Economic cooperation among South Asian countries is primarily driven by increasing intra-regional trade. That's why, within less than a decade of signing the charter of the South Asian Association for Regional Cooperation (SAARC) in Dhaka, the member countries also decided to sign a regional trade pact to provide preferential treatment to each other in selected commodities. Thus, they formally signed the South Asian Preferential Trade Agreement (SAPTA) in 1993 with a positive list negotiation approach. Bangladesh, Bhutan, India, Maldives, Nepal, Pakistan and Sri Lanka are the countries.
Sri Lanka mooted the idea, and the first round of concessions under the preferential trade deal came into effect in 1995, ten years after the formal lunching of the regional cooperation platform in Dhaka. The deal was also supposed to establish a free trade area in the region and a customs union in the future. The value of intra-regional trade stood at $4.36 billion at the end of 1995, which was $2.56 billion in 1993. Members also ended the last round of tariff concessions under the SAPTA agreement in December 2002, when the value of intra-regional trade stood at $7.45 billion.
SAPTA has been a limited success as a small number of products were negotiated under the pact. It was, however, necessary to move ahead for broader trade concessions. Accordingly, with cautious enthusiasm, seven member states of the SAARC in 2004 signed a framework agreement on the South Asian Free Trade Area (SAFTA), and the year witnessed around $13 billion in intra-regional trade in goods. The expectation was that regional cooperation in trade would be advanced in a positive manner.
Despite various obstacles and differences of opinion, SAFTA came into effect in 2006 as members started a trade liberalisation program (TLP) under the agreement. Afghanistan joined the SAARC in 2007 as the eighth member and subsequently became a partner of the SAFTA. Following the negative list approach, meaning products appearing in the lists of the countries are not eligible for tariff reduction, SAARC countries have been implementing the agreement by issuing required customs notifications. Though the members completed their respective TLPs in the first and second phases by cutting down many products in the sensitive lists, the progress in the third or final phase is almost stalled now.
Since 2015, no meeting on the SAFTA committee of experts responsible for reviewing the progress in TLP has occurred. Moreover, after the postponement of the 19th SAARC summit, scheduled to be held in Pakistan in 2016, any progress regarding regional trade cooperation also came to a standstill. The full implementation of SAFTA has become uncertain, and the ambitious goal to establish a customs union in South Asia now seems to be a distant dream. The next step, or establishing a common regional market, seems unviable. Thus, the ultimate goal, quite overambitious no doubt, of setting a common economic and monetary union is impossible.
A critical question in this connection is whether it is possible to break the impasse of SAFTA and move ahead. Having intra-regional trade worth $40 billion last year, which is around 7.20 per cent of the region's total international trade, the current geopolitical reality of the region provides no optimistic answer to the question. The India-Pakistan rivalry, especially in the area of national security, has intensified over the decades, making SAARC almost dysfunctional. Over the last decade, India has taken a strong position to isolate Pakistan in the regional forum and give more focus on BIMSTEC. Pakistan also opposes various SAARC initiatives apprehending that those are India-dominated moves.
Moreover, from the beginning of the SAFTA, Pakistan has denied giving the Most Favoured Nation (MFN) status to India. Though India gave the MFN status to Pakistan in 1996, a year after the formal inception of the World Trade Organization (WTO), Pakistan never reciprocated. However, in 2004, a move was made that was not realised. Finally, in 2019, following the terrorist attack in Pulwama in Jammu and Kashmir, India also revoked the MFN status to Pakistan. MFN is the first clause in the General Agreement on Tariffs and Trade (GATT), and all members of the WTO are generally obliged to give MFN to all international trade partners to ensure non-discriminatory trade among them. Without resolving the MFN status, little will advance in the near future in Indo-Pak bilateral trade and regional trade, although both countries are trading indirectly via a third country, the UAE, Dubai, to be precise.
Another difficulty is that SAARC members are more engaged in bilateral free trade initiatives. There are India-Sri Lanka and Pakistan-Sri Lanka BFTAs and Afghanistan-India and Bangladesh-Bhutan PTAs. Bangladesh and India are now negotiating a Comprehensive Economic Partnership Agreement (CEPA). Both Nepal and Bhutan have bilateral trade agreements with India. Moreover, most of the SAARC countries are common members of more than one regional trade agreement (RTAs). Bangladesh, India and Sri Lanka are members of the Asia-Pacific Trade Agreement (APTA) along with South Korea and China. Again, five SAARC members -Bangladesh, India, Sri Lanka, Nepal, and Bhutan - are members of the Bay of Bengal Initiative for Multi-Sectoral Technical and Economic Cooperation (BIMSTEC) along with Myanmar and Thailand. All these create a kind of 'spaghetti bowl effect', which indicates the multiplication of FTAs. Some analysts also identified the SAFTA rules of origin (ROO) as a barrier to progress due to its stringent nature.
As SAFTA is entirely focused on trade in goods, SAARC countries, in the Sixteenth Summit in Bhutan in 2010, signed the SAARC Agreement on Trade in Services (SATIS). The idea was to promote the trade in services in the region. Though the members exchanged their requests and offer lists, there has been no progress since 2015.
One thing is, however, clear. Countries in the region will continue to enhance their trade in goods and services through bilateral, regional and multilateral mechanisms. The experience of SAFTA in the last one and half decades shows that though the members are unlikely to abandon the deal, they will put less time and energy into breaking the impasse.
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