What is SAFTA ?

World over, regional and free trade agreements (RTAs and FTAs) are becoming the norm, even as the WTO is in the throes of reconciling differences among membercountries to institute a freer multilateral trade regime. Trade and investment among member-countries of the South Asian Association of Regional Cooperation (Saarc) compares poorly with those within Asean or the EU in the absence of an RTA. Despite the political conflicts in the region, Saarc countries are going ahead with plans to sign an RTA, namely Safta. It is an abbreviation for the South Asian Free Trade Area. It is a proposed FTA between the seven members of the Saarc group. These include Bangladesh, Bhutan, India, Maldives, Nepal, Pakistan and Sri Lanka. Ultimate Goal : It will replace the earlier South Asia Preferential Trade Agreement (Sapta), which was limited in its scope. The ultimate aim of Safta will be to put in place a full-fledged South Asia Economic Union on the lines of the EU. Safta is scheduled for launch in January 2006 and will lead to reduction of tariffs for intra-regional trade among Saarc countries. The agreement incorporates trade in goods. Services and investment are not part of the agreement. Objectives Among its aims are: promoting and enhancing mutual trade and economic cooperation by eliminating barriers in trade, promoting conditions of fair competition in the free trade area, ensuring equitable benefits to all and establishing a framework for further regional cooperation to expand the mutual benefits of the agreement.

to promote the welfare of the people of South Asia and to improve their quality of life; to accelerate economic growth, social progress and cultural development in the region and to provide all individuals the opportunity to live in dignity and to realize their full potential; to promote and strengthen collective self-reliance among the countries of South Asia; to contribute to mutual trust, understanding and appreciation of one another's problems; to promote active collaboration and mutual assistance in the economic, social, cultural, technical and scientific fields; to strengthen cooperation with other developing countries; to strengthen cooperation among themselves in international forums on matters of common interest; and to cooperate with international and regional organisations with similar aims and purposes.

Other Benefits It could lead to enhancement of foreign investment among Saarc nations. The visible spurt in foreign investment within Asean cou-ntries and the increase in investments by India in Sri Lanka and vice versa following the India-Sri Lanka FTA bear testimony to the potential of such agreements in boosting investments. The agreement can be structured to ensure that such investments dont harm the domestic industries of member-nations. RTAs, like the proposed Safta, can also catalyse beneficial industrial restructuring in member-countries through cross-border corporate marriages and acquisitions. What is NAFTA? The North American Free Trade Agreement (NAFTA) is one of the most powerful and wide-reaching treaties in the world. It governs the entire spectrum of North American trade and has at its roots hemispheric cooperation on a scale never before seen. NAFTA is a treaty between Canada, Mexico, and the United States that was designed to foster greater trade between the three countries. NAFTA has been in effect since 1 January 1994. It has since been updated with two major additions, the North American Agreement for Economic Cooperation (NAAEC) and the North American Agreement for Labor Cooperation (NAALC). A very recent addition was the Security and Prosperity Partnership of North America, designed to foster cooperation on issues of national security. One important thing that NAFTA did right away was to eliminate a large number of tariffs on goods shipped between the three countries. American goods, mostly, were being sold to Canada and especially to Mexico and carried with them a high tariff. Mexico and Canada did not wish to pay the tariffs, so the goods were not sold in North America. Prime examples of these goods were cars, car parts, computers, and food. As a result of NAFTA, Mexico especially has purchased goods from the US in much greater numbers than before. This saves Mexican companies money on imports, and it saves American companies money on export shipping costs. Canada has benefited in this way as well, although not nearly to the extent that Mexico has. One prime benefit of NAFTA is that goods shipped between the three countries have labels printed in three languages: French, Spanish, and English. The English is for Canada and the US, the Spanish is for Mexico, and the French is for Quebec and other French-speaking parts of Canada. Another prime benefit, at least for Mexico, is that the NAFTA agreement ostensibly also encourages greater immigration between the three countries. In recent years, the increased immigration from Mexico to the US has become even more of a flashpoint than it had been previously. The same sort of relationship does not exist between Canada and the US or between Canada and Mexico.

