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1.1 INTRODUCTION

1.2 GOALS OF ECONOMIC INTEGRATION

1.3 FORMS OF ECONOMIC INTEGRATION:

1.4 ADVANTAGES OF ECONOMIC INTEGRATION:

1.5 DISADVANTAGES OF ECONOMIC INTEGRATION

CHAPTER 1: ECONOMIC INTEGRATION

ECONOMIC INTEGRATION

1.1 INTRODUCTION

Economic integration is the unification of economic policies between different states

through the partial or full abolition of tariff and non-tariff restrictions on trade taking place

among them prior to their integration. This is meant in turn to lead to lower prices for

distributors and consumers with the goal of increasing the combined economic productivity

of the states.

Economic integration is an economic alliance or network based on co-operation,

collaboration, flexibility, adaptation, risk and cost reduction, shared interests and objectives,

closeness and a commitment between two countries on an integrating, ongoing process. It’s

not an easy task.

Economic integration is a process where barriers to trade are reduced or eliminated to

facilitate trade between regions or nations. There are varying degrees of economic integration

ranging from theoretically completely free trade to the use of preferential trade agreements to

stimulate relationships between specific trade partners. Removing trade barriers comes with

costs and benefits, depending on the degree of economic integration and the level of

cooperation between member regions or nations.

Many economies have attempted some degree of economic integration. Some nations use

free trade zones, for example, to stimulate trade with partners. Others sign free trade

agreements like the North American Free Trade Agreement (NAFTA). In the European

Union (EU), a high degree of economic and monetary integration has been accomplished

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between member nations. Various EU nations may also have trade agreements with nations

outside the union.

Reducing barriers to trade has the tendency to cut costs associated

with economic activities. Not having to pay taxes, tariffs, fees, and other expenses can be

beneficial for trading partners. This causes the volume of trade to increase, as trading partners

actively seek out deals in regions where some degree of economic integration has been

achieved. For nations outside integration agreements, however, barriers to trade can be

created as they may not be able to compete with preferred trading partners.

When economies are strong, economic integration has benefits for all members, and every

member of an agreement, union, or treaty can experience economic growth. The same holds

true of economic downturns. When individual members of a trade agreement start to be

dragged down, their economic problems can spread. This was notably seen in the European

Union during the economic crises of the early 2000s, when bad debt in nations like Greece

and Portugal caused problems across the EU, including in nations with relatively strong

economies, like Germany.

As regions and nations embark on economic integration programs, they weigh the costs

and benefits of integration carefully to see if it is the right choice for their needs. Some

nations may prefer to avoid the risks, even though barriers to trade may pose a problem.

Others may be willing to take on the risks in exchange for increased trade and foreign

exchange. Growing nations are often particularly eager to engage in economic integration, as

trade with foreign nations can contribute to rapid economic growth. They may use incentive

programs to attract foreign trade and investment.

1.2 GOALS OF ECONOMIC INTEGRATION

The main goals of economic integration are to create a network of like-minded states that

together design economic goals and work together to attain these goals. Economic integration

can be accomplished on basis of ongoing collaboration between nations to enhance economic

conditions over a long period of time.

The following are the goals and objectives:

1. To protect domestic industries or certain other sectors of the economy.

2. To guard against dumping.

3. To promote indigenous research and developments.

4. To conserve the foreign exchange resources of the country.

5. To make the balance of payment positions more favourable.

1.3 FORMS OF ECONOMIC INTEGRATION:

Economic cooperation or integration may take any one or a combination of any of the

following forms:

(i) Economic Union

(ii) Customs Union,

(iii) Free Trade Area,

(iv) Preferential Trading.

These different forms of integration visualise different degrees of economic cooperation in

the descending order.

a) Economic Union is a case of absolute integration. It implies complete economic

integration of a group of countries. There is, thus, free mobility of factor resources

and commodities in such a union. The economic activities and policies (fiscal,

monetary and general) of the member nations are perfectly harmonised, coordinated

and collectively operated. Benelux (Belgium, the Netherlands and Luxembourg) and

the European Common Market (ECM) are such economic unions. An economic union

is, therefore, commonly referred to as a common market.

b) Customs Union involves a common external tariff against non-member countries,

while within the union itself there is unrestricted free trade. From the customs union

gradually, complete economic union is evolved. For instance in the case of ECM, the

Rome Treaty (1958) laid the basis of a customs union of the six member countries,

leading finally to an economic union by 1970.

