Why is intra-regional trade not growing in South Asia, despite more than a decade of SAFTA, several bilateral free trade agreements and a one-way tariff-free customs regime from India to all the least developed countries in the region (Afghanistan, Bangladesh, Nepal, Maldives and Bhutan)? The Latest World Bank report « A Glass Half Full: The Promise of Regional Trade in South Asia » explains itself. And here are the reasons for the inefficiency of SAFTA. First, the SAFTA is undermined by the so-called « sensitive » list – a long list of products excluded from the tariff liberalisation programme. Each country has many products in this sensitive list, which range from 6 to 45 percent of its imports from other South Asian countries. Bangladesh, Sri Lanka and Nepal account for the highest proportion of sensitive imports from South Asia. Similarly, 5 – 48% of exports to South Asia do not benefit from tariff preferences from recipient countries, with the Maldives, India and Pakistan accounting for the highest proportion of exports subject to this treatment. The main objective of the agreement is to promote competition in the region and to offer equitable benefits to the countries concerned. It must benefit the citizens of countries by bringing transparency and integrity between nations. SAFTA was also created to strengthen the level of trade and economic cooperation between ASARC states by reducing tariffs and trade barriers and to grant specific preferences to least developed countries (LDCs) within SAARC, nations.to create a framework for further regional cooperation.
Both countries have taken steps to improve their economic relations. In 1995, India granted Pakistan preferred nation status (MFN), but Pakistan did not retaliate. In 2011, Pakistan decided to extend MFN status to India, with a view to coming into force as of 1 January 2013, but this target has not been achieved. The South Asia Free Trade Area (SAFTA) also failed to meet expectations. In 2004, the two countries signed the agreement with six other South Asian countries, but there was no significant improvement in the trading environment or increase in bilateral trade. There is enormous potential to expand bilateral trade. The Pakistani and Indian economies are very complementary and increasingly important over time. The two countries also have a common border, history and cultural commonalities. Nevertheless, trade relations between South Asia`s two largest economies remain weak. Strong political will is needed to ensure that SAFTA and MFN have a positive impact on bilateral trade.
Regional and bilateral trade agreements require political reforms to reduce tariff and non-tariff barriers. These reforms can only be implemented if trade agreements are supported by support institutions. The South Asian Free Trade Area (SAFTA) is the free trade agreement of the South Asian Association for Regional Cooperation (SAARC). The agreement entered into force in 2006 and came into force with the 1993 ASAC preferential trade agreement. SAFTA`s signatory countries are Afghanistan, Bangladesh, Bhutan, India, Maldives, Nepal, Pakistan and Sri Lanka. Improving physical and soft infrastructure is a prerequisite for improving bilateral trade. Trade agreements between the two countries, including Pakistan`s eventual granting of MFN status to Pakistan, can only be effective in expanding bilateral trade if they are supported by a clearly defined and implemented institutional framework, ensuring the proper implementation of the necessary reforms.