta&e a testing certificate from the 8ureau of ndian
Standard (8S) before exporting to ndia. (or every ton of cement export$ 8angladeshi
exporters had to ta&e 8S certificate which re'uires a payment of fee. After that cement
export from 8angladesh to ndia had stopped. Another potential exportable item for
8angladesh is lead acid battery which had also a large mar&et in ndia around HS dollar -**
million. After implementation of SA%TA$ import tariff on battery export from 8angladesh to
ndia reduced from -+.)! percent to #<.## percent. As a result 8angladesh was exporting
considerable amount of batteries to ndian mar&et and it was estimated that around !* percent
of ndian demand might be fulfilled by 8angladeshi batteries. n such a moment$ on ,anuary
)**)$ ndian government imposed anti.dumping duties on all 8angladeshi battery exporters$
claiming that they were originated in China and Corea and exported below normal value.
8angladesh appealed against this anti.dumping duty to 1T6 dispute settlement body and on
(ebruary )**+ a consultation was held.
After that ndia withdrew the controversial anti.dumping duty$ but within these three years
8angladeshi battery lost its previous mar&et in ndia. Another concern for countries li&e
8angladesh is that unli&e 'uantitative restrictions SA(TA Agreement has not clearly
mentioned the elimination of non.tariff and para.tariff measures. t is mentioned in article B.+
in SA(TA Agreement that all non.tariff and para.tariff measures will be notified by the
member countries of SA(TA. After that SA(TA committee of experts will recommend either
eliminate or implement the measuresD but on the other hands$ Article B.= clearly mentioned
regarding the elimination of all 'uantitative restrictions by the member countries. n such
respect$ if non.tariff barriers are not fully eliminated$ then the potential benefits of SA(TA
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will never be reali/ed by the countries li&e 8angladesh. ?on.tariff and para.tariff barriers that
are imposed by ndia on 8angladesh:s export are described in table +(Appendix).
&.1.0 Parallel $radin! "rran!ement
The member countries of SA(TA have been engaging in several bilateral$ sub.regional and
trans.regional trading arrangements and becoming a Fspaghetti bowlG of such arrangements.
n South Asia$ ndia has bilateral trading arrangements with Sri 2an&a$ 8hutan and ?epal.
8angladesh is trying to establish three bilateral trading arrangements with ndia$ %a&istan and
Sri 2an&a.
%a&istan and Sri 2an&a are also having tal&s to create a bilateral trading tie between them. A
sub.regional arrangement namely South Asian Arowth Iuadrangle (SAAI) among
8angladesh$ 8hutan$ ndia and ?epal launched in !""B to promote trade$ investment$
transport and communication among the member states. 8ay of 8engal nitiative for 7ulti.
Sectoral Technical and 9conomic Cooperation (87ST9C) is a sub.regional cooperation
between South and South.9ast Asia which includes SA(TA without %a&istan and Afghanistan
and added 7yanmar and Thailand. 87ST9C member countries established an (TA side by
side with SA(TA which came into force in )**- and fully implemented in )*!B. 9vidence
shows that these types of parallel initiatives are very rear in the ma0ority of trading blocs.
7ost of the trading blocs ta&e collective decision with respect to their own regional progress
and entering into the new trading blocs. The argument against the overlapping
membership is that each country eventually develops different rules against its trading partner
in different trading blocs. FTraders: costs in meeting multiple sets of trade rules can hamper
trade flowsG.
n South Asian region$ the main interest of smaller countries is to get mar&et access to large
countries li&e ndia and %a&istan. (or instance$ Sri 2an&a has already got mar&et access to
ndia under ndia.Sri 2an&a (TA. Sri 2an&a and %a&istan have also agreed on the principal
for establishing an (TA in near future. n such a case$ SA(TA will become marginali/ed not
only to Sri 2an&a but also to other countries$ as long as they involve in bilateral treading
arrangements with ndia and %a&istan. Another issue is whether there is any mechanism to
incorporate bilateral (TA with SA(TA. n the presence of such a mechanism$ the existing
(TA between South Asian countries can promote SA(TA by providing an advanced starting
point of negotiation. 8ut$ without such a mechanism bilateral (TA then exists as a parallel
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trading arrangement which poses a threat to the successful implementation of SA(TA. Some
bilateral trading arrangement between SA(TA members provide more liberal terms which is
unli&ely to be accepted as a starting point by some of the SA(TA member countries.