c) Free Trade Area involves the abolition of all trade restrictions within the group, but

each individual country in the group is free to maintain any sort of relation with the

non-member countries. Countries in a free trade area have, thus, no common external

tariffs to maintain. Through this the goods entering the free trade area will enter with

the lowest tariffs and the member countries of free trade area do the trade within

themselves free of cost.

d) Preferential Trading is a sort of trading technique involving various measures for

promoting trade among the members of the group. In this the member countries

within themselves make preferential policies for their trade like reduced tariff, special

quota, etc

Generally, agreements may be entered into to ensure to each contracting party a favoured

treatment as compared to others. Such an agreement is usually referred to as the most-

favoured nation agreement. It may relate to commerce, industry and navigation, or it may

relate either to commodities or merely to customs duties. Ordinarily, the most-favoured

nation clause is bilateral in operation.

The trade liberalisation programme of the OEEC can be regarded as an example of

preferential trading. In 1950, the Code of Liberalisation was adopted by the members of the

OEEC in order to increase intra-European trade.

1.4 ADVANTAGES OF ECONOMIC INTEGRATION:

Trade Creation :

Member countries have

(a) Wider selection of goods and services not previously available;

(b) Acquire goods and services at a lower cost after trade barriers due to lowered tariffs

or removal of tariffs

(c) Encourage more trade between member countries the balance of money spend from

cheaper goods and services, can be used to buy more products and services

Greater Consensus:

Unlike WTO with high membership (147 countries), easier to gain consensus amongst small

memberships in regional integration

Political Cooperation:

A group of nation can have significantly greater political influence than each nation would

have individually. This integration is an essential strategy to address the effects of conflicts

and political instability that may affect the region. Useful tool to handle the social and

economic challenges associated with globalization

Employment Opportunities:

As economic integration encourage trade liberation and lead to market expansion, more

investment into the country and greater diffusion of technology, it create more employment

opportunities for people to move from one country to another to find jobs or to earn higher

pay. For example, industries requiring mostly unskilled labour tends to shift production to

low wage countries within a regional cooperation

1.5 DISADVANTAGES OF ECONOMIC INTEGRATION

Creation Of Trading Blocs :

It can also increase trade barriers against non-member countries.

Trade Diversion :

Because of trade barriers, trade is diverted from a non-member country to a member country

despite the inefficiency in cost. For example, a country has to stop trading with a low cost

manufacture in a non-member country and trade with a manufacturer in a member country

which has a higher cost.

National Sovereignty :

Requires member countries to give up some degree of control over key policies like trade,

monetary and fiscal policies. The higher the level of integration, the greater the degree of

controls that needs to be given up particularly in the case of a political union economic

integration which requires nations to give up a high degree of sovereignty.

2.1 COMMERCIAL PLICY

2.2 FREE TRADE:

2.3 PROTECTION POLICY:

2.4 FREE TRADE V/S PROTECTION:

2.5 INSTRUMENTS OF PROTECTION:

CHAPTER 2: NEED FOR ECONOMIC INTEGRATION

NEED OF ECONOMIC INTEGRATION

2.1 COMMERCIAL POLICY

A ‘‘commercial policy’’ (also referred to as a trade policy or international trade policy)is

a set of rules and regulations that are intended to change international trade flows,

particularly to restrict imports. Every nation has some form of ‘‘‘trade policy’’’ in place, with

public officials formulating the policy which they think would be most appropriate for their

country. Their aim is to boost the nation’s international trade. Example ‘‘‘European Union’’,

Mersocur committee etc. The purpose of trade policy is to help a nation's international trade

run more smoothly, by setting clear standards and goals which can be understood by potential

trading partners. In many regions, groups of nations work together to create mutually

beneficial trade policies.

Trade policy can involve various complex types of actions, such as the elimination of

quantitative restrictions or the reduction of tariffs. According to a geographic dimension,

there is unilateral, bilateral, regional, and multilateral liberalization. According to the depth of

a bilateral or regional reform, there may be free trade areas (wherein partners eliminate trade

barriers with respect to each other), ‘‘‘custom unions’’’ (whereby partners eliminate

reciprocal barriers and agree on a common level of barriers against no partners), and free

economic areas (or deep integration as in, for example, the European Union, where not only

trade but also the movement of factors has been liberalized, where a common currency has

been instituted, and where other forms of integration and harmonization have been

established). Some of the most common trade barriers are: ‘‘‘Tariffs’’’: Taxes levied on

products that are traded across borders are called tariffs. However, governments impose

tariffs essentially on imports and not on exports. Two most popular types of tariffs are: • Ad

valorem: This tariff involves a set percentage of the price of the imported goods. • Specific:

This refers to a specific amount charged by the government on import of goods.

