Transcript Document

Special Treatment for
LDCs in SAFTA
Dr Selim Raihan
Assistant Professor
Department of Economics
University of Dhaka, Bangladesh
Presented at the Seminar on
Regional Economic Cooperation in South Asia
Kathmandu, 14-16 August 2006
Challenging Conventional Wisdom
• Economic benefits/costs are not uniform across the
South Asian Countries. Some countries gain and
others may lose from SAFTA
• Studies based on the gravity model to estimate
the welfare gains from regional trading
arrangements (RTAs) are methodologically flawed.
• The welfare gains or loses of RTAs can be estimated
by two effects of RTA: Trade creation and trade
diversion.
• We know, trade creation is welfare enhancing, and
trade diversion is welfare reducing.
Challenging Conventional Wisdom (cont.)
• Gravity models are partial equilibrium analysis, not
a general equilibrium analysis. Therefore, can’t take
into consideration the sectoral interlinkages.
• The right hand side of the Gravity equation is the
bilateral trade not the welfare.
• Also, the impact of the RTA is captured by
introducing the dummy variables in the equation
which is a very weak methodology.
• Therefore, gravity models can not actually estimate
the trade creation and trade diversion impacts
of RTAs.
Country-wise Share (%) in
Intra-SAARC Exports in 2003
Pakistan
7.3%
Sri Lanka
7.5%
Nepal Maldives
5.4% 0.3%
Bangladesh
2.3%
India
77.2%
India accounts for three-fourth of regional export.
Bangladesh accounts for less than 3 percent
Country-wise Share (%) in
Intra-SAARC Imports in 2003
Pakistan
7.1%
Nepal
14.5%
Sri Lanka
26.6%
Maldives
2.6%
India
12.8%
Bangladesh
36.4%
Bangladesh is the single largest importer in South Asia
Methodology
• Ex ante analyses.
• The use of an integrated global trade
database (GTAP).
• Application of a General Equilibrium
modelling framework to simulate the
potential implications.
• Using this model we can actually
decompose the welfare effects into trade
creation and trade diversion.
The GTAP Model



Version 6 of the GTAP database.
Base year data have been adjusted for MFA
phase-out, China’s accession to WTO.
Different simulations are carried out for
SAFTA.
Simulations
• SAFTA100: 100 percent removal of tariff
by all SAFTA countries.
• SAFTA(100+BD50): 100 percent
removal of tariff by all SAFTA countries
and Bangladesh reduces 50 percent of her
tariff with the ROW.
SAFTA100: Trade Creation and
Trade Diversion Effects (Million US$)
Rest of SA
Sri Lanka
India
Bangladesh
-200
-150
-100
-50
0
50
Trade Creation
100
150
200
250
Trade Diversion
300
350
SAFTA(100+BD50): Trade Creation
and Trade Diversion Effects (Million US$)
Rest of SA
Sri Lanka
India
Bangladesh
-150
-100
-50
0
50
Trade Creation
100
150
200
Trade Diversion
250
300
SDT Measures for LDCs in SAFTA
• Four LDCs, as per UN definition, namely
Bangladesh, Bhutan, the Maldives and Nepal have
been provided S&DT within the SAFTA Treaty Text.
• They are contained in:
– three sub-paragraphs in Article 3 (Objectives and
Principles);
– four paragraphs in Article 7 (Trade Liberalisation
Programme);
– entire Article 11 (Special and Differential Treatment for
the Least Developed Contracting States); and
– one paragraph in Article 16 (Safeguards Measures).
These S&DT Measures Include
 Longer timeframes to reduce or eliminate tariffs (10
years as opposed to 7 for non-LDCs);
 Rapid tariff reduction or elimination by non-LDC
partners on products originating from LDCs (3
years)
 Special regard when considering the application of
antidumping and countervailing measures to least
developed countries
 No safeguards measures can be applied against a
product originating in an LDC as long as its share of
imports does not exceed 5%
These S&DT Measures Include (cont..)
 Flexibility for LDC in the number of products
contained in their Sensitive Lists
 Flexibility in the provisional use of quantitative
restrictions or other restrictions
 Direct measures taken to enhance sustainable
exports from LDCs
 Technical assistance and cooperation
 Mechanism to compensate LDCs for their loss of
custom revenues
Sensitive Lists
•
The Agreement provides scope for maintaining of
sensitive lists, which are not subject to tariff
reduction programme.
•
Although the Agreement maintains that sensitive
list shall be different for LDCs and non-LDCs, only
three countries namely Bangladesh, India and
Nepal maintain different sensitive lists for LDCs
and Non-LDCs.
•
The LDCs maintain longer sensitive lists than the
Non-LDCs.
Sensitive Lists
Country
Total number of
Products (4 digit HS
Code)
For
Non-LDCs
1254
1249
For
Non-LDCs
(%)
24.0
Bhutan
157
157
3.0
3.0
India
865
744
16.6
14.2
Maldives
671
671
12.8
12.8
Nepal
1335
1299
25.6
24.9
Pakistan
1191
1191
22.8
22.8
Sri Lanka
1079
1079
20.7
20.7
Bangladesh
For
LDCs
Coverage of Sensitive
products as % of Total
HS Lines
For
LDCs
(%)
23.9
Rules of Origin
• SAFTA Rules of Origin requires that in order to
enjoy the preference under SAFTA a products
must undergo sufficient processing for changing
the tariff heading from the non-originating
inputs and for having value at least 40% value
addition measures as percentage of fob value.
• However, value addition requirement is lower for
Sri Lanka and LDCs, which is 35% and 30%
respectively.
Mechanism for Compensation
of Revenue loss
• A mechanism has been established to
compensate the revenue loss to be incurred by
the LDCs due to reduction of tariffs.
• The Compensation will be in cash and partial:
maximum 5% of the Customs duty collected
from SAARC import in 2005.
• Compensation will be available for 4 years only
(for Maldives compensation will be available for
six years).
Technical Assistance for LDCs
•
There are provisions for technical assistance
for LDCs at their request. Areas of Technical
Assistance as agreed upon are as follows:
–
Capacity building (Trade related)
–
Development and improvement of tax policy and
instruments
–
Customs procedures related measures
–
Legislative and policy related measures, assistance
for improvement of national capacity
–
Studies on trade related physical infrastructure
development, improvement of banking sector,
development of export financing
Safeguard Measures
•
In order to protect domestic industry from
possible injury due to increased preferential
import, the Agreement provides scope for
partial or full withdrawal of preference granted
under SAFTA for a period of maximum 3 years.
•
Safeguard measures cannot be applied against
the product of LDCs if share of import from an
LDC of the product concerned in total import
of importing country is less than 5%.
What to do
•
Trade diversion for Bangladesh and possibly for
other LDCs under SAFTA is inevitable.
•
Bangladesh and other LDCs in South Asia will
have to raise their export share into the Indian
market substantially.
•
S&DT for the LDCs under SAFTA are not
sufficient, especially maintaining the sensitive
list for some of the critical products by India
will not help the South Asian LDCs to increase
their export share.
•
Technical assistance to the South Asian LDCs
to diversify their export basket.