When the SAARC heads of state met in New Delhi in 1995, they signed a charter that (among other things) promised to eradicate poverty from the region by 2002. One-fourth of the world's poor still live in South Asia.
Compared to such wishful thinking, the South Asian Free Trade Area (SAFTA) plan may be less ambitious, and therefore more likely to succeed. But if Nepal isn't prepared for free trade, it won't benefit from it. If we couldn't even act on the benefits of the 1995 South Asian Preferential Trade Arrangement (SAPTA) that was supposed to boost intra-regional trade on a commodity-wise basis, it is unlikely we will take any advantage from SAFTA.
Economists supported the SAPTA idea, but consumers and traders did not see any discernible changes. "The good news was that SAPTA came about earlier than expected," says Rajendra Khetan, the president of the Nepal Britain Chamber of Commerce and Industry. "The bad news is that the negotiations among member countries for tariff concessions went pretty slow."
In the last nine years, barely 5,000 items were tagged with concessions in an entire region of 1.5 billion people. And even after the agreement to lower tariffs for the import of these goods by member countries, no deals were struck because some SAARC member countries had not done their homework. Those who did, discovered they could play by easier bilateral rules, and didn't need to get bogged down in a regional framework.
If SAPTA was a disaster, can SAFTA be any better? SAFTA plans to boost the present five percent intra-SAARC trade by phasing out tariff barriers and quota restrictions for goods between member countries over a 10-year period. The clock will start ticking for Nepal, Bhutan and the Maldives to reduce their tariff rates to zero to five percent between 2006-2016. India, Pakistan and Bangladesh will get five years to implement the new tariff regime. Sri Lanka will have six years.
Nepal may well bring tariff barriers down because it has already signed the draft SAFTA agreement. The same applies to other SAARC members. On paper, the idea looks lucrative. With tariff rates at zero by 2016, South Asia-home to one-fourth of humankind-will indeed be a huge market for member states. Theoretically, everyone stands to gain. But practically, countries will only gain if they are prepared.
Nepali officials still haven't figured out which commodities will be advantageous to us. "There has been no research in this regard," says Hasta Dabadi, Executive Director at the FNCCI. "Without such a study, we are not in a position to say if we will benefit or lose from SAFTA. Such studies require massive investments which we can't afford."
But it doesn't take a rocket scientist to figure out that landlocked Nepal's exports face a logistical problem, especially when it comes to exporting to a third country via India. Transit and transportation time inflates the price of goods that are usually available in South Asian countries at a much cheaper price. "There are problems with transit and transportation," says economist Bishwambar Pyakurel. "These add up the cost of our exports and minimise our comparative advantage."
India is Nepal's biggest trading partner to which we export around Rs 30 billion worth of goods annually. This could have reached saturation since India produced just about everything Nepal makes, and given its economies of scale, would find it expensive to import Nepali products. In such a situation, even if India lowers its tariffs for Nepali goods under the SAFTA provision, Nepalis would not be able to compete with Indian manufacturers.
What is true for India could apply to other South Asian markets. Under SAFTA, if the tariffs are brought down to zero in all SAARC nations, it will be Indian products that will flood that market not Nepali products. There have been exceptions like Nepal's ghiu and noodles, but with SAFTA in place, regional economic giants could cut into Nepal's comparative advantage.
Nepal must have a strategy if it is to benefit from SAFTA. If not, we'll lose out regionally and in the domestic market too. Lowered tariffs for imported products will mean regional foreign goods will inundate the market. If those products are better quality and cheaper, they will wipe out domestic production. "In such a scenario, the country will face a lose-lose situation," says Pyakurel. "Local producers will suffer loss because of a decline in export and sales. The government will also start losing revenue."
But there will be one winner: the Nepali consumer. And if that can happen here, it can also happen in other South Asian countries. Nepali producers must sharpen their competitive edge, not just because of SAFTA but also because of WTO. "WTO and SAFTA will complement each other," says Prachanda Man Shrestha, Joint Secretary at the Ministry of Industry, Commerce and Supplies. "That is why the trade rules and regulations we are changing will help us cope with the situation."
If the opportunities presented by WTO are the same as SAFTA but on a bigger scale, then the risks will also be bigger. This means Nepal has to gauge and calculate how we can take advantage.