‘‘‘Subsidies’’’: Subsidies work to foster export by providing financial assistance to locally-

manufactured goods. Subsidies help to either sustain economic activities that face losses or

reduce the net price of production. ‘‘‘Quotas’’’: Import quotas are the trade limits set by the

government to restrict the quantity of imports during a specified period of time.

‘‘‘Embargo’’’: This is an extreme form of trade barrier. Embargoes prohibit import from a

particular country as a part of the foreign policy. In the modern world, embargoes are

imposed during wartimes or due to severe failure of diplomatic relations. ‘‘‘A voluntary

export restraint’’’: is a restriction set by a government on the quantity of goods that can be

exported out of a country during a specified period of time. Often the word voluntary is

placed in quotes because these restraints are typically implemented upon the insistence of the

importing nations.

Objectives of Commercial Policy:

The main objectives of the commercial policy are:

1. First, to appreciate trade with other nations.

2. Second, to protect domestic market prevailing in the country.

3. Third, to increase the export of particular product which will help in expanding

domestic market?

4. Fourth, to prevent the imports of particular goods for giving protection to infant

industries or developing key industry or saving foreign exchange, etc.

5. Fifth, to encourage the imports of capital goods for speeding up the economic

development of the country.

6. Sixth to restrict the imports of goods which create unfavourable balance of payments?

7. Seventh, to assist or prevent the export or import of goods and services for achieving

the desired rate of exchange.

8. Eighth, to enter into trade agreements with foreign nations for stabilizing the foreign trade.

2.2 FREE TRADE:

Free trade is a policy by which a government does not discriminate against imports or

interfere with exports by applying tariffs (to imports) or subsidies (to exports) or quotas.

According to the law of comparative advantage, the policy permits trading partners mutual

gains from trade of goods and services. Under a free trade policy, prices emerge from supply

and demand, and are the sole determinant of resource allocation.

'Free' trade differs from other forms of trade policy where the allocation of goods and

services among trading countries are determined by price strategies that may differ from

those that would emerge under deregulation. These governed prices are the result of

government intervention in the market through price adjustments or supply restrictions,

including protectionist policies.

2.3 PROTECTION POLICY:

This is a policy in which the countries put hindrances to protect themselves from trade.

Interventions include subsidies, taxes and tariffs, non-tariff barriers, such as regulatory

legislation and import quotas, and even inter-government managed trade agreements such as

the North American Free Trade Agreement (NAFTA) and Central America Free Trade

Agreement (CAFTA) (contrary to their formal titles) and any governmental market

intervention resulting in artificial prices.

Such government interventions can increase as well as decrease the cost of goods and

services to both consumers and producers. Since the mid-20th century, nations have

increasingly reduced tariff barriers and currency restrictions on international trade. Other

barriers, however, that may be equally effective in hindering trade include import quotas,

taxes, and diverse means of subsidizing domestic industries.

2.4 FREE TRADE V/S PROTECTION:

The commercial policy of a country enables a choice between free trade and protection. If the

choice is protection, it may suggest methods of protection and extent of protection. Presently

the world economic order does not encourage free trade. The choice is only between the

methods of protection and the extent of protection. However, there are several cases

developed in favour of protection. Uniformly free trade is abundant because it favours

developed countries more than underdeveloped countries.

Free Trade:

The classical political economy strongly advocates free trade. Free trade is the freedom of

trade where countries can import or export on the merit of efficiency in absence of any trade

barrier. Free trade is proposed for its several advantages.

1. The region of trades maximizes the volume. When countries trade freely, the volume

of merchandise tends to be high.

2. Countries would specialize on the basis of resources and the cost advantage will be high.

3. When countries operate according to cost advantage, the resource used will be most

efficient.

4. The cost of production will be low enabling lower prices and advantage to the consumers.

5. Free trade develops mutual dependence and friendly economic relation.

However free trade is restricted on the grounds that it benefits only advanced countries. The

countries which have high bargaining power and elastic merchandise get larger advantage.

In most cases free trade may develop international monopolies and unfair trade practices.

As against free trade, the idea of protectionism developed since inter war period. Protection is

enforced by a series of methods like tariff duties, import sanction, regional economic co-

operation, economic sanction, and trade embargo. The intensity of protection may change

between these methods.

2.5 INSTRUMENTS OF PROTECTION:

1. Tariffs:

Typically, tariffs (or taxes) are imposed on imported goods. Tariff rates usually vary

according to the type of goods imported. Import tariffs will increase the cost to importers, and

increase the price of imported goods in the local markets, thus lowering the

quantity of goods imported, to favour local producers. Tariffs may also be imposed on

exports, and in an economy with floating exchange rates, export tariffs have similar effects as

import tariffs. In practice tariff can be levied in four ways :

1. Specific duty: It is a duty levied as per the quantity. Specific duty

is levied in case of bulk low value merchandise.