&.1.1 +ac of Physical Infrastructure
2ac& of physical infrastructure$ li&e the inefficient road$ railway and waterway lin&ages$
increases the transportation cost. n current globali/ed world$ freight cost is one of the ma0or
determinants of competitiveness. The gains from South.South trade liberali/ation are not so
significant because developing countries have not been able to minimi/e the transportation
cost of trade$ both in the cases of inland transportation and international transportation. Some
studies show that poor infrastructure negatively affects the trade flows by increasing transport
costs. %oor 'uality infrastructure is a ma0or challenge for South Asia to move ahead for
regional trade integration. n terms of 8angladesh.ndia trade$ around B= percent of flows
occur through land transport. The roads and bridges$ which are used to transport goods
between these two countries$ are not wide enough for free movement of vehicles. 7oreover$
in ndian Territory a Fmafia groupG controls the movements of vehicles and forces to pay
ndian Rupee #* per vehicles to move across. They also force to pay ndian Rupee !** for
par&ing the vehicles in their Fso called premisesG. Jery often$ they create such a situation so
that the loaded vehicles have to stay there for few nights. These types of expenses are
estimated around !* percent of logistic cost. f a country:s transport cost increase by =*
percent then trade will be decreased by +* percent. To achieve the full potential of SA(TA it
is necessary to provide ade'uate support to improve the physical infrastructure$ so that goods
can easily move across border.
&.1.3. Informal $rade
nformal trade$ among South Asian countries$ is a common phenomenon particularly between
ndia and its neighbors. Although there is no 'uantitative study on it$ some 'ualitative studies
identified that informal trade between 8angladesh and ndia is around B= percent of their
formal trade and it is mainly ndian export to 8angladesh. Similarly$ informal trade between
ndia . Sri 2an&a and ndia . ?epal is around ## percent and !** percent of their formal trade
respectively. So$ it might be the case that SA(TA will result an increase of trade flows by
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bringing this informal trade into formal channel. f this will happen then SA(TA itself will
not be credited for the real increase of trade flows among member countries.
&.2 S"#$"5s Im'lications for Ban!ladeshi Economic 2evelo'ment
&.2.1 Im'act on Poverty
9xportables li&ely to be stimulated by SA(TA are mainly labor.intensive manufactures.
Therefore$ if SA(TA succeeds in increasing 8angladesh:s exports$ employment opportunities
will increase. (urthermore$ because many commodities whose exports are expected to
increase are products of small.scale industries (e.g.$ melamine products$ home textiles$ food
items such as biscuits$ 0uice$ pic&les$ light engineering products)$ the employment.creating
effect of export expansion is li&ely to be stronger. 8angladesh sources a significant part of its
imports from SAARC countries$ particularly ndia. Such imports doubtlessly will increase
with implementation of the SA(TA agreement. 4ow will this$ along with export growth
li&ely after SA(TA comes into force$ affect employment and poverty in 8angladeshK The
answer depends on the nature of the imported commodities. 8ecause ndia has been the main
source of 8angladesh:s imports from the region$ an examination of the product composition
of imports from ndia is instructive. A large portion of 8angladesh:s imports from ndia are
capital goods$ intermediate inputs$ and industrial raw materials. 8esides prepared foodstuffs
and food grains$ another ma0or import category is producer goods. These imports have
facilitated an increase in manufacturing activity and have therefore increased employment.
Conversely$ if imports of consumer goods (found mainly under Fproducts of chemical and
allied industries$G Fplastic articles$G and FothersG)$ which displace domestically produced
goods$ predominate$ employment would probably be reduced. n the actual case$ the net
effect on employment is li&ely to have been positive.
mplementation of SA(TA is li&ely to increase exports and have a positive effect on
economic growth in 8angladesh. 9xport growth$ in turn$ will lead to an increase in
employment opportunities. 4ow import growth will affect employment once SA(TA
becomes operational is less clearD however$ because most imports from ndia are producer
goods$ which increased manufacturing production$ it is li&ely that SA(TA will exert a net
positive effect on employment by enabling imports.= Thus$ the overall effect of trade
liberali/ation under SA(TA on employment in 8angladesh is li&ely to be positive. This$ in
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turn$ is expected to have a salutary effect on poverty. n the unli&ely event that export
incomes increase faster than manufacturing wages$ ine'uality would worsen$ creating other
perceived as well as real social problems.
