Special Treatment for

LDCs in SAFTADr Selim Raihan

Assistant ProfessorDepartment 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

Maldives0.3%

India77.2%

Nepal5.4%

Pakistan7.3%Sri Lanka

7.5%

Bangladesh 2.3%

India accounts for three-fourth of regional export. Bangladesh accounts for less than 3 percent

Country-wise Share (%) in Intra-SAARC Imports in 2003

Maldives2.6% India

12.8%Nepal14.5%

Pakistan7.1%

Sri Lanka26.6%

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$)

-200 -150 -100 -50 0 50 100 150 200 250 300 350

Bangladesh

India

Sri Lanka

Rest of SA

Trade Creation Trade Diversion

SAFTA(100+BD50): Trade Creation and Trade Diversion Effects

(Million US$)

-150 -100 -50 0 50 100 150 200 250 300

Bangladesh

India

Sri Lanka

Rest of SA

Trade Creation Trade Diversion

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

Total number of Products (4 digit HS

Code)

Coverage of Sensitive products as % of Total

HS Lines

Country

For Non-LDCs

For LDCs

For Non-LDCs

(%)

For LDCs (%)

Bangladesh 1254 1249 24.0 23.9

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

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.