2. Ad velorm : it is a duty imposed as per the value. Ad velorm duty

is imposed on high value merchandise.

3. Sliding scale duties: it is a variable duty imposed on imports to

make their price less competitive in the home market.

4. Tariff quota: it is a tariff duty imposed together with quota

restriction.

2. Import quotas:

Quotas are used to reduce the quantity and therefore increase the market price of imported

goods. The economic effects of an import quota are similar to that of a tariff, except that the

tax revenue gain from a tariff will instead be distributed to those who receive import licenses.

Economists often suggest that import licenses be auctioned to the highest bidder, or that

import quotas be replaced by an equivalent tariff.

3. Administrative barriers:

Countries are sometimes found using their various administrative rules (e.g. regarding food

safety, environmental standards, electrical safety, etc.) to introduce barriers to imports.

4. Anti-dumping

These are laws which prevent "dumping" of cheaper foreign goods that would cause local

firms to close down. However, in practice, antidumping laws are usually used to impose trade

tariffs on foreign exporters.

5. Direct subsidies:

Government subsidies (in the form of lump-sum payments or cheap loans) are sometimes

given to local firms that cannot compete well against imports. These subsidies protect local

jobs, and to help local firms adjust to the world markets.

6. Export subsidies:

Export subsidies are often used by governments to increase exports. Export subsidies are the

opposite of export tariffs; exporters are paid a percentage of the value of their exports. Export

subsidies increase the amount of trade, and in a country with floating exchange rates, have

effects similar to import subsidies.

7. Exchange rate manipulation:

A government may intervene in the foreign exchange market to lower the value of its

currency by selling its currency in the foreign exchange market. Doing so will raise the cost

of imports and lower the cost of exports, leading to an improvement in its trade balance.

8. International patent systems:

National patents help protect trade at a national level in two ways. Firstly, when patents held

by one country form relative advantage in trade negotiations against another, secondly

patents confers "good citizenship" status.

9. Employment based immigration restrictions, such as labour certification requirement

or numerical caps on work visas.

10. Import Quota

The commercial policy contains a direct restrictive instrument called import quota. Import

quota is a positive restriction on incoming goods regardless of tariff. It is not a demand

instrument. It does not provide freedom of consumption. Quota is imposed as a serious

retaliatory measure. Following are the objective of quota:

1. To restrict import directly from a particular country globally.

2. It is used as a strong retaliatory move.

3. Quota imposes B.O.P disequilibrium position.

4. With import license quota provides better supervision of precious imports.

Import quota can be levied with tariff commonly called as tariff quota. An ideal

commercial policy should be made up of quota and tariff. Import quotas provide all the effect

provided by tariff except revenue. However tariff quota can bring in revenue. In addition

quota may offer all those effects found with tariff income effect, employment effect,

bargaining power, terms of trade effect can be found. However with pure quota revenue

cannot be derived. Import quotas together with import licensing system may not only control

import but also supervise usage of imports. Under developed countries apply quota to protect

home industry and developed nations use quota for improving bargaining power.

3.1 INTRODUCTION:

3.2 OBJECTIVE

3.3 PRINCIPLES

3.4 STANDING COMMITTEE

3.5 TECHNICAL COMMITTEES

]

CHAPTER 3 : SAARC

SAARC (South Asian Association for Regional Co-operation)

3.1 INTRODUCTION:

The South Asian Association for Regional Cooperation (SAARC) is an

organization of South Asian nations, which was established on 8 December 1985 when the

government of Bangladesh , Bhutan, India, Maldives, Nepal, Pakistan, and Sri Lanka

formally adopted its charter providing for the promotion of economic and social progress,

cultural development within the South Asia region and also for friendship and cooperation

with other developing countries. It is dedicated to economic, technological, social, and

cultural development emphasizing collective self-reliance. Its seven founding members are

Sri Lanka, Bhutan, India, Maldives, Nepal, Pakistan, and Bangladesh. Afghanistan joined

the organization in 2007. Meetings of heads of state are usually scheduled annually; meetings

of foreign secretaries, twice annually. It is headquartered in Kathmandu, Nepal.

