1. South Asian Free Trade Area - Some Issues
Sanath Jayanetti

2. 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

3. 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

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

5. Broad summary of all agreements, Sri Lanka – June 2005 (8 digit level)
ISFTA PSFTA SP B SL S GSTP BK
Negative
Free
Positive
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

6. 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

7. 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

8. 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

9. 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

10. 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).

11. 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.

12. 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.

13. 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.

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

15. 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

16. Thank You