Towards a Free Trade Area in South Asia: Charting A Feasible Course for Trade Liberalisation with Reference to India's Role

Abstract: Four rounds of exchange of trade concessions have taken place under the South Asian Preferential Trading Arrangement (SAPTA). Initiated since December 1995, negotiations under SAPTA have been based on Positive List approach. A large number of products have however been offered concessions exclusively to Least Developed Countries (LDCs). India has offered the largest number of concessions, particularly favouring LDCs with tariff preferences ranging from 50-100 percent. This paper examines the impact of tariff concessions on India’s preferential trade in the first three rounds of SAPTA negotiations in relation to its total bilateral trade with Bangladesh, Maldives, Pakistan and Sri Lanka covering the period 1996-97 to 2002-03. The hypothesis is that tariff cuts are expected to induce faster growth in India’s preferential trade in relation to its bilateral trade. The study reveals that owing to lack of proper targeting, low preferential margins, non-concern with a variety of non-tariff barriers, and the emergence of more ambitious Indo-Lanka Free Trade Agreement, the performance of India’s preferential trade under SAPTA has been lackluster. However, there are a few hopeful pointers. There has been relatively better targeting of trade preferences between India and Pakistan leading to increasing share in India’s preferential trade in recent years for products exchanged preferences in the Second Round. Bangladesh has been the main beneficiary of India’s offer of duty-free access to least developed countries on selected products under the Third Round and their immediate positive response in terms of increasing shares in India’s preferential imports is just beginning to be observed. The paper suggests a few modalities to meet the required prerequisites for a smooth transition from SAPTA to SAFTA. Experience from the operation of SAPTA suggests that mere tinkering with modest preferential margins, maintaining unduly long phase-out period to attain the goal of a free trade area without concern for deeper forms of integration such as removal of non-tariff barriers, investment cooperation and improvement in trade facilitation measures could make SAFTA largely irrelevant.