The first concrete proposal for establishing a framework for regional cooperation in South

Asia was made by the late president of Bangladesh, Ziaur Rahman, on May 2, 1980. Prior to

this, the idea of regional cooperation in South Asia was discussed in at least three

conferences: the Asian Relations Conference in New Delhi in April 1947, the Baguio

Conference in the Philippines in May 1950, and the Colombo Powers Conference in April

1954. In the late 1970s, SAARC nations agreed upon the creation of a trade bloc consisting of

South Asian countries. The idea of regional cooperation in South Asia was again mooted in

May 1980. The foreign secretaries of the seven countries met for the first time in Colombo in

April 1981. The Committee of the Whole, which met in Colombo in August 1985, identified

five broad areas for regional cooperation. New areas of cooperation were added in the

following years

3.2 OBJECTIVE

The objectives of the Association as defined in the Charter are:

to promote the welfare of the people of South Asia and to improve their quality of

life;

to accelerate economic growth, social progress and cultural development in the region

and to provide all individuals the opportunity to live in dignity and to realize their full

potential;

to promote and strengthen selective self-reliance among the countries of South Asia;

to contribute to mutual trust, understanding and appreciation of one another's

problems;

to promote active collaboration and mutual assistance in the economic, social,

cultural, technical and scientific fields;

to strengthen cooperation with other developing countries;

to strengthen cooperation among themselves in international forums on matters of

common interest; and

to cooperate with international and regional organizations with similar aims and

purposes.

3.3 PRINCIPLES

The principles are:

Respect for sovereignty, territorial integrity, political equality and independence of all

members states

Non-interference in the internal matters is one of its objectives

Cooperation for mutual benefit

All decisions to be taken unanimously and need a quorum of all eight members

All bilateral issues to be kept aside and only multilateral(involving many countries)

issues to be discussed without being prejudiced by bilateral issues

Afghanistan was added to the regional grouping on 13 November 2005, with the addition of

Afghanistan, the total number of member states were raised to eight (8). In April 2006, the

United States of America and South Korea made formal requests to be granted observer

status. The European Union has also indicated interest in being given observer status, and

made a formal request for the same to the SAARC Council of Ministers meeting in July

2006. On 2 August 2006 the foreign ministers of the SAARC countries agreed in principle to

grant observer status to the US, South Korea and the European Union. On 4 March 2008, Iran

requested observer status. Followed shortly by the entrance of Mauritius.

3.4 STANDING COMMITTEE

1.The Standing Committee comprising the Foreign Secretaries shall have the following

functions:

a) Overall monitoring and coordination of programme of cooperation;

b) Approval of projects and programmes, and the modalities of their financing;

c) Determination of inter-sectoral priorities;

d) mobilisation of regional and external resources;

e) identification of new areas of cooperation based on appropriate studies.

2. The Standing Committee shall meet as often as deemed necessary.

3. The Standing Committee shall submit periodic reports to the Council of Ministers and

make reference to it as and when necessary for decisions on policy matters.

3.5 TECHNICAL COMMITTEES

1. Technical Committees comprising representatives of Member States shall be responsible

for the implementation, coordination and monitoring of the programmes in their respective

areas of cooperation.

2. They shall have the following terms of reference:

a) Determination of the potential and the scope of regional cooperation in agreed areas;

b) Formulation of programmes and preparation of projects;

C) Determination of financial implications of sectoral programmes;

D) Formulation of recommendations regarding apportionment of costs;

E) Implementation and coordination of sectoral programmes;

f) Monitoring of progress in implementation.

3. The Technical Committees shall submit periodic reports to the Standing Committee.

4. The Chairmanship of the Technical Committees shall normally rotate among Member

States in alphabetical order every two years.

5. The Technical Committees may, inter-alia, use the following mechanisms and modalities,

if and when considered necessary:

a) Meetings of heads of national technical agencies;

b) Meetings of experts in specific fields;

c) Contact amongst recognised centres of excellence in the region.

4.1 INTRODUCTION

4.2 PURPOSES OF THIS AGREEMENT:

4.3 ESTABLISHMENT

4.4 OBJECTIVES AND PRINCIPLES:

4.5 INSTRUMENTS

4.6 TRADE LIBERALISATION PROGRAMME

4.7 ADDITIONAL MEASURES

4.8 DISPUTE SETTLEMENT MECHANISM

4.9 WITHDRAWAL

CHAPTER 4 : SAFTA

SAFTA (SOUTH ASIAN FREE TRADE ASSOCIATION)

4.1 INTRODUCTION

For the formation of SAFTA the countries of SAARC the People’s Republic of Bangladesh,

the Kingdom of Bhutan, the Republic of India, the Republic of Maldives, the Kingdom of

Nepal, the Islamic Republic of Pakistan and the Democratic Socialist Republic of Sri Lanka

were referred as “Contracting States” in the agreement of SAFTA.

