Key Aspects of South Asia Free Trade Agreement - Coursework Example

South Asia Free Trade Agreement (SAFTA) Table of Contents South Asia Free Trade Agreement (SAFTA Table of Contents 2 Introduction 3 South Asia Free Trade Agreement (SAFTA) 3 Transaction Cost 6 Conclusion 8 Reference 9 Bibliography 10 Introduction This report aims to offer an insight into the South Asia Free Trade Agreement (SAFTA). A critical assessment of this report reveals whether it has imposed any kind of stumbling block for global trade, investment, production efficiency and integration of the regional economies into the multilateral system. An effort has been put forward to add a discussion on the transaction cost and the handling of the same by SAFTA. South Asia Free Trade Agreement (SAFTA) “A trade bloc can be defined as a ‘preferential trade agreement’ (PTA) between a subset of countries, designed to significantly reduce or remove trade barriers within member countries” (ECDPM, n.d.). If the trade bloc comprises of geographically proximate countries, the trade agreement is known as ‘regional trade agreement. Most of these trade agreements are done to enhance the business situation in a region by the coordination offered by each of the member states. Back in 2006, on the first day of January, the agreement on South Asia Free Trade Agreement came into force. Out of their members India, Pakistan and Sri Lanka are known as Non Least development Contracting state (NLDCS) and Bhutan, Bangladesh, Maldives are Nepal are referred as Least Developed Contracting States (LDCS) (Commerce, n.d.). The member countries of this agreement are able to avail a number of trade opportunities which are specifically available to the member countries of this agreement. These agreements have emerged to promote multilateral trade with a commitment to offer higher rate of economic growth worldwide. However, the spread of these regional blocs has denied allowing the non member countries to take the advantage of free trading. To enjoy the benefits of free trading which include enhanced resource allocation, improved level of efficiency, exposure to new innovative ideas, technologies and products the South Asia countries must ensure trade facilitation, economic cooperation to other Agreements and higher investment across the countries in that region. Despite of the fact that South Asia Association for regional Cooperation (SAARC) is being into existence for the last 25 years, still in 2004, the percentage of intra regional trade was only of 4 % of the total trade amount (Kemal, 2004). This section deals with a question whether SAFTA has posed a stumbling block for few factors. This part has been discussed in the wake of the following factors. Global Trade In a review, World Bank has revealed that all the regional grouping does not boost the trade and enhance the growth automatically. Although, the objective of these regional trading groups is to promote inter regional trade and economic growth, a large no of groups fail to achieve the same (Kemal, 2004). SAFTA has allowed the countries to prepare a sensitive list for trade barriers. However, if the list is large enough, no doubt, it will affect the trading in a negative way. “Whenever trade would be promoted, the industries in which the country does not have comparative advantage will close down” (Kemal, 2004). Moreover agreements which contains significant constraints and place high external border barriers negatively affect the trading opportunities. This would result in a stumbling block for the trading activities by promoting inefficient trading and undermining the competitiveness of other countries. Global Investment As per the norms of SAFTA the agreement, rules of origin, protection, tariff reduction, dispute settlement and institutional structure are supposed to be sorted out within the member countries of this free trade agreement. The agreement has been in place to promote the inter-regional trading activities and thus enhancing the economic growth in this region. The tariff reduction of the regional group demands the more developed countries like India, Pakistan and Sri Lanka are supposed to reduce the tariff to 20 percent, while the other members of this agreement are required to reduce the tariff by 30 percent by the year 2006 (Kemal, 2004).The agreement requires the elimination of the ineffective restriction on products. The entire clauses have been inserted to ensure the continual growing of trade activities between the regions and at the same time contributing to the economic growth of the region. Apart from the economic growth, these regional trade agreements are meant to contribute in the social welfare of the member states with cultural enrichment of those regions. Specifically the under developed countries like Bangladesh, Bhutan, Maldives these regional trade agreements can be a better opportunity to connect and share the social, economical, technological and cultural resources enrich themselves. Overall the multilateral agreements are supposed to contribute in the welfare of the South Asia region. As the business environments in these countries would enhance, the investment is supposed to see an upward direction. However this would vary between the countries as per their size, infrastructure, protection and industrial positioning. Even some activities have been acting as the hindering blocks on the way of investment. The first one is the sensitive product list of the countries; as the list would go large the investment may not show rapid growth in the respective region. The second factor is the tension prevailing among some