SAPTA became operational in 1995 and after its launching, three rounds of preferential tariff reductions were implemented. The SAPTA Agreement provided for the exchange of tariff concessions/preferences among the SAARC nations without a commitment to turn this arrangement into a free trade area by a specified date. SOURCE: i. Tariff cuts by the SAARC countries were not deep. 4951 products were covered during preferential tariff concessions agreed to by SAARC member states in the first three rounds of trade negotiations under SAPTA. The country-wise detail showing the number of products and depth of tariff concessions is as under:
SAPTA Agreement made a distinction between the least developed countries (LDCs) ie Bangladesh, Nepal, Bhutan and Maldives and non-least developed countries (non-LDCs) ie India, Pakistan and Sri Lanka.
The Agreement provided for a special and differential treatment for the LDC members and also included a regional MFN provision. Thus any preference extended within the SAPTA framework by a non-least developed country to another non-developing country was to be extended automatically to all SAPTA members.
During the first and second rounds, trade negotiations between the member countries were conducted on product-to-product basis while in the third round, the negotiations were conducted chapter-wise of Customs tariff. For the fourth round, it was decided that the negotiations as far as possible, be conducted on chapter-wise, sector and across the board basis.
The 10th summit held in Colombo in 1998 decided in principle that in order to accelerate progress under SAPTA negotiations, deeper tariff concessions be extended to products which are being traded actively or are likely to be traded among members. The summit also decided that the local content requirement under SAPTA rules of origin be relaxed.
The tariff concessions/preferences given to the LDCs were higher than that of non-LDC members and many of the products on concession list for the LDCs are different from those under non-LDC members' list of products. Concessions under the first round of SAPTA (SAPTA-1) included 226 tariff lines at the HS 6-digit level.
Thus coverage of SAPTA-1 was very modest as only about 6% of traded goods were covered under it. The issue of non-tariff barriers was also not discussed at all and the tariff cuts were also relatively small considering the higher tariff rates in the region.
The second round covered 1868 tariff lines. The product coverage and proposed tariff cuts were a little bit significant under SAPTA-2. Another important feature of this round was that it considered non-tariff measures also. During the third round, 3456 tariff lines were added. Thus a total of 5550 tariff lines were included in the agreement. The LDC member states within SAARC were offered a large share of such concessions vis-à-vis the non-LDC states. Despite tariff reductions under SAPTA, intra-regional trade in South Asia did not register any noticeable growth in percentage terms as evident form the following table:
=====================================================
Year. Intra SAARC Trade, Intra-regional Trade
in million USD (In Percentage terms)
-----------------------------------------------------
1995 4265 3.91
1996 4929 3.85
1997 4669 3.75
1998 6001 4.43
1999 4806 3.57
2000 5311 3.87
2001 5912 4.3
2002 6769 4.76
2003 9374 5.58
2004 11491 5.20
2005 14115 4.85
=====================================================
==========================================================================
Country Number of Products Depth of Tariff Concession
--------------------------------------------------------------------------
Bangladesh. 572 10% and 15%
Bhutan. 266 10%, 13%, 15% and 20%
India. 2402 10%, 15%, 20%, 25%, 30%, 40%, 50%, 90% and 100%
Maldives. 390 5%, 7%, 10% and 15%
Nepal. 425 10% and 15%
Pakistan. 685 10%, 15%, 20% and 30%
Sri Lanka. 211 10%, 15%, 20%, 30%, 50%, 60% and 75%
--------------------------------------------------------------------------
Total. 4951
==========================================================================
SOURCE: Pakistan offered the largest number of concessions in chemical products. Tariff concessions offered under SAPTA were not substantial. India, apparently, offered the highest margins but considering that the normal tariff rates in India were comparatively higher than those of its partners, the net impact of such concessions remained limited. The number of items negotiated for tariff concessions was although substantial, but most of the concessions were offered in a few selective sectors.
ii. Majority of the items offered concessions were not relevant to the trade interest of other member countries. For example the largest number of concessions offered by Pakistan was in chemical products. It is a fact that many of the products offered concession under SAPTA are not widely traded in the region.