Motivated by the commitment to strengthen intra-SAARC economic cooperation to

maximise the realization of the region’s potential for trade and development for the benefit of

their people, in a spirit of mutual accommodation, with full respect for the principles of

sovereign equality, independence and territorial integrity of all States;

Noting that the Agreement on SAARC Preferential Trading Arrangement (SAPTA) signed in

Dhaka on the 11th of April 1993 provides for the adoption of various instruments of trade

Liberalization on a preferential basis;

Convinced that preferential trading arrangements among SAARC Member States will act as

a stimulus to the strengthening of national and SAARC economic resilience, and the

Development of the national economies of the Contracting States by expanding investment

and production opportunities, trade, and foreign exchange earnings as well as the

development of economic and technological cooperation;

Aware that a number of regions are entering into such arrangements to enhance trade through

the free movement of goods;

Recognizing that Least Developed Countries in the region need to be accorded special and

differential treatment commensurate with their development needs; and

Recognizing that it is necessary to progress beyond a Preferential Trading Arrangement to

move towards higher levels of trade and economic cooperation in the region by removing

barriers to cross-border flow of goods;

4.2 PURPOSES OF THIS AGREEMENT:

1. Concessions mean tariff, para-tariff and non-tariff concessions agreed under the Trade

Liberalisation Programme;

2. Direct Trade Measures mean measures conducive to promoting mutual trade of

Contracting States such as long and medium-term contracts containing import and supply

commitments in respect of specific products, buy-back arrangements, state trading

operations, and government and public procurement;

3. Least Developed Contracting State refers to a Contracting State which is designated

as a “Least Developed Country” by the United Nations;

4. Margin of Preference means percentage of tariff by which tariffs are reduced on

products imported from one Contracting State to another as a result of preferential

treatment.

5. Non-Tariff Measures include any measure, regulation, or practice, other than “tariffs”

and “para-tariffs”.

6. Para-Tariffs mean border charges and fees, other than “tariffs”, on foreign trade

transactions of a tariff-like effect which are levied solely on imports, but not those

indirect taxes and charges, which are levied in the same manner on like domestic

products. Import charges corresponding to specific services rendered are not considered

as para-tariff measures;

7. Products mean all products including manufactures and commodities in their raw,

semi-processed and processed forms;

8. SAPTA means Agreement on SAARC Preferential Trading Arrangement signed in

Dhaka on the 11th of April 1993;

9. Serious injury means a significant impairment of the domestic industry of like or

directly competitive products due to a surge in preferential imports causing substantial

losses in terms of earnings, production or employment unsustainable in the short term;

10. Tariffs mean customs duties included in the national tariff schedules of the Contracting

States;

11. Threat of serious injury means a situation in which a substantial increase of

preferential imports is of a nature to cause “serious injury” to domestic producers, and

that such injury, although not yet existing, is clearly imminent. A determination of threat

of serious injury shall be based on facts and not on mere allegation, conjecture, or remote

or hypothetical possibility.

4.3 ESTABLISHMENT

The Contracting States hereby establish the South Asian Free Trade Area (SAFTA) to

promote and enhance mutual trade and economic cooperation among the Contracting

States, through exchanging concessions in accordance with this Agreement

4.4 OBJECTIVES AND PRINCIPLES:

1. The Objectives of this Agreement are to promote and enhance mutual trade and

economic cooperation among Contracting States by, inter-alia:

2.

Eliminating barriers to trade in, and facilitating the cross-border movement of

goods between the territories of the Contracting States;

Promoting conditions of fair competition in the free trade area, and ensuring

equitable benefits to all Contracting States, taking into account their respective

levels and pattern of economic development;

Creating effective mechanism for the implementation and application of this

Agreement, for its joint administration and for the resolution of disputes; and

Establishing a framework for further regional cooperation to expand and

enhance the mutual benefits of this Agreement.

3. SAFTA shall be governed in accordance with the following principles:

a. SAFTA will be governed by the provisions of this Agreement and also by the

rules, regulations, decisions, understandings and protocols to be agreed upon

within its framework by the Contracting States;

b. The Contracting States affirm their existing rights and obligations with respect

to each other under Marrakesh Agreement Establishing the World Trade

Organization and other Treaties/Agreements to which such Contracting States

are signatories;

c. SAFTA shall be based and applied on the principles of overall reciprocity and

mutuality of advantages in such a way as to benefit equitably all Contracting

States, taking into account their respective levels of economic and industrial

development, the pattern of their external trade and tariff policies and systems;

d. SAFTA shall involve the free movement of goods, between countries through,

inter alia, the elimination of tariffs, para tariffs and non-tariff restrictions on

the movement of goods, and any other equivalent measures;

e. SAFTA shall entail adoption of trade facilitation and other measures, and the

progressive harmonization of legislations by the Contracting States in the

relevant areas; and

f. The special needs of the Least Developed Contracting States shall be clearly

recognized by adopting concrete preferential measures in their favour on a

non-reciprocal basis.