Can SAFTA become NAFTA ? FREE trade agreements (FTAs) are becoming common and India is not lagging behind either. Once a protagonist of protectionism and a staunch supporter of the World Trade Organisation (WTO), India is now looking at FTAs, especially with East Asia, as a new axis for development of trade and investment. Within a year the country has signed four FTAs one bilateral (with Thailand) and three multilateral (one each with BIMSTEC, the Asean and SAFTA). Of these, SAFTA (South Asian Free Trade Agreement) has been relatively successful and is perhaps the only FTA which has served to reduce political asymmetry among the South Asian Association of Regional Cooperation (SAARC). Two factors pushed India into accelerating its FTA drive. One, the breakdown of Soviet Union and the prolonged stagnation in the West, which forced India to look East-ward. But efforts to promote East Asia as a major trade partner failed as India was not part of any regional trade bloc. And, two, the emergence of China as a global economic and trading powerhouse and its keenness on FTAs, particularly with the Asean. Though the FTAs that India has entered into are good news, there seems to an underlying feeling of suspicion. For instance, following the FTA with Thailand, the domestic auto component industry is jittery, as its Thai counterpart is better placed, thanks to the liberal domestic tariff system which has resulted in a lower cost structure. And with regard to the FTA with Singapore, which is to be inked, there are already tradediversion fears, of Chinese assembled goods finding their way into the country via Singapore, which is no manufacturing centre. And because of the current political situation, there is scepticism about SAFTA as well. Economic benefits apart, SAFTA would enrich political understanding among the members, something SAARC has found difficult to achieve. It is true that the immediate impact of SAFTA is blurring as the member-nations are endowed with similar assets abundant labour and natural resources. But barring India, there is scarcity of technology and capital. SAFTA members can reap economic benefits through enhanced cross-border trade. Thus far, because of high tariffs and cumbersome Customs procedures, much trade is taking place illegally through smuggling, for instance. With better capital and technology, India would have a bigger role to play in SAFTA, just as the US in NAFTA (North American Free Trade Agreement). India is the biggest exporter to Sri Lanka, accounting for 10-15 per cent of its imports, Bangladesh (35 per cent), Bhutan (over 80 per cent) as also Nepal. By contrast, the major export destinations of these countries are the US and Europe. It is surprising that despite this trade pattern, SAFTA has become reality. One big constraint for exports of these countries to India is the high tariff, especially on textiles and garment. These countries enjoy concessional tariff in the US and Europe under the quota regime. But once quotas are lifted, in 2005, these countries will face severe competition from China in the American and European markets and India may emerge a big market, hitherto unviable to them because of the high tariff. Besides, with

the rupee strengthening against the dollar, export earnings from India will increase. Therefore, it would not be right to infer that only India will gain from SAFTA. How best SAFTA can be the used to foster closer economic ties among membercountries can be gleaned from NAFTA, where also there is sizeable disparity among the members the US and Mexico, for instance. Unlike the EU, NAFTA was the first major FTA between developed and developing nations. Mexico's per capita GDP is only a seventh of the US'. At the start, the economic asymmetry between the countries roused concern over the likely success of NAFTA. But it has turned out to be a windfall for both the countries. NAFTA emerged a strong platform for Mexico to boost exports and supplement its economy, which was wobbling on a large trade deficit. NAFTA helped in Mexico's export recovery through duty-free trade with the US. Over the past decade, Mexico's export to the US has risen four-fold. And to the surprise of many, Mexico turned its trade balance with the US in its favour in the post-NAFTA period. How did Mexico succeed on the NAFTA platform, despite being the only developing nation in the trilateral FTA? Mexico became a cheap workshop for many US multinationals by cashing in on investment, labour and service issues yet to come under the WTO regime. These resulted in huge foreign direct investment (FDI) by US multinationals, which set up production units in Mexico and imported back the goods duty-free into the US, thus taking on the increasing competition from Asia. A number of US firms established maquiladora (units set up with incentives from the government to make goods mainly for exports) operations along the US-Mexican border. Maquiladora accounts for 53 per cent of Mexico's total export. NAFTA has become the springboard for Mexico to export to the global market. The issues relating to investment in NAFTA, which guaranteed national treatment and exemption from export obligations, domestic procurement and transfer of technology prompted the US to invest heavily in Mexico. The latter had to accept the FTA on these terms, as its rather rudimentary legal system was turning out to be a barrier in attracting FDI. Therefore, NAFTA helped Mexico spur not only investment but also investmentrelated exports to the world's biggest economy. This shows that a developing nation in a multilateral FTA bloc can reap benefits and not have the fear of developed nations having the upper hand. But unlike NAFTA, the issues covered under SAFTA are not comprehensive; the scope is confined only to trade in goods. Cross-border trade among member-countries would get energised only if issues such as treatment of foreign investments, movement of labour and trade in services are included in SAFTA.