South Asia Free Trade Agreement - Essay Example

SAFTA Table of Contents Introduction 3 South Asian Free Trade Agreement 3 Conclusion 6 Reference 8 Introduction The reorientation of the trading policies towards a wider economy having rapid economic growth centred on the Asian regions has resulted in a new direction of production and trade worldwide. The contribution of Asia to the GDP of the entire world has established the triumph of this economy on the globe market. Back in 1980, Asia’s contribution to the world GDP had been 14 percent; while in 1996, the figure had been 24 percent (Hellvin & Nilsson, 2000). It has also been noted that the countries in Asia are heterogeneous in many aspects including income levels, size and openness of the market. To encourage multilateral trade in South Asia, in 2004, SAFTA (South Asian Free Trade Agreement) was signed. The agreement aimed to create a free trade zone among the participating seven countries like India, Nepal, Bhutan, Pakistan, Sri Lanka, Bangladesh and Maldives (EconomyWatch, n.d.). This paper aims to offer an insight into the role and functioning of SAFTA. South Asian Free Trade Agreement The trading blocs are meant to create a free trade zone for multilateral trading among several countries belonging to a specific zone with an objective to enhance the business condition by establishing coordination among the member states. One of the objectives of SAFTA agreement has been to impose ‘zero customs duty’ in the trading of goods and services by the year 2012. The agreement has been initiated to offer an open trade environment which is expected to boost the economy of the respective region. Intra- industry trade plays a significant role in integrating the regional activities in the South Asian region. Research studies have suggested that in the South Asian region, the nature and magnitude of trade has been quite low for a large number of products. The intra industry trading in this region takes place for a few products and that too in an inconsistent manner. It has been noticed that the intra regional trading is mostly dominated by leather products, clothing and textiles and basic machinery goods. As per the World Bank, it is wrong to expect trade and growth in one region to get enhanced by regional trade agreements. The multilateral trade agreement involves a number of transaction costs which include search and information cost, negotiation costs, policy enforcement costs, custom fees and insurance costs. Search and information cost refers to the cost incurred in identifying the goods with profitable trade opportunities. Cost is also incurred to determine the availability of different goods in the market. Among the significant transaction costs, negotiation cost is one of its kinds. Countries, while developing a multilateral agreement incur this negotiation cost to develop a contractual trade agreement. Proper alignment of the agreement policies in the interests of the participating countries is always desirable. The agreement is a legal contract which ensures the compliance of the trading deals in accordance with the existing rules and regulations of the regional trade group. A cost is involved to ensure that the participating countries abide by the rules and regulations. A new regulation from the participating members would also incur a certain cost for the trading bloc. Custom duty fees are charged on the transaction value of the goods. Insurance charge costs are incurred when there is any unsuccessful completion of projects. The custom duty fees have been levied in the trading zone of SAFTA to ensure a free trading among the regional countries. Introduction of custom practices which are quite similar have helped the trading bloc to minimise certain transportation cost incurred previously. However, a bird’s eye view on the South Asian trade would reveal that while the whole region is looking towards SAFTA for an enhanced trading environment, the integration of this trade region is very much limited by the inefficient integrated and improved transport system. Researchers have suggested that the region is very much homogeneous in its socio cultural environment and possesses huge resources (De, 2004). In the wake of globalisation, an integrated regional trade situation can boost up the intra regional trade among the participating countries and ensure a faster growth in the economy. The countries must work together to improve the infrastructural facilities. This would in turn promote the intra regional as well as international trade in South Asia. Changes in the capital structure of the population would fetch economic growth in long term. Capital, labour and infrastructural facilities of a region are the means which pave the way for inter-regional and international trade opportunities. The responsibility to develop the means has been given to a number of institutions; some of which are public and most of them are private. Their role is to transform the resources to the desired trade output. Infrastructure encourages trading in two ways; direct contribution in the form of lesser transportation cost and enhanced productivity which indirectly enhances the amenities that improve the life style of the population. Lack of such facilities can result in low productivity in that region. This is one of the significant reasons which explain the differences in the prosperity of various countries. The relationship between infrastructure and economic growth in any particular region is quite complex in nature. It directly affects the production and consumption nature of the nation. However, apart from this it also encourages employment growth by creating opportunities for additional employment. The resource capabilities of different South Asian countries are different in nature. The required infrastructure would vary across countries. Enhanced infrastructures coupled with increased cooperation to maintain an integrated trade environment can pave the way for success of SAFTA. Under the agreement of SAFTA, the participating countries are told to make a sensitive list of products. However, it has been mentioned that longer is the list of sensitive products, lesser would be the trading opportunities. So it has been suggested to keep the sensitive list as short as possible to encourage trading of more goods, both inter-regional and international. Even SAFTA can result in horizontal specialisation among the participating countries (Bashir, Baksh & Imdad, n.d.). For instance, Sri Lanka can act as the key producer of the rubber industry. In the similar manner certain countries can specialise in certain tradable products and gain competitive advantage in their respective product. This would not only reduce the information cost in the inter-regional trading but at the same time the South Asian countries would be able to gain the leading positions worldwide in the trading of various commodities. SAFTA’s tariff reduction program demands zero to five percent tariff reduction. Apart from this, reducing the cost of telecommunication, finance, retail and wholesale commerce and services can result in higher productivity (Jabbar, 2006). Reducing the transition costs by facilitating trade will enhance not only the interregional trade operations but also the cross border relationship. Enhanced homogenous custom system, improved efficiency and developed infrastructure will help in the development of inter-regional as well as international trade opportunities. Conclusion A pessimistic air prevails among the smaller countries in the South Asia that tariff liberalisation will only prove to be advantageous for the developed countries; the non developed ones would suffer the negative impacts of the same. This has increased the sensitive list of goods (Dash, 2008). However, the countries must understand that such hostile steps will limit the income of that region. Economic development is only possible if the participating countries develop a responsive environment for trading. SAFTA is trying to create a holistic approach that will deliver long term benefits to the participating countries at the expense of short term costs. Since the region possesses certain inherent advantages like homogeneity in the socio-cultural environment, one can expect the free trade to be successful in near future leading to a fast economic growth in that region. However, there still exists certain barriers like high transaction cost, issues in accessing the global market etc. Nonetheless, it can be expected that regional trade expansion, enhanced productivity and improved export quality would benefit the participant countries not only in the inter-regional trade activities, but will also lead the way in the global market. Reference Bashir, M., Baksh, K. & Imdad, A. No Date. Prospects Of Trade Under SAFTA. [Pdf]. Available at:https://www.gtap.agecon.purdue.edu/resources/download/2970.pdf [Accessed on May 13, 2010]. Dash, K. Regionalism in South Asia. NewYork:Routledge, 2008. De, P. 2004. Transaction Costs as Barriers to Economic Integration in Asia. Available at:http://www.ris.org.in/dp77_pap.pdf [Accessed on May 13, 2010]. EconomyWatch. No Date. SAFTA. Available at: http://www.economywatch.com/country-grouping/safta.html [Accessed on May 13, 2010]. Hellvin, L. & Nilsson, L. April, 2000. Trade Flows Between Trading Blocs:The Case of the EUs Trade with Asia and NAFTA. [Pdf]. Available at: http://www.snee.org/filer/papers/36.pdf [Accessed on May 13, 2010]. Jabbar, M. 2006. SAFTA. Available at:http://www.cuts-citee.org/PDF/RECSAFinal-Paper3.pdf http://www.snee.org/filer/papers/36.pdf [Accessed on May 13, 2010]. Read More