South Asian Free Trade Area - Some Issues

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South Asian Free Trade Area- Some Issues

• Sanath Jayanetti

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Outline

• 1. Regional Trading Arrangements and the WTO
• 2. Existing Trading Arrangements Case of Sri
  Lanka
• - Broad summary of all agreements, Sri Lanka,
  June 2005 (8-digit level)
• 3. SAFTA Some issues of concern
• - Substantial trade
• - RoO
• 4. Sri Lankas FTAs with India and Pakistan
• 5. SAFTA Some of the Challenges
• 6. Moving forward/Conclusion

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Regional Trading Arrangementsand the WTO

• Non-discrimination is the cornerstone of
  multilateral trading order as envisaged by the
  MFN Principle (Article 1) and National Treatment
  Principle (Article III) of GATT
• MFN Principle allows an exception for regional
  trade initiatives under the GATT Article XXIV and
  the Enabling Clause GATS Article V with respect
  to trade in services
• According to Article XXIV there should be a plan
  and schedule and substantially all the trade
  should be included in the FTA arrangement

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Existing Trade Arrangements

• India Sri Lanka Free Trade Agreement
• Pakistan Sri Lanka Free Trade Agreement
• SAPTA
• SAFTA
• Generalized Scheme of Trade Preferences
• Bangkok Agreement

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Broad summary of all agreements, Sri Lanka June
2005 (8 digit level)

• ISFTA PSFTA SP B SL S GSTP BK
• Negative 1831 1145
• Free 2034 763 7 0 6 0 2 11
• Positive 2541 4498 194 25 155 5 86 297
• Note ISFTA-India Sri Lanka Free Trade Agreement
  PSFTA-Pakistan Sri Lanka Free Trade Agreement,
  SP-SAPTA for developing countries B-Bangladesh
  SL-SAPTA LDC S-SAARC GSTP-Generalized Scheme of
  Trade Preferences B-Bangkok Agreement
• Source Authors calculations

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SAFTA Some issues of concern

• Substantial Trade
• 20 of tariff lines to be permitted for inclusion
  for non-LDCs
• Items high on the present trading list will most
  likely be in the negative list (substantial
  trade?)
• Sensitive List to be reviewed every 4 yrs
• No commitment unlike ASEAN to phase out list
• This will make the effective protection very high
  for those industries in the negative list and may
  lead to inefficient sectors at a high cost to the
  country

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SAFTA Some issues of concern (cont.)

• RoO
• RTAs require RoO to determine whether a
  consignment of goods is eligible for preferential
  treatment or not
• Success of trading arrangement in terms of
  net-trade creation and welfare would depend a
  great deal on its RoO
• RoO might force producers in the FTA to source
  their inputs from high cost regional producers of
  intermediateries
• RoO can be used as a protectionist tool
• Has to be simple

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SAFTA Some issues of concern (cont.)

• RoO
• VA (percentage test)
• may create bias against efficient producers
  more likely to have trade diversion
• Change of tariff heading (CTH)
• origin? 4-digit or 6-digit? Eg. Tea

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Indo Lanka Free Trade Agreement
Sri Lanka
India

• 100 removal of tariffs on 1351 items upon entry
  into force
• 429 items in the negative list
• Rest 2797 items follow phased removal of tariffs
  up to 100 Within 3 years
• 25 reduction for textiles
• 50 fixed tariff concession for imports of tea
  from Sri Lanka on a preferential basis annual
  max. quota upto 15 mil. Kgs.
• 50 fixed tariff concession for imports of
  garments from Sri Lanka subject to max. annual
  quota of 8 mil. pieces of which minimum of 6 mil.
  pieces should contain Indian fabrics (no single
  category should exceed 1.5 mil. pieces per annum)

• 100 removal of tariffs on 319 items upon entry
  into force
• 1180 items in the negative list
• 50 reduction in tariffs for 889 items upon entry
  into force with phased out tariffs upto 70 at
  the end of the 1st year 90 at the end of 2nd
  year and 100 at the end of 3rd year
• Remaining 2724 items removal of tariffs will be
  phased out not less than 35 before the end of
  the 3rd year not less than 70 before the end of
  the 6th year not less than 100 before the end
  of the 8th year

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Indo Lanka Free Trade Agreement (cont.)

• ROO criteria To receive tariff concessions, a
  product should either be wholly obtained in a
  country or should go through a substantial
  transformation within a country, if it contains
  any material imported from a third country.
• In the FTA, the ROO criterion has been fixed at
  35 per cent of FOB value. Hence, a product with
  a minimum domestic value addition of 35 per cent
  of the FOB value would become eligible for tariff
  concessions to be sourced from any other country.
• The ROO is further reduced to 25 per cent,
  provided that the product exported from Sri Lanka
  contains a minimum of 10 per cent content
  originating from the importing country (as
  imported from India).

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Indo Lanka Free Trade Agreement CEPA

• Widened to include more goods, and deepened to
  improve market access through trade facilitation
  and removal of non-tariff barriers
• Agreement on trade in services
• Measures for promotion of investment in each
  others countries
• Enhance cooperation in areas such as education,
  education, transportation and ICT.

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Pakistan - Sri Lanka FTA
Pakistan
Sri Lanka

• 100 tariff removal for 102 tariff lines upon
  entry into force
• 697 tariff lines on the negative list
• Will eliminate 4527 tariff lines of 5224 at
  6-digit HS code over five years. 30 tariff
  reduction by the end of the 1st year, 40 by the
  2nd, 60 by the 3rd, 80 by the 4th and 100
  after 5 years
• TRQ for 6000MT of Basmathi rice and 1000MT of
  potatoes free of duty per annum.

• 100 tariff removal for 206 tariff lines upon
  entry into force
• 540 tariff lines on the negative list
• Will eliminate the customs tariff on 4,680 tariff
  lines out of a total of 5,224 tariff lines at
  six-digit level, over a period of three years.
  34 by the end of the 1st year, 64 by the 2nd
  and 100 after three years.
• Special Tariff Rate Quotas (TRQs)10,000 MT of
  tea free of duty per annum 1200 Tons of betel
  leaf per annum at preferential margin of 35
• TRQ of 35 duty concession for 200,000 pieces for
  each of 21 categories of Sri Lankan Apparel
  products without RoO on fabrics.
• 20 preferential tariff margin on ceramic tiles
  and tableware (No complete tariff elimination).

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Pakistan - Sri Lanka FTA (cont.)

• Rules of Origin require 35 domestic value
  addition. Or 25 Sri Lankan value addition along
  with 10 using Pakistani imports.
• Investment and services will be drawn into the
  process of liberalization with the CEPA.

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SAFTA Some of the Challenges

• Bilateral FTAs in South Asia
• Other more dynamic regional/bilateral deals

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Moving forward/Conclusion

• Negative lists not larger than bilateral negative
  lists, negative lists should be phased out
• ROO similar or better than bilateral with
  regional cumulation
• Importance of incorporating bilateral agreements
  into SAFTA
• No paratariffs or NTBs
• No TRQs
• Investment agreements to facilitate trade
• Trade facilitation
• Indias lead role

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Thank You