Regional Economic Integration: Deepening SAFTA

Dushni Weerakoon

Institute of Policy Studies of Sri Lanka

Institute of Policy Studies of Sri Lanka

Deepening SAFTA

• A broad economic integration map emerging across Asia– Attempts to link East/Southeast/South Asia– ASEAN+3/ASEAN+6, etc.

• India playing a key role– Pakistan, to a lesser extent– Options for other South Asian economies more limited

• SAFTA possible means of bridging the distance– Deepening of trade in goods– Broadening to cover trade in services and investment

• But, can SAFTA deliver in a timely and cohesive fashion?

Institute of Policy Studies of Sri Lanka

SAFTA Negative Lists

Tariff lines

No. %

Value of imports subject to negative

list (%)Bangladesh 1254a 24.0 65.0

Bhutan 157 3.0 n.a.

India 884 b 16.9 38.4

Maldives 671 12.8 74.5

Nepal 1310c 25.1 64.0

Pakistan 1183 22.6 17.2

Sri Lanka 1065 20.1 51.7

Total 52.9

Notes: a. For LDCs 1249 items; b. For LDCs 763 items; c. For LDCs 1301 items.Source: Weerakoon and Thennakoon (2008).

Institute of Policy Studies of Sri Lanka

Intra-regional Trade and India

Share of SAARC

trade (%)

Share of trade with India (%)

2007 2007

Afghanistan 1.1 14.6

Bangladesh 5.8 89.5

India 77.5 -

Maldives 0.3 63.6

Nepal 0.8 99.0

Pakistan 10.6 38.7

Sri Lanka 4.0 90.3

Source: IMF, Direction of Trade Statistics, various issues.

• India accounts for 78% of intra-regional trade– Up from 66% in 2000

• Bulk of trade on bilateral basis with India– If Afghanistan is

excluded, Pakistan share is also 75%

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Market Access to India

• Liberal treatment offered by India– Nepal and SL get near

free market access under bilateral FTAs

– LDCs given further access in 2008

• Market access to India much more restrictive– Including under

bilateral FTAs

% of imports

subject to India’s SAFTA

negative list (%)

% of imports from India subject

to SAFTA negative

lists (%)

Bangladesh 11.2 66.0

Maldives 3.6 65.2

Nepal 46.2 64.2

Pakistan 16.4 14.5

Sri Lanka 41.5 53.5

Source: Weerakoon and Thennakoon (2008)

Institute of Policy Studies of Sri Lanka

Post-SAFTA Performance

• Total export earnings estimated at US$ 277 million– Bangladesh accounts for US$ 186 mn– Pakistan for US$ 46 mn

• SAFTA concessions largely irrelevant for many others– Bilateral FTAs driving South Asian trade in the case of Nepal, Sri Lanka.

• Will services and investment agreements make a difference?

Institute of Policy Studies of Sri Lanka

Services

Export of Services

0

2

4

6

8

10

2000 2001 2002 2003 2004 2005 2006 2007

% o

f GD

P

Bangladesh India Pakistan Sri Lanka

• Accounts for 60% of GDP on average for most South Asian economies

• Services exports have emerged recently– Dominated by India

• Services increasingly related to FDI

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Foreign Direct Investment

Key Sectors

BAN IND NEP PAK SL

Manufact.

Food/bev. √ √ √

T&C √ √ √

Chemicals √ √

Services

Energy √ √ √ √ √

Hotels √

Tran/com √ √ √ √ √

Trade √

Financial √ √

IT √

Source: ADB (2009)

FDI Trends: 2007

Services (%)

FDI ($)

Bangladesh 60.3 791.8 mn

India 75.0 24.5 bn

Nepal 52.0 572.9 mn

Pakistan 70.0 5139.5 mn

Sri Lanka 60.0 550 mn

Source: ADB (2009)

Institute of Policy Studies of Sri Lanka

Intra-regional FDI

• South Asia gets only 5% of global FDI– India gets 80%

• Intra-regional FDI very limited– Accounts for

substantive share only in Nepal

– India accounts for most of the regional FDI

– Indian services/FDI nexus clearly visible in SL

BAN NEP SL

Bangladesh 1.3 0.7

India 48.2 97.6 89.7

Pakistan 27.0 0.8 3.6

Sri Lanka 24.8 0.2

Share as % of total

3.0 44.5 5.0

Source: ADB (2009)

Institute of Policy Studies of Sri Lanka

‘Dilemma’ of Integration

India's trade with South Asia

02468

10121416

2000 2001 2002 2003 2004 2005 2006 2007

% o

f tra

de w

ith R

OW

Exports to India Imports from India

• Despite asymmetric market access offered by India, trade imbalances are growing– 2000-07, exports from rest

of South Asia to India increased by 9% p.a.

