South Asian Free Trade Area - Some Issues Sanath Jayanetti

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 Lanka’s FTAs with India and Pakistan 5. SAFTA – Some of the Challenges 6. Moving forward/Conclusion

Regional Trading Arrangements and 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

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

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: Author’s calculations

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

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

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

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

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).

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 other’s countries Enhance cooperation in areas such as education, education, transportation and ICT.

Pakistan - Sri Lanka FTA 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). 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.

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.

SAFTA – Some of the Challenges Bilateral FTAs in South Asia Other more dynamic regional/bilateral deals

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 India’s lead role

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