Regional Free Trade Area · Regionalism · SAARC · South Asia

Achieving Economic Integration of South Asia

Achieving Economic Integration of South Asia

Md. Joynal Abdin

Diplomacy & Foreign Affairs Magazine, New Delhi, India Volum 11, Issue 5, May 2013

Though South Asia covers 4,488,300 sq kms of the world’s surface area with a population of 1.5 billion, still it has only a negligible share of the world’s total volume of trade. Most of the people of this region are living below the poverty line. Only mutual initiatives towards economic integration can play a vital role in upgrading the standards of living of the poor people.

Economic integration in general is a process of removing progressively the discriminations which occur at the national borders. Such discrimination may affect the flow of goods and services and the movement of factors of production either directly or through economic activity via the factor of production.

Academicians have predicted two opposite outcomes, both positive and negative. Negative effects include the possibility that the infant industrial sector may not survive the open market competition or that the sick industries might face ruin. On the other hand, positive effects in the short-run include inland ‘trade-creation effects.’ But that must outweigh trade diversion effects in order to achieve beneficial trade liberalization. However, apart from short-run benefits, there are also the long-run benefits such as greater technical efficiency due to greater competition, larger markets, higher consumer surpluses, and more foreign investments.

There are five main stages of regional integration such as free trade areas, customs unions, common market, economic union and total economic integration. Such stages are the outcome of policy decisions taken by regional inter-governmental forum and/or supranational institutions in order to affect the depth and breadth of regional integration.

The meaningful integration through increased participation in the global/regional economy generates a lot of benefits. These include:

There is efficient allocation of resources due to the changing production patterns promoting comparative advantage;

Domestic competition gains international standards of efficiency;

Wider options are available to consumers;

The ability increases to tap international capital markets for smoothing consumption in the face of short-term shocks (as well as to achieve higher long-term growth; and,

There is exposure to new ideas, technologies, and products, etc.

Our journey through South Asia Free Trade Arrangement (FTA) and some other existing initiatives to form more FTAs among the member countries created the awareness for economic integration. But we must have to remember that there is a long way to reach the destination. Proper initiatives, commitments and timely actions are required to have success.

In south Asia, almost all the countries have some strengths and weaknesses. But all limitations can be overcome, if they share their strengths among themselves. Private sector is the only key player in this Endeavour under the prevailing global economic dispensation.

Actions towards economic integration in South Asia:

BFTAs: Only two bilateral free trade arrangements (BFTAs) are in operation in South Asia namely, India-Sri-Lanka BFTA, and Sri-Lanka-Pakistan BFTA. The proposals for establishing India-Pakistan BFTA, Pakistan-Bangladesh BFTA and India-Bangladesh BFTA are under consideration. The steps so far are encouraging but not up to the mark for economic integration.

SAFTA through South Asian Preferential Trade Arrangement (SAPTA): Introduction of South Asian Free Trade Area (SAFTA) was a historic action by the South Asian countries to facilitate trade liberalization and later formation of SAFTA. South Asian leaders should realize the importance of an effective SAFTA in the light of European Union (EU).

Role of private sector: All arrangements of economic integration are bound to fail if private sector does not play its role effectively.

Private sector has to play the final game because they are the doers. They have to guide the government about how they might achieve their expected benefit. They have to bring the problems they face to the notice of the government in doing trans-border business among the signatory states. Government will communicate these problems to be solved by the state concerned.

Inputs for any technical or business negotiation have to be supplied by the business community who are actually doers of the job. These inputs can be used as core text of the speech of the ministers concerned in the forum and taking necessary measures to farther advancement.

A. Barriers removing: Usually there are three types of problems in trans-border business. These are – tariff barriers, non-tariff barriers and non-routine barriers. Tariff barriers are getting removed according to the agreement declarations but non-tariff barriers may be more effective in some cases. On the other hand, some new problems are arising day by day. These may be for short period, though those may be more dangerous than any others. These types of problems may be addressed as non-routine barriers. First steps towards economic integration should be to remove all sorts of barriers to international business.

B. Negative list: A country must think of its own industries but those should not be used as barriers to the major exportable goods from other countries. If any common product is there, market should be opened up to face competition. We must have to remember that open competition increases efficiency. Some may argue that infant or sick industries have to be protected. On this score, we must think about the strategic advantage. If any industry has strategic advantage, it will have to continue; otherwise, it will die even after lots of subsidies. For example, in Bangladesh, the readymade garment (RMG) is the energetic sector from the day it was born in 1980s. But jute remained in infancy since the British period. However, at the same time some jute mills are also making enough profit.