– But, imports from India increased by 14% p.a.

Institute of Policy Studies of Sri Lanka

‘Dilemma’ of Integration

• Comparative advantage driven?– With near duty-free market access, Sri Lanka’s exports to India

increased by 35% p.a. during 2000-08– With nearly 50% of Indian imports restricted by Sri Lanka’s negative list,

imports from India have still grown by 25% p.a.

• Non Tariff Barriers?– Argument made that India maintains relatively higher NTBs

• Smaller South Asian economies will have to deal with the dilemma of whether to push ahead with closer integration with India or not

Institute of Policy Studies of Sri Lanka

Direction of Trade

With SAARC With ASEAN+3

2000 2007 2000 2007

Afghanistan 30.1 42.1 26.1 11.5

Bangladesh 8.8 11.6 25.4 25.9

India 2.4 2.7 15.5 27.4

Maldives 22.3 17.0 42.9 28.9

Nepal 37.7 67.6 17.3 16.8

Pakistan 3.5 7.2 18.7 29.6

Sri Lanka 7.7 18.2 23.4 20.4

Total 4.4 5.3 17.7 27.0

Source: IMF, Direction of Trade Statistics, various issues.

Institute of Policy Studies of Sri Lanka

A Coalescing ‘Asian’ Integration Process?

Partners

FTA ASEAN Aus/NZ

CEPA India Japan

FTA India Thailand

CECA India Malaysia

FTA India ASEAN

CEPA India Korea

FTA ASEAN Japan

FTA Pakistan China

FTA ASEAN Korea

CEPA ASEAN China

FTA China Korea

CEPA India Singapore

• India a key player in the last 3-4 years– Apart from Pakistan,

no other SA country involved in recent initiatives

• Means of connecting South Asia– Nepal, Sri Lanka,

Bhutan already made headway via bilateral FTAs with India

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Other SAFTA+ Options

Intra-regional Trade

0246

8101214

2000 2001 2002 2003 2004 2005 2006 2007

%

SAARC APTA BIMSTEC

• BIMSTEC – Intra-regional trade rising

steadily– FTA goods chapter ready for

ratification. Moving to services/investment

• APTA– High and rising intra-regional

trade– Attractive, with participation of

both India and China

Institute of Policy Studies of Sri Lanka

SAFTA: Too Little, Too Late?

• A fragmented process– Of no interest to some countries – Of some interest to others, but this too can change

• Diverging strategic interests for key players– Pakistan following its own initiatives in East Asia– Goods/services agreement with China, FTA with Malaysia, etc.

• Will initiatives to ‘deepen’ SAFTA change status-quo?

Institute of Policy Studies of Sri Lanka

Deepening/Broadening SAFTA

• Goods: agreed to reduce negative lists by 20% from 2011– India/Pakistan in 3 yrs, Sri Lanka in 6 yrs and LDCs in 8 yrs– No binding provision in FA

• NTBs: submit list of NTBs faced– Has essentially become a bilateral issue between India/Pakistan– No binding provision in FA. Required to be WTO consistent only

• Services: FA almost ready– Unilateral regimes more liberal than GATS+ – The positives are that binding commitments will be given– Regulatory environment will be clearer

Institute of Policy Studies of Sri Lanka

Deepening/Broadening SAFTA

• Services can have +/-– With limited capital bases, penetrating foreign markets more difficult– However, can benefit from ‘access’ to foreign suppliers– Can include possibility of greater Indian FDI presence

• But, services negotiations likely to be protracted– Difficulties faced by policymakers in SL to “sell” CEPA– Changes to domestic regulatory regimes required

• Other ‘constraints’ as in goods– De facto ban/restriction on FDI between India & Pakistan

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Thank You

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