New York Times
December 31, 2003

South Asia Looks to Sign Free Trade Pact

By HARI KUMAR

NEW DELHI, Dec. 30 - Seven South Asian nations are expected to sign a free trade agreement at a regional summit to be held next week in Pakistan, according to government officials from around the region.

Representatives of Bangladesh, Bhutan, India, the Maldives, Nepal, Pakistan and Sri Lanka worked out a draft treaty in Islamabad last week for leaders to sign. Only a few issues remain to be resolved, officials said. The gathering will be in Islamabad beginning Sunday and ending Tuesday.

Of greatest concern to the region's least-developed nations is that they will be swamped by goods from their more developed neighbors, especially India. Agriculture, the impasse in global trade talks, has thus far not presented any obstacle in the discussions.

Officials have expressed confidence in recent days that the agreement, which would go into effect Jan. 1, 2006, will be signed. The pact would lower tariffs to 25 percent within three to five years and would eliminate them within seven years.

Bangladesh has said that it wants a few more years to bring down tariffs, which could hold up the treaty. Some "sensitive" products in each nation would be excluded from the accord.

Officials favoring the agreement point to the success of the other Asian regional bloc, the Association of Southeast Asian Nations, or Asean, as a model for South Asia.

"It is embarrassing that still we are talking in terms of signing the free trade agreement," said S. S. Kapur, a senior Indian commerce ministry official. "The rest of the world has gone way ahead."

The seven countries that make up , the group, which is called the South Asia Association of Regional Cooperation, are home to 1.5 billion people, about a third of whom live in poverty.

Despite the size of the region, only 5 percent of the official trade of the South Asian countries is among themselves. Trade between India and Pakistan, the two largest nations in the area, is only $200 million a year.

However, trade between the two countries through unofficial channels - either through a third country or by smuggling - is estimated at about $2 billion a year, according to the Federation of Indian Chambers of Commerce and Industry earlier this year. A report from the group estimated that the potential trade in the South Asian region at approximately $14 billion with a full free agreement.

Four nations within the region - Bangladesh, Bhutan, Nepal and the Maldives - have asked for compensation for revenue they would lose if they were deluged with imports after the imposition of substantially lower tariffs. These nations have fewer products to export and anticipate that a free trade agreement could overwhelm their economies. The leaders of India, Pakistan and Sri Lanka have agreed to compensate those countries at an earlier summit, officials said, but the form of that compensation has yet to be worked out.

Elias Ahmed, a senior commerce ministry official in Bangladesh, said by phone from Dhaka that the least developed countries were apprehensive about rules governing antidumping duties, the origin of products and tariff cuts.

"Our basic concern is that our existing market share in the regional trade shall be maintained even after signing the free trade agreement," he said.

Hostile relations between India and Pakistan have long distorted the growth of South Asia as a cohesive trade region. One positive outcome of the coming summit has been a thawing in relations. India and Pakistan have fought three wars and nearly went to war again last year.

Kashmir, divided between the two countries, lies at the heart of their dispute, but rapid economic growth in both countries has provided an impetus to defuse tension and focus on development. Both economies are expected to grow more than 6 percent this year, while their stock markets have rallied. The Karachi stock exchange is up 65 percent this year, and the Mumbai Sensex 30 index has soared 71 percent.

"As we develop greater economic stakes in each other, we can put aside mistrust and dispel unwarranted suspicions," Atal Bihari Vajpayee, the prime minister of India, said in a recent speech.

"If Saarc cannot organize itself, it will simply miss the boat," Mr. Vajpayee, who plans to attend the summit, said in another speech, using the acronym for the South Asian Association for Regional Cooperation.

An atmosphere of mistrust among neighbors, security concerns, tariff and nontariff barriers, and infrastructure bottlenecks all hamper trade in the region. On the India-Bangladesh border, for instance, it takes a truck carrying cargo four days to complete the paperwork to cross over.

At present, the seven nations have a preferential trade agreement that sets some lower tariffs on 4,951 products. Many items, however, are traded infrequently because every country produces them, like chemicals, metal products and raw materials.

The lack of a broad agreement can make trade circuitous. A large volume of the India-Pakistan trade takes place via Dubai, Singapore and the Turkmenistan-Afghanistan route, and includes items like cement, tires, medicines, videotapes, cosmetics and tea.

Pakistan is one of the world's major tea consumers, while India has a tea surplus. But Pakistan imports its tea mostly from Kenya, in part because of a tariff of more than 50 percent on Indian tea.

Pakistan, meanwhile, stands to benefit through the increased export in the region of leather, textile and plastic goods.

Jagdish Bhagwati, an economics professor at Columbia University in New York, expressed some skepticism on the regional nature of the agreement.

"They need to bring down these barriers in general, not at subregional level." He added that agriculture is heavily subsidized throughout southern Asia. "If you include subsidized products in free trade agreements, it creates problems," he said.