Adverse effects on income distribution and on employment can be mitigated by (!) creating
remunerative 0obs for the poorD ()) educating and teaching appropriate s&ills to the poorD and
(#) creating infrastructure (e.g.$ electricity and all.weather roads) and improving poor
people:s access to these facilities.
&.2.2 Encoura!in! "!ricultural 2iversification
3ominating 8angladesh:s agriculture sector$ rice cultivation alone accounts for nearly B*
percent of gross farm revenue from crop production. Although the country is proud of having
achieved self.sufficiency in rice$ the sustainability of agricultural growth with rice as the
dominant crop has been 'uestioned Crop diversification has assumed importance in
8angladesh:s agricultural development strategy. %ro0ections of the profitability of crops other
than rice$ such as potato$ vegetables$ onion$ and cotton$ show economic and private returns
significantly higher than those of rice. ,ute also has a competitive edge over local.variety rice
at the prevailing world price of 0ute. 1heat$ sugarcane$ and oilseeds show very low$ even
negative$ economic returns. This indicates that 8angladesh does not have a comparative
advantage in those items$ which compete with imports of those products. Crops with
potentially high profitability$ such as potato and vegetables$ are produced entirely for the
domestic mar&et or have only limited access to the world mar&et. The domestic mar&et for
non.cereal crops$ especially the high.value ones$ is limited because of low living standards.
This underscores the need to export the non.cereal crops in which 8angladesh has a
comparative advantage;vegetables$ potato$ fruits$ and spices. SA(TA offers 8angladesh the
opportunity to export non.cereal crops. This will allow speciali/ation in agriculture and bring
about a structural change in crop agriculture.
(urthermore$ calculations show that certain farm produce$ such as mil&$ vegetables$ fruits$
and flowers$ have scope for value addition through agro processing. SA(TA preferences may
enable 8angladesh to export these products to other SAARC countries. Regional trade
liberali/ation under SA(TA will clearly affect the structure of 8angladesh:s industry. 6n the
one hand$ inefficient domestic industries ma&ing 0ute$ cotton textiles$ paper$ chemical
products$ metal products$ and rubber products$ as well as light engineering$ will be forced to
contract or even close down. 6n the other hand$ industries with export potential such as
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ceramic tableware and tiles$ melamine products$ pharmaceuticals$ and some food industries$
are expected to expand when SA(TA becomes operational.
0.1 Recommendations for /aximi,in! the Benefits of S"#$"
8angladesh could benefit significantly from facilitating new mar&et accesses if SA(TA
would be more effective. As a less developed country$ 8angladesh is also eligible to get
special differential treatment and trade assistance under the SA(TA agreement from the more
advanced neighboring countries in the region. The following steps are suggested to ma&e
SA(TA more effective.
21 | P a g e
L Roadma' to6ards a South "sian Economic 7nion
As (igure ! shows$ the SA(TA initiative could lead into a successful economic union$ which
is supposed to be the ultimate target. n short$ a more effective SA(TA would be a
tremendous chance to gain for all SAARC member states.
(igure !5 Roadmap towards a South Asian 9conomic Hnion
Met$ the above figure also shows that South Asian countries still have to go a long and
complicated way before reaching an 9conomic Hnion in South Asia. f SA(TA fails to
be effective$ it will be very difficult to reach an economic union in the near future. 4ence$
an effective SA(TA should be a priority concern for the SAARC member governments.
A united South Asia would be much more effective in tac&ling any tas&.
L "ccelerate the Im'lementation of "ll S"#$" "!reements
t is important that all SA(TA agreements are implemented as soon as possible. 1hile the
treaty has come into force on ,anuary !$ )**-$ there are various elements that are supposed to
be fully implemented only by 3ecember #!$ )*!=.
L Eliminate $ariffs8 Para.$ariffs and -on.$ariff Barriers
South Asia continues to suffer from high tariffs$ para.tariffs and non.tariff barriers. 1hile
it has been argued that some tariffs might be 0ustified to protect the industries especially
of the region:s least developed countries$ the existing tariffs are currently not supporting
that argument as they are applied across all South Asian countries. f SAARC countries
want an effective regional free trade area$ all tariffs and trade barriers need to be identified
such that the necessary actions can be ta&en to remove them before the end of )*!=.