C. Rules of origin: Rules of origin must not be more stringent than that prevailing under SAPTA. The Federation of Bangladesh Chambers of Commerce & Industry (FBCCI) therefore advocates non-restrictive and simplified rules of origin, based on value addition criteria (summation of freight on board (FOB) value of exports – summation of cost insurance freight (CIF) value of imports >or = 30 per cent) to match their industrial capabilities as in SAPTA, with derogation of 20 per cent value addition for RMG and other such labour incentive exports products.

D. Free Movement of People: Till now visa procedures of SAARC countries is very complicated. To facilitate economic integration at first free movement of goods, services, investment as well as people has to be ensured. Primarily visa system should make easier and intra-SAARC connectivity should be ensured.

E. Recommendations: The following trade facilitation measures should be implemented as an obligation to ensure enabling trade policy and governance for smooth and speedy movement of goods across the borders which can make FTA effective as well as work to build confidence among the nations, which lead us towards the next step of economic integration:

Bangladesh, India, Nepal and Bhutan have to be connected through functioning roads and transit facility should be ensured. More generally, we can say that trucks from any country should have the right to enter any signatory state without prior permission with legal goods.

Cross-border trade regulations and documents do and to be harmonized by an end date.

A South Asian Association for Regional Cooperation (SAARC)-harmonized tariff nomenclature at eight digit level should be created based on the Harmonized Commodity Description and Coding Systems (HS) of the World Customs Organization.

There should be online publications of relevant trade regulations and procedures, including fees and charges, in the local language and in English.

Simplification of customs procedures do need to aim at cutting the time taken and cost of transactions at each customs point. Regional customs action plan should be implemented.

An effective appeal procedure has to be put in place for customs and other agencies’ rulings must be in place.

Effective measures should be taken to ensure cosmopolitan environment which will help to ensure more business transactions.

Transport and communications infrastructures, port and warehousing facilities must be developed to benchmark levels within a time frame.

Direct shipping and air links with necessary support and incentives provided by the respective governments have to be established

Bangladesh and other least developed countries (LDCs) must ask for immediate compliance of Articles V, VIII and X of the GATT 1994 by the non-LDCs and notify their transit measures and tariff schedules, NTBs and regulations on rules of origin, labeling requirements, customs clearance and appeal procedures to SAARC Secretariat.

Private sector specialists should have facilities to take part in the negotiation for effective dialogue among the states.

One ‘problem dealing authority’ can be established to quickly respond to any problems in the field level of operations. They must have to be authorized to take necessary actions according to international law without waiting for political decisions of the government concerned.

Non-tariff measures/barriers: Import licensing; Members must adopt and notify non-restrictive, locally administered, automatic and transparent import licensing procedures at least for the regional trade. Instead of Kolkata handling import licensing for Tripura, the licensing office should be opened in Agartala.

Technical Regulations and Standards: Member countries must harmonize TBT and SPS measures (on prioritized traded products) to streamline flow of traded goods. The SAARC/Regional Accreditation Body must be established and in the meantime technical regulations and standards conformity assessment certificates issued by the respective designated national public or private sector institution must be accepted.

Non-acceptability of conformity assessment certificates of any particular product, if and when arise, should be resolved by mutual cooperation without restricting its trade. Technical and financial assistance must be ensured for capacity building in this regard.

National treatment must be accorded to charges and fees for imported products at the rate applicable for similar domestic products. Fees levied must be limited in amount to the approximate cost of services rendered and should not represent an indirect protection to domestic products or for fiscal purposes.

Trade restrictive and discriminatory registration, labeling and testing requirements should be removed by extending most favored nation (MFN) and ‘national treatment’ to imported products. Labeling and testing requirements without any valid scientific grounds must be waived.

Customs valuation: Customs valuation must not be used for protective purposes or as barrier to trade. A common interpretation of the GATT/WTO valuation agreement should be adopted to ensure uniformity and standardized implementation of the agreement.

Information exchange: Member states must ensure exchange of vital information on the prevention and repression of smuggling, trafficking of narcotics and psychotropic substances, and other customs frauds.

All these issues have to be recommended from the private sector to their government concerned for raising the same during international negotiations with the states concerned. Private sector will also have to work as pressure group to the governments concerned so that these recommendations may be implemented as early as possible.

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