E.N. Mukherji has shown by using intra-regional trade data for 1997 and 1998 for the region that top hundred items at 6-digit HS classification, traded between SAARC members, don't even meet the twin criterion of having adequate demand in receiving countries and adequate supply capabilities in the supply countries. He finds that SAPTA trade negotiations upto third round have accommodated products having a meager potential for concession.
iii. SAPTA was negotiated on product-by-product basis which, prima facie, seems very generous on the basis of number of concessions given but a preferential arrangement can be best judged on the basis of actual trade coverage of such preferences.
Moreover, a product-by-product approach, though allows a certain amount of flexibility, yet it is time consuming. Different trade lobbies working in each member country put pressure on the governments to safeguard the products of their interest and trade liberalisation does not occur on rational basis. Preferential/free trade is hijacked by these vested interests.
iv. Another reason attributable to the limited progress of SAPTA is that the implementation of the scheme mostly remained confined to the issue of tariff cuts. Issues pertaining to the non-tariff barriers were raised on a few occasions but commonly acceptable solutions in respect of such barriers could not be evolved. Tariff concessions alone could not generate any significant gains in the intra-SAARC trade.
v. The stringent rules of origin prescribed under SAPTA were also partly responsible for its failure as these rules required a higher percentage of domestic value addition criteria in the beginning which seriously prevented member countries from meeting the local content requirements of Rules of Origin (ROO) under SAPTA.
Despite the downward revision in the local content requirement, SAPTA rules of origin were still more restrictive as compared with other trade agreements in the region. For example under India - Sri Lanka Free Trade Agreement (ILFTA), products having a domestic value addition of the 35% qualify for preferential market access.
In addition, Sri Lankan Exports having a minimum 10% content of inputs originating from India qualify for preferential market access under a reduced total domestic value addition of 25%.
On the other hand, SAPTA rules of origin prescribed that if the products were not wholly produced or obtained within the member country, the total value of the materials, parts or other inputs originating in non-member states or of undetermined origins which were used in the production of the exported product should not have exceeded 50% of the FOB value and the final processing/manufacturing must have been performed within the territory of the exporting member state.
The non-local input is valued at their CIF prices where obtainable or otherwise at the earliest ascertainable price. The rules thus stipulated a minimum 50% of the FOB value addition to qualify for SAPTA preference. In order to encourage regional value addition, the rules however permitted that if within - SAARC cumulative content was not less than 60% of the FOB price, the product was eligible for SAPTA preference.
The SAPTA rules of origin remained contentious and after much resistance, mainly from India, in 1999 the local content requirement was reduced to 40% for non-LDC members and to 30% for the four LDC members and the cumulative origin requirement was reduced to 50%.
==========================================================================
Rules Before Amendment After Amendment
For Non- For LDCs For Non- For LDCs
LDCs LDCs -
Rule 3(a) Not wholly 50% 40% 40% 30%
produced or obtained
domestic value addition
in exporting country.
Maximum input permitted 50% 60% 60% 70%
for Non-contracting
states (ie from
Outside the SAARC region)
Rule 4: Cumulative Rules 60% 50% 60% 40%
of Origin Aggregate
Domestic Value Addition
in an Exporting Country
including inputs scoured from
within the SAARC region.
Maximum input permitted from. 40% 50% 50% 60%
==========================================================================
SOURCE: The SAFTA agreement contains mechanism for trade liberalisation but the liberalisation may have only a cosmetic effect in view of existing lists of sensitive items. The SAFTA agreement provides that sensitive lists will be reviewed after every four years but these lists are not considered liable to trade liberalisation schedule.
The second lesson is that SAFTA can show an improvement upon its predecessor only with liberal rules of origin. The local content as well as cumulative regional content conditions need to be further relaxed. The third lesson is that reduction in tariffs will not serve the purpose if non-tariff barriers are not removed simultaneously.