of these participating countries in this agreement. However despite of all these hindrances, the region is committed to show their competence by attracting more investment in the coming future. Production Efficiency The multilateral agreement is supposed to contribute to the harmonisation of custom standards and procedures, cooperation in transport ad infrastructure, mutual realisation of the test results among the member countries. Competition between the countries is supposed to inject better integration among the member countries. Reduction of telecommunication cost, enhanced financials, commercial activities and business services are expected to result in the productivity gains. As the countries would be able to coordinate the technological advancements among themselves, it can be expected that with the contribution of the more developed countries, the under developed countries in this region would be able to enhance the product efficiency. Greater integration of the regional economies into the multilateral system The development of SAFTA is expected to positively impact its participants. However the impact is supposed to be different for each of the countries as most of these countries are different in size, structure of trade and income. The intensity of this effect would depend on the preliminary level of protection in those countries. This is much significance assessing the role of this agreement as trade diverting or trade creating (Antoine, Simon & Marcelle, 2010). Transaction Cost The transaction cost can be termed as the costs which are beyond the production costs. There are certain types of transaction costs. Each of them is articulated below. Search and Information Cost: This cost considers the cost which is incurred to search for the goods with the lowest price. The cost incurred in determining the availability of the goods in the market. Bargaining costs: This is one of the significant transaction cost in a multilateral agreement. This cost is incurred to come up at an acceptable agreement among two or more countries. Policy and enforcement cost: This cost is incurred in ensuring that the countries involved in the trading would comply with the rules and regulation. Imposing of new regulations in the agreements is also included in the transaction cost. Monitoring cost: Monitoring of the trade agreements is known as monitoring cost. Insurance cost: Insurance cost arises out of the unsuccessful project implementation. SAFTA has introduced trade facilitation policies with the collection of various instruments to reduce the Import and export cost including equalisation of the custom practices and offering technical assistance especially provided to the least developed SAFTA members (Delgado, 2007). The region can secure much higher gains if SAFTA would implement measures to reduce the transaction cost and at the same time create more effective transportation infrastructure to link the region with roads, rail and air (Financial Express, 2008). There is a need of trade facilitation. Enhancement in the trading situation within the region can spread across other regions too as enhancement of custom procedures and improved efficiency of the transportation helps both the intraregional trade and international trade (Kemal, 2004). Conclusion The SAFTA has brought a triumph among the South Asia countries. However as per the economists there can be certain events, in wake of which the agreement may go redundant. If all the participating countries of WTO reduce their tariffs to match up the preferential tariff level under the agreement of SAFTA, the growth in the inter-regional trading may see a downturn in its pace (Kemal, 2004). Moreover, if the negative list of the products is quite large, then that can negatively affect the inter-regional trading among the countries. The SAARC countries must put an effort to make SAFTA a success to induce economic development in the region. The regional trade expansion has enabled the member countries to avail efficient and enhanced quality of exports, which in turn would benefit the countries, taking part in the regional cooperation effort of doing trade in a better, enhanced and profitable way. The SAFTA has great prospective and the regional countries must incur the short term costs for future gains. Reference Antoine, B., Simon, M., & Marcelle, T. 2010. Is SAFTA trade creating or trade diverting? [Online]. Available at: http://www.ifpri.org/publication/safta-trade-creating-or-trade-diverting [Accessed on May 06, 2010]. Commerce. No Date. Agreement on South Asia Free Trade Agreement (SAFTA). [Pdf]. Available at: http://commerce.nic.in/trade/safta.pdf [Accessed on May 06, 2010]. Delgado, J. February, 2007. SAFTA: Living in a World of Regional Trade Agreements. [Pdf]. Available at: http://www.imf.org/external/pubs/ft/wp/2007/wp0723.pdf [Accessed on May 11, 2010]. ECDPM. No Date. Trade Blocs. [Pdf]. Available at:http://www.ecdpm.org/Web_ECDPM/Web/Content/Download.nsf/0/7063A1D7D8686243C12574980049FDAD/$FILE/Trade%20Blocs.pdf [Accessed on May 06, 2010]. Financial Express. March 29, 2008. SAFTA to have positive impact for S Asia: ADB-UNCTAD. [Online]. Available at: http://www.financialexpress.com/news/SAFTA-to-have-positive-impact-for-S-Asia--ADB-UNCTAD/289988/ [Accessed on May 11, 2010]. Kemal, R. A. 2004. SAFTA and Economical Cooperation. [Online]. Available at: http://www.southasianmedia.net/conference/Regional_Cooperation/safta.htm [Accessed on May 06, 2010]. Bibliography Statemaster. No Date. SAFTA. [Online]. Available at: http://www.statemaster.com/encyclopedia/SAFTA [Accessed on May 06, 2010]. Read More