SAFTA comes into force. Free trade doesn’t

Pakistan and Sri Lanka have developed cold feet. Regional free trade is off to a very shaky start.

Pakistan and Sri Lanka develop cold feet

It remained on the back burner since it was first mooted in 1995. And then suddenly two years ago, subcontinental summiteers announced that they too, like everyone else in the alphabet soup business, would form a free trade zone. And within two years. That is a blistering pace for the most cohesive of international organisations. For SAARC countries, it is almost unholy. Yet they surprised everyone, themselves included, by putting together a framework that satisfied almost everyone. This meant, of course, that tariff reductions would be gradual and spread out over seven years (ten years in the case of the least-developed countries); and that some countries could exclude almost a thousand items on “sensitive lists”.

It’s the first of January, 2006 today. SAFTA, supposedly, has come into force. But over in Islamabad, they are still struggling with the old cart and horse problem. As a result, Pakistan is yet to ratify the free-trade agreement. Those in India who had expected that the multilateral agreement under SAARC would finally lead to Pakistan giving India a quasi-MFN status will now have to wait either for six more months or for the ‘core issue‘ to be finally resolved. India’s commitment to lower tariffs — including for imports from Pakistan — stays, and it should because lower tariffs benefit Indian consumers. But it remains to be seen what incentives India will have (other than resolving the core issue to Pakistan’s satisfaction) before Indian exporters are allowed into the Pakistani market. Although Afghanistan has become a full-fledged member of SAARC, Pakistan will not allow transit trade from India into the land locked country.

Sri Lanka too has delayed ratification, ostensibly because the new cabinet is still in the process of finding its feet. President Mahinda Rajapakse’s commitment to free trade, never strong in the first place, looks more suspect. While India and Sri Lanka already have a preferential trading arrangement, Sri Lanka’s backing off can have disastrous consequences for SAFTA.

SAFTA has been touted as SAARC’s most successful project. It is off to a shaky start. SAARC is anyway making itself irrelevant. The failure of SAFTA would be a body blow to the subcontinent’s alphabet soup project, not to mention for regional free trade.

This post also appears on The Indian Economy Blog