SAARC at 35: Cooperation is Vital to Reinvigorate its Relationship with SAFTA Members
By Dr. Srimal Fernando
Economic integration has been seen as the mode that paves the way for reviving South Asian economies while creating new opportunities that could not only promote stronger regional cooperation but also re-invigorate the South Asian Association for Regional Cooperation (SAARC). Even though the states in South Asia have commenced initiatives for economic liberalisation, it can be debated that its progress has been riddled with challenges resulting in the slow pace of the liberalisation process in the economies of South Asia. Hence, to assure that the economies of South Asia secure the potential gains from liberalising trade, it is vital that they enact further economic reforms, reduce non-tariff barriers and open up their markets. New regionalism has the potential to provide the South Asian economies with opportunities and prospects to merge into the global economy.
South Asian Free Trade Area (SAFTA)
The dynamic effects of regional economic integration far outnumber its static effects. The dynamic gains of economic integration are apparent from the advent of larger markets. Given these developments, the prospects of the SAFTA agreement being side lined by the South Asian nations in preference of alternate benefits linked with their participation in varying trading arrangements is very factual. In spite of many challenges, the continuous presence of SAARC since its establishment, for over three decades, provides novel prospects to improve the prevailing political and economic ties between its member states. It was possible for the association to discuss and sign the South Asian Preferential Trading Area (SAPTA) which subsequently transitioned into the South Asian Free Trade Area (SAFTA). Since then, SAARC has been able to progress with tax reduction initiatives in two phases. In addition, SAARC has been able to increase financial cooperation between its members through numerous initiatives. It is vital that SAFTA’s member states discover and exploit a mode through which a process for incorporating and implementing its tenets could be established.
This would be crucial in advancing SAFTA’s success and effectiveness while alleviating the negative consequences from parallel trade agreements entered into by SAFTA members. If trade complementarity among the member states of SAARC increases further leading towards an increase in comparative advantage, the South Asian region stands to massively benefit from intra-regional trade. Furthermore, given that revenues of a number of smaller states are sourced from trade related taxes, several South Asian nations are more apprehensive about the fiscal consequences of liberalising their economies. They are, therefore, reluctant to liberalise their economies and maximise the advantages of economic integration. A major impediment to trade growth in the region is the high trading costs that negatively impact on trade flows and the bilateral trading agreements amongst the countries in South Asia. In other words, reduced costs of trade products can be achieved by decreasing transport costs with the assistance of enhanced transport infrastructure in the region. In addition, the removal of numerous trade barriers will facilitate the achievement of low transaction costs.
Regional Integration and Informal Trade in South Asia
There is an immense need to uplift the low level of trade exchanges between SAARC states which is currently lower than 7 per cent of the total trade in the region. A challenge to economic integration has been the fear of economic polarisation by the weaker nations of the SAARC. This is owing to the inequities in economic weight observed between South Asian member states. Another hurdle in the path towards effectively implementing the SAFTA agreement is the lack of trade complementarity amongst the nations in South Asia. The main commodities produced by the majority of the South Asian nations are similar in nature and are mainly related to the agricultural sector and the textile industry. The characteristic of producing almost similar trading commodities by the states in South Asia has resulted in the weak complementarity in the trading mechanism of the member states of SAARC. The majority of SAARC’s member states export homogenous products while India is also a major exporter to these states. This has driven the weaker economies of South Asia to look for alternate possibilities such as foreign aid and extra-regional trading arrangements which are not favourable in the end for economic integration in South Asia.
The increased level of informal trade amongst member states of SAFTA could be due to the existence of high non-tariff barriers and also additional challenges such as poor transport infrastructure. It is vital that South Asian states guarantee the initiation of policy measures to promote the redistribution of growth gains, thereby making regional growth inclusive. Furthermore, these nations should also work towards boosting human potential and capabilities. The inclusion of the people of South Asia in the regional growth and development process is vital for promoting human capabilities as well as sustainability.
The development of transit trade arrangements among states will play an important role for South Asia to reach the targets of promoting free trade in the region under the SAFTA framework. Transit trade income will be predominantly vital for the smaller member states of SAARC as this could be utilised for social and infrastructure development at the numerous cross border points of these states.
Planning for Further Integration
An impending aim of SAARC is the formation of a South Asian Economic Union in an attempt to further strengthen regional economic integration. It is notable that informal trade between the member states of SAFTA has been prevailing since the official establishment of the agreement, particularly between India and its neighbours. Forming a South Asian Economic Union indicates growth in transborder trade between the states as well as the free movement of goods, services, labour and capital. SAARC has made substantial efforts in an endeavour to strengthen the integration of the South Asian economies. Particularly, the advent of globalisation has been influential in providing an impetus towards the attainment of the goals under the SAFTA framework. To effectively achieve the goals of SAFTA, it is vital that the nations of South Asia act mutually in order to ease the movement of trading supplies amongst them. By effectively reducing the trade related costs between these states, the volume of intra-regional trade between these countries is set to be uplifted.
About the Author:
Dr. Srimal Fernando received his PhD in the area of International Affairs. He was the recipient of the prestigious O.P. Jindal Doctoral Fellowship and SAU Scholarship under the SAARC umbrella. He is also an Adviser/Global Editor of Diplomatic Society for South Africa in partnership with Diplomatic World Institute (Brussels). He has received accolades such as 2018/2019 ‘Best Journalist of the Year’ in South Africa, (GCA) Media Award for 2016 and the Indian Council of World Affairs (ICWA) accolade. He is the author of ‘Politics, Economics and Connectivity: In Search of South Asian Union.’