4.5 INSTRUMENTS

The SAFTA Agreement will be implemented through the following instruments:-

1. Trade Liberalisation Programme

2. Rules of Origin

3. Institutional Arrangements

4. Consultations and Dispute Settlement Procedures

5. Safeguard Measures

6. Any other instrument that may be agreed upon.

4.6 TRADE LIBERALISATION PROGRAMME

A. Contracting States agree to the following schedule of tariff reductions:

a. The tariff reduction by the Non-Least Developed Contracting States from existing

tariff rates to 20% shall be done within a time frame of 2 years, from the date of

coming into force of the Agreement. Contracting States are encouraged to adopt

reductions in equal annual instalments. If actual tariff rates after the coming into force

the Agreement are below 20%, there shall be an annual reduction on a Margin of

Preference basis of 10% on actual tariff rates for each of the two years.

b. The tariff reduction by the Least Developed Contracting States from existing tariff

rates will be to 30% within the time frame of 2 years from the date of coming into

force of the Agreement. If actual tariff rates on the date of coming into force of the

Agreement are below 30%, there will be an annual reduction on a Margin of

Preference basis of 5 % on actual tariff rates for each of the two years.

c. The subsequent tariff reduction by Non-Least Developed Contracting States from

20% or below to 0-5% shall be done within a second time frame of 5 years, beginning

from the third year from the date of coming into force of the Agreement. However,

the period of subsequent tariff reduction by Sri Lanka shall be six years. Contracting

States are encouraged to adopt reductions in equal annual instalments, but not less

than 15% annually.

d. The subsequent tariff reduction by the Least Developed Contracting States from 30%

or below to 0-5% shall be done within a second time frame of 8 years beginning from

the third year from the date of coming into force of the Agreement. The Least

Developed Contracting States are encouraged to adopt reductions in equal annual

instalments, not less than 10% annually.

2. The above schedules of tariff reductions will not prevent Contracting States from

immediately reducing their tariffs to 0-5% or from following an accelerated schedule

of tariff reduction.

a. Contracting States may not apply the Trade Liberalisation Programme as in

paragraph 1 above, to the tariff lines included in the Sensitive Lists which

shall be negotiated by the Contracting States (for LDCs and Non-LDCs)

and incorporated in this Agreement as an integral part. The number of

products in the Sensitive Lists shall be subject to maximum ceiling to be

mutually agreed among the Contracting States with flexibility to Least

Developed Contracting States to seek derogation in respect of the products

of their export interest; and

b. The Sensitive List shall be reviewed after every four years or earlier as may

be decided by SAFTA Ministerial Council (SMC), established under

Article 10, with a view to reducing the number of items in the Sensitive

List.

3. The Contracting States shall notify the SAARC Secretariat all non-tariff and para

tariff measures to their trade on an annual basis. The notified measures shall be

reviewed by the Committee of Experts, established under Article 10, in its regular

meetings to examine their compatibility with relevant WTO provisions. The

Committee of Experts shall recommend the elimination or implementation of the

measure in the least trade restrictive manner in order to facilitate intra-SAARC trade1.

4. Contracting Parties shall eliminate all quantitative restrictions, except otherwise

permitted under GATT 1994, in respect of products included in the Trade

Liberalisation Programme.

Notwithstanding the provisions contained in paragraph 1 of this Article, the Non-

Least Developed Contracting States shall reduce their tariff to 0-5% for the products

of Least Developed Contracting States within a timeframe of three years beginning

from the date of coming into force of the Agreement.

4.7 ADDITIONAL MEASURES

Contracting States agree to consider, in addition to the measures set out in Article 7, the

adoption of trade facilitation and other measures to support and complement SAFTA for

mutual benefit. These may include, among others: -

a. Harmonization of standards, reciprocal recognition of tests and accreditation of

testing laboratories of Contracting States and certification of products;

b. Simplification and harmonization of customs clearance procedure;

c. Harmonization of national customs classification based on HS coding system;

d. Customs cooperation to resolve dispute at customs entry points;

e. Simplification and harmonization of import licensing and registration procedures;

f. Simplification of banking procedures for import financing;

g. Transit facilities for efficient intra-SAARC trade, especially for the land-locked

Contracting States;

h. Removal of barriers to intra-SAARC investments;

i. Macroeconomic consultations;

j. Rules for fair competition and the promotion of venture capital;

k. Development of communication systems and transport infrastructure;

l. Making exceptions to their foreign exchange restrictions, if any, relating to

payments for products under the SAFTA scheme, as well as repatriation of such

payments without prejudice to their rights under Article XVIII of the General

Agreement on Tariffs and Trade (GATT) and the relevant provisions of Articles of

Treaty of the International Monetary Fund (IMF); and m) Simplification of

procedures for business visas.

4.8 DISPUTE SETTLEMENT MECHANISM

1. Any dispute that may arise among the Contracting States regarding the interpretation

and application of the provisions of this Agreement or any instrument adopted within

its framework concerning the rights and obligations of the Contracting States will be

amicably settled among the parties concerned through a process initiated by a request

for bilateral consultations.

2. Any Contracting State may request consultations in accordance with paragraph 1 of this

Article with other Contracting State in writing stating the reasons for the request

including identification of the measures at issue. All such requests should be notified to

the Committee of Experts, through the SAARC Secretariat with an indication of the

legal basis for the complaint.

3. If a request for consultations is made pursuant to this Article, the Contracting State to

which the request is made shall, unless otherwise mutually agreed, reply to the request

within 15 days after the date of its receipt and shall enter into consultations in good

faith within a period of no more than 30 days after the date of receipt of the request,

with a view to reaching a mutually satisfactory solution.

4. If the Contracting State does not respond within 15 days after the date of receipt of the

request, or does not enter into consultations within a period of no more than 30 days, or

a period otherwise mutually agreed, after the date of receipt of the request, then the

Contracting State that requested the holding of consultations may proceed to request the

Committee of Experts to settle the dispute in accordance with working procedures to be

drawn up by the Committee.

5. Consultations shall be confidential, and without prejudice to the rights of any

Contracting State in any further proceedings.

6. If the consultations fail to settle a dispute within 30 days after the date of receipt of the

request for consultations, to be extended by a further period of 30 days through mutual

consent, the complaining Contracting State may request the Committee of Experts to

settle the dispute. The complaining Contracting State may request the Committee of

Experts to settle the dispute during the 60-day period if the consulting Contracting

States jointly consider that consultations have failed to settle the dispute.

7. The Committee of Experts shall promptly investigate the matter referred to it and make

recommendations on the matter within a period of 60 days from the date of referral.

8. The Committee of Experts may request a specialist from a Contracting State not party

to the dispute selected from a panel of specialists to be established by the Committee

within one year from the date of entry into force of the Agreement for peer review of

the matter referred to it. Such review shall be submitted to the Committee within a

period of 30 days from the date of referral of the matter to the specialist.

9. Any Contracting State, which is a party to the dispute, may appeal the

recommendations of the Committee of Experts to the SMC. The SMC shall review the

matter within the period of 60 days from date of submission of request for appeal. The

SMC may uphold, modify or reverse the recommendations of the Committee of

Experts.

10. Where the Committee of Experts or SMC concludes that the measure subject to dispute

is inconsistent with any of the provisions of this Agreement, it shall recommend that the

Contracting State concerned bring the measure into conformity with this Agreement. In

addition to its recommendations, the Committee of Experts or SMC may suggest ways

in which the Contracting State concerned could implement the recommendations.

11. The Contracting State to which the Committee’s or SMC’s recommendations are

addressed shall within 30 days from the date of adoption of the recommendations by

the Committee or SMC, inform the Committee of Experts of its intentions regarding

implementation of the recommendations. Should the said Contracting State fail to

implement the recommendations within 90 days from the date of adoption of the

recommendations by the Committee, the Committee of Experts may authorize other

interested Contracting States to withdraw concessions having trade effects equivalent to

those of the measure in dispute.

4.9 WITHDRAWAL

1. Any Contracting State may withdraw from this Agreement at any time after its entry

into force. Such withdrawal shall be effective on expiry of six months from the date

on which a written notice thereof is received by the Secretary-General of SAARC, the

depositary of this Agreement. That Contracting State shall simultaneously inform the

Committee of Experts of the action it has taken.

2. The rights and obligations of a Contracting State which has withdrawn from this

Agreement shall cease to apply as of that effective date. Following the withdrawal by

any Contracting State, the Committee shall meet within 30days to consider action

subsequent to withdrawal.

REFERENCES

Bibliography:

International Business.

Eco

Education

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