L Shorten -e!ative +ists
%resently$ some of the ma0or exportable products of South Asian countries are formally
excluded from trade among South Asian countries due to long negative lists. f there is a
goal to have a free trade area within South Asia$ then every country should shorten its
negative list as soon as possible. The shortening of the negative lists would also reduce the
smuggling of goods currently ongoing across South Asia and the negative effects that come
with it.
22 | P a g e
L Involve Private Sector Re'resentatives in the -e!otiations
%resently$ all types of trade negotiations are ta&ing place at the governmental level. This
applies to the 1T6 as well as to SA(TA. 8usiness communities$ which are the actual actors$
are being neglected in this regard. n order to identify the problems more clearly and to solve
them efficiently$ business communities and private sector representatives should be included
in all trade negotiations. Apex business bodies li&e the (ederation of 8angladesh Chambers
of Commerce and ndustry ((8CC) and the (ederation of ndian Chambers of Commerce
and ndustry ((CC) can help a lot in this process.
L #orm a S""R% $as #orce
Another suggestion is to form a high.level tas& force with representatives from each country
to identify current problems and that the authority of such a tas& force would need to be
preserved to solve the problems without any political or bureaucratic intervention.
L $acle %ommon Economic and Political %hallen!es
SAARC countries should start with tac&ling common macroeconomic challenges and adopt a
common resource sharing policy. They should also act 0ointly in the international bodies li&e
the Hnited ?ations. A common list of interests should be identified and actions should be
ta&en to achieve them. (or example$ a common nuclear power generation plant could be
established to meet the regional power crisis. Another example would be to form a regional
defense body li&e the ?orth Atlantic Treaty 6rgani/ation (?AT6) to strengthen intra SAARC
defense.
L Establish Re!ional #und to Promote Poverty Reduction
(inally$ it would be useful to establish a SAARC (und to promote capacity building in the
regional 23Cs that have high levels of poverty and face natural disasters to ensure the
provision of food for the South Asian people. Such a fund could also include the provision of
resources for the trade.related infrastructure development.
0.2 %onclusion
A political will is re'uired on the part of the advanced developing members to ensure that the
wea&er economies benefit from the regional integration process. Advanced developing
countries in collaboration with their wea&er counterparts may devise fiscal and financial
incentive pac&ages so that regional and international investors find it attractive to invest in
the wea&er countries. The 23C members of SA(TA should continue with their concerted
efforts$ in terms of reforms and addressing supply side bottlenec&s$ so that they can benefit
23 | P a g e
from a bigger regional mar&et. f SA(TA is implemented properly$ then ndia would be
bound to offer transit to the other member states and 8angladeshi exports to ?epal and
8hutan would increase considerably. 9ven the %a&istani and Afghan mar&ets would be more
easily accessible for 8angladesh. (urthermore$ if a deep seaport would be established in
8angladesh$ 8angladesh would be able to earn a considerable amount of revenue by
providing transit to the regions and countries that are land.loc&ed to the eastern and northern
parts of 8angladesh.
Biblio!ra'hy

L 4ossain$ Sharif 7. ()**"). South Asian Free Trade Area: Implications for
Bangladesh. Hniversity of Applied Sciences$ 8erlin$ 8angladesh nstitute of
nternational and Strategic Studies.
L 8ur&i ,aved Shahid. Robertson 1. ,ames. Ali Rashid 7ohammed ()**"). South Asian
Free Trade Area: Opportunities and Challenges.
L Raihan$ Selim ()**<). SAFTA and the Bangladesh Economy: Assessment of Potential
Implications. South Asian ?etwor& 6n 9conomic 7odeling$ 3iscussion %aper ?o. #.
L Abdin ,oynal 7d. ()**"). An Analysis of SAFTA in the Contet of Bangladesh.
8angladesh 3evelopment Research 1or&ing %aper Series (83R1%S).
"''endix
$able 1* $ariff %oncession (ffered 7nder S"P$"
24 | P a g e
N(igures in parentheses represent percentage concessions in tariff rates.
Source5 7ohanty )**#$ p. )+.
$able 0* -on.$ariff and Para.$ariff Barriers faced by Ban!ladeshi Products in Indian
/aret
2% | P a g e
Source5 Raihan )**<$ pp. )!.)).
OOOOOOOOOOOOOOOOOOOOOOOOO
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