SAFTA, answer to major trade blocs, by 2001

By Asiff Hussein

As the drive towards the South Asia Free Trade Area (SAFTA) fast approaches reality, all indications are that a successful transition to a strong viable regional trading bloc, as envisaged by the South Asian Association for Regional Co-operation (SAARC), will eventually take place by the year 2001.

SAFTA will mean the dismantling of all tariff and non-tariff barriers to trade other than for specific purposes, such as security to ensure the free movement of goods and services across borders within the region.

Not only will this process enable the seven South Asian countries - India, Pakistan, Bangladesh, Nepal, Bhutan, Sri Lanka and the Maldives - to co-operate economically for their benefit by way of preferential tariff regimes, but also pave the way for a common front in connection with dealing with the outside world.

The implications of such a scheme are indeed far-reaching. Besides allowing for the optimum utilization of the region's natural and human resources and strengthening the industrial, commercial and financial sectors of the member countries, it is expected to contribute to greater political stability and co-operation between member states, especially India, Pakistan, Bangladesh and Sri Lanka.

SAFTA, with a combined population of over 1.3 billion people and vast natural resources and production and service facilities is truly South Asia's proposition to the other major trading blocs that have emerged since of late by such as the European Union (EU), the North American Free Trade Area (NAFTA) and the Association of South East Asian Nations (ASEAN).

It must also be pointed out that unlike all other regional trading blocs which have taken 10-15 years to become a reality since they were first propounded, SAFTA is on its way to becoming a reality within a much shorter period.

The most significant step in the move towards SAFTA was the signing of the South Asian Preferential Trading Arrangement (SAPTA) by all SAARC nations on April 11, 1993.

The agreement was ratified on November 7, 1993 and came into effect the following month.

What is especially desirable about the arrangement is its provisions for favourable treatment to the Least Developed Countries (LDCs) in the SAARC region - Bangladesh, Maldives, Nepal and Bhutan.

This includes favourable terms for technical assistance, duty-free access, deeper tariff preferences, provision of special facilities with regard to shipping and identification, preparation and establishment of industrial and agricultural projects, training facilities and support to export marketing.

Provisions for safeguard action and balance of payments measures have also been incorporated in the agreement to protect the interests of member states during critical economic situations, namely unfavourable market forces.

For instance, in the event of a surge in imports, the effected country is free to unilaterally withdraw the concessions granted.

All this is in keeping with SAPTA's basic policy which states that it shall be based and applied on the principles of overall reciprocity and mutuality of advantage in such a way as to benefit equitably all contracting states taking into account their respective levels of economic and industrial development, the pattern of their external trade and their trade and tariff policies and systems.

Despite the fact that inter-regional trade among the South Asian countries last year amounted to only 3-4 percent of their total trade, it was nevertheless an improvement from the mid-1980 when intra-regional trade stood at a mere 2.27 percent.

However this inter-regional trade of 3-4 percent is negligible when compared with that of other regional trading blocs.

For instance in the case of NAFTA, inter-regional trade is as high as 65 percent while in the case of the EU it is well over 50 percent.

It must however not be forgotten that SAPTA is only a modest beginning and despite long-standing political animosities among regional states such as India and Pakistan, it is nevertheless making much headway.

It was only late last year that an Indian trade delegation visited Pakistan while the first ever direct tea exports from India to Pakistan took place early this year.

Prior to this, trade between the two countries took place via a third country.

More Exports

The issue of trade imbalances however needs urgent attention especially in view of the favourable trade position of India and Pakistan within the region.

Presently, the major exporters within the region are India and Pakistan, while the major importers are Bangladesh and Sri Lanka.

The share of India's exports in intra-regional exports was 70.37 percent in 1994 while the combined share of Sri Lanka and Bangladesh in total inter-regional imports was 72.94 percent for the same year.

India and Pakistan have therefore been exporting more in comparison to imports to other SAARC countries.

With the exception of these two countries, all other regional states are having trade deficits in the context of inter-regional trade.

This imbalance is however expected to be corrected shortly in view of the greater number of tariff concessions made by India and Pakistan.

The first round of trade negotiations under SAPTA held in April 1995 at the sixth meeting of the Inter-Governmental Group (IGG) entailed the member states having intensive bilateral and multilateral negotiations to reduce import duties and remove para-tariff (border charges etc) and non-tariff (licensing, quotas, standards etc) barriers.

The negotiations which were conducted on a product-by-product basis resulted in a comprehensive list of concessions that were to be granted by individual contracting states to other contracting states under the agreement which was approved at the 15th session of the SAARC Council of Ministers in May 1995.

These National schedules covered 226 tariff classifications comprising 106 concessions made by India, 35 by Pakistan, 31 by Sri Lanka, 17 by Maldives, 14 by Nepal, 12 by Bangladesh and 11 by Bhutan.

Sri Lanka granted concessions for a number of consumer goods including agricultural products, processed fruits and fish, chemicals, timber and woven products, metal products, motor cycles and vehicular parts and accessories.

A major consideration that has been taken into account in permitting duty cuts on imported items is of course its impact on local manufacturers.

Heavy duty cuts have been conceded in cases where the imported product is not available or devisable locally.

For instance, the duty on motor spares was reduced from 20 percent to 10 percent while the duty on Maldive fish was reduced from 10 percent to 5 percent.

Sri Lanka was able to secure direct concessions based on bilateral negotiations for 67 products of exports interest to her including 37 from India, 10 from Pakistan, 5 each from Nepal and Maldives, 3 from Bhutan and 2 from Bangladesh.

In addition, the country will be eligible to the preferential rate of duty granted to 21 other products which are of export interest to her that were included in the National Schedules of Concessions of the other member states.

The duty cuts granted to Sri Lanka ranged from 10 percent to 90 percent.

All this however dealt mainly with tariff reduction.

The issue of para-tariff and non-tariff measures was not extensively addressed in the first round.

Concessions

The second round of negotiations held from September to November 1996 resulted in tariff concessions being granted to 1871 new products which were approved at the fourth IGG meeting held in Kathmandu.

This comprised 902 concessions by India, 363 by Pakistan, 233 by Nepal, 226 by Bangladesh, 95 by Sri Lanka, 47 by Bhutan and 5 by the Maldives.

Sri Lanka was able to secure direct concessions on 69 items while it became eligible for duty concessions on 229 other products as a result of multilateral agreements among the contracting states.

The duty cuts conceded at the second round varies from 10 percent to 50 percent of Most Favoured Nation (MEN) rates.

The contracting states also agreed to take measures to eliminate non-tariff barriers pertaining to concessions covered under SAPTA.

The third round of negotiations which is envisaged to be a combination of product-by-product, sectoral and across-the-board approaches, began in July last year and is expected to be concluded by the end of this year.

Sri Lanka has submitted request lists of 214 items to Bangladesh, 81 items to Bhutan, 265 items to India, 180 items to the Maldives, 118 items to Nepal and 164 items to Pakistan.

The country has received request lists covering 551 items from Bangladesh, 158 items from Pakistan, 151 items from Nepal, 72 items from India, 17 items from Bhutan and 16 items from Maldives.

To ensure that concessions are granted only to products genuinely originating in member states, products have been classified into two categories, viz, wholly-obtained products which are wholly manufactured with raw material or components originating from a particular country and non-wholly-obtained products which are those products manufactured with significant inputs of imported raw material.

Sri Lanka's total exports under SAPTA in 1997 amounted to US $14.66m while its imports amounted to US $12.63m.

The main export items were mace, cloves, nutmeg, oleo pine resin, desiccated coconut, coconut milk powder, arecanuts, biscuits, graphite and surgical gloves.

The main import items were motor cycles, Maldive fish, clutch plates and carbon black.

Vice-President of the SAARC Chamber of Commerce and Industry (SCCI), Macky Hashim contends that in order to facilitate inter-regional trade, it is necessary that regional governments relax travel restrictions for entrepreneurs.

Relax Travel Bans

These include visa facilities, cheaper air fares and positive governmental assistance.

He however noted that under a scheme initiated late last year, genuine entrepreneurs will be issued visas promptly to any of the regional countries upon the recommendations of the respective chamber federations.

Besides, SCCI officials in all SAARC countries have been conceded visa exemptions. The SCCI, founded in 1994 to promote inter-regional trade has been instrumental in proposing and formulating regional policy in connection with SAPTA and SAFTA.

It is due to its commitment towards regional trade and co-operation that all regional states accepted SAPTA within just two years of the chamber's existence.

The SCCI has since taken steps to identify other areas where meaningful co-operation is possible, especially service-related industries such as tourism and construction.

To date two SAARC service promotion bodies, the SCCI Tourism Council and the SCCI Construction Industry Council have been formed.

The SCCI Tourism Council established in 1996 in order to promote inter-regional tourism in the SAARC region as well as to promote the region as an attractive destination for tourists and visitors outside the region shows much promise in realizing its objectives.

To date three SCCI Tourism Council seminars have been held in Lahore, Colombo and New Delhi and have deliberated on a number of issues, constraints and prospects for developing the industry within the region.

The Council has called on regional governments to adopt a number of meaningful measures to realise its objectives.

These include recognizing the SCCI Tourism Council as the apex body of tourism business in the region, provision of special rates for travel for nationals of SAARC countries, liberalization of regulations governing the movement of people and means of transportation within the region (eg., visa rules, currency exchange regulations, air and surface transport regulations etc) thus ensuring easy travel for SAARC nationals, provision for the free flow of tourism-related investment within the region, introduction of tour packages especially designed for SAARC nationals and the development of tourism products involving more than one country within the region.

Tourism

Mr. Hashim pointed out that the SAARC region with its middle class of about 300 million (over 200m in India alone) is a potentially large tourist market which can be tapped by those countries having advanced holiday facilities such as Sri Lanka, Nepal and the Maldives.

He observed that such an activity could serve as a major source of income for the region. It also shows immense potential in generating greater employment.

The SCCI Construction Industry