Coming closer together for trade

Dr. Prabhash Ranjan

Deeper economic integration of SAARC nations will help sustain the growth rate and ensure a free flow of goods, services and capital.

The recently concluded SAARC Finance Ministers’ conference in Islamabad was in the news in India, not so much for the issues discussed but for the fact that Finance Minister Arun Jaitley did not attend the event. While Mr. Jaitley might have had his own reasons not to travel to Pakistan, perhaps it was improper for India to use the SAARC platform to send a message to Pakistan. Also, given the fact that this SAARC Finance Ministers’ meeting will soon be followed by the 19th SAARC summit in Pakistan in November this year, Mr. Jaitley should have attended the meeting.

The SAARC Finance Ministers’ conference highlighted key issues pertaining to regional economic integration and reiterated the commitment to establish a South Asian Economic Union (SAEU). The proposal to establish a SAEU by 2020 was made way back in 1998 in a report prepared by the SAARC Group of Eminent Persons (SGEP). The SGEP report also proposed that as a precursor to SAEU, a South Asian Customs Union (SACU) should be established by 2015 whereby all South Asian countries will maintain common tariff and non-tariff barriers on imports from all non-member countries. South Asia is the fastest growing region in the world, according to the World Bank, with economic growth projected to increase from 7.1 per cent in 2016 to 7.3 per cent in 2017. Deeper economic integration will help sustain this growth rate by creating an integrated South Asian market ensuring a free flow of goods, services and capital. Close to two decades after the SGEP report, and as we approach yet another SAARC summit, it is imperative to critically assess the efforts made towards achieving economic integration.

Trade liberalisation

The South Asian Free Trade Area (SAFTA), enforced exactly a decade back, has been hailed as an important milestone on the road to SAEU. However, SAFTA has, at best, made a very modest contribution in boosting intra-SAARC trade. At the time of its adoption, all South Asian countries decided to place many products in what is known as a ‘sensitive list’ to exclude them from tariff liberalisation. Consequently, as a study shows, 53 per cent of intra-regional import trade was excluded from tariff liberalisation under SAFTA in 2006.

In 2012, under phase two of tariff liberalisation under SAFTA, countries agreed to prune their sensitive lists. However, this trimming was not significant. For example, while India brought down the number of products in its sensitive list by 95 per cent for least developed countries (LDCs) of South Asia (Nepal, Bhutan, Bangladesh, and Afghanistan), it reduced its sensitive list for non-LDC countries only by around 30 per cent. Pakistan shortened its sensitive list for all countries by about 20 per cent. More is expected from the two biggest economies in the region.

Additionally, intra-SAARC trade also suffers from complex non-tariff barriers, poor infrastructure, lack of connectivity and bureaucratic red tape at borders. This cumulatively increases the costs of doing trade in South Asia. Consider this: it takes 35 days for a container to go from Delhi to Dhaka because it has to go via Colombo or even Singapore whereas it can reach in five days if there is direct connectivity. The recently signed Motor Vehicles Agreement between Bhutan, Bangladesh, India and Nepal is expected to improve connectivity but only on the eastern side of South Asia. No wonder, according to World Bank, intra-SAARC trade is even lower than 5 per cent of total trade whereas in East Asia it is 35 per cent and in Europe 60 per cent. Similarly, trade in services in South Asia is very low notwithstanding the signing of the SAARC Agreement on Trade in Services in 2010, aimed at liberalisation of trade in services.

Investment liberalisation

An integral component of economic integration is investment liberalisation. Despite its potential, South Asia has failed to emerge as a prime destination for foreign investment. The World Investment Report, 2016, of the United Nations Conference on Trade and Development reveals that while FDI inflows to South Asia increased from $36 billion in 2013 to $50 billion in 2015, it is significantly less compared to East and Southeast Asia where these numbers stand at $350 billion and $448 billion for 2013 and 2015, respectively. South Asia’s share in world FDI inflows in 2015 stood at a meagre 2.9 per cent whereas East and Southeast Asia attracted 25 per cent of world FDI flows.

A key characteristic of FDI inflows in East and Southeast Asia is the ever-increasing intra-regional FDI inflows. Within the Association of Southeast Asian Nations (ASEAN) region alone, intra-ASEAN FDI accounts for 18 per cent of total FDI flows in the region. On the other hand, barring few success stories of Indian garment companies investing in Bangladesh, intra-SAARC FDI is very low.

Arguably, a SAARC investment treaty, on the lines of the ASEAN investment agreement that has helped increase intra-ASEAN investment, will help further intra-SAARC FDI. In the just-concluded SAARC Finance Ministers’ meeting, all countries renewed their commitment to finalise the investment treaty, which is pending since 2007. However, India adopting a new model bilateral investment treaty (BIT) in 2015 has thrown a spanner in efforts to have a SAARC investment treaty. India’s model BIT offers limited protection to foreign investment and also limited means to enforce their rights. Will India ask all countries to base the SAARC investment treaty on the Indian model? If that happens, the investment treaty will not have any noticeable impact on boosting intra-SAARC FDI inflows.

India should take the lead

Evidently SAARC has struggled to achieve effective economic integration and thus denied to itself numerous economic benefits. SAARC’s top leaders, when they meet in Pakistan later this year, need to demonstrate the political will to walk swiftly on the road to deeper economic integration by at least ensuring that SAARC becomes a duty-free area. India being the strongest economy in the region should take lead in this regard.

There is some talk that Mr. Modi might not travel to Pakistan for the summit. This would be extremely unfortunate and would go against Mr. Modi’s own ‘neighbourhood-first’ policy. Deeper trade and investment links will allow Indian corporations to make market- and efficiency-seeking FDI in South Asia.

This, in turn, will infuse fresh capital, create jobs in other countries and also boost intra-company trade. Thus, Prime Minister Modi, in Pakistan, building on modest past successes, should make a strong pitch for deeper SAARC economic integration.

Dr. Prabhash Ranjan is an Assistant Professor in the Faculty of Legal Studies, South Asian University, New Delhi. Views expressed are personal. The original article appeared in the Hindu, the link of which could be accessed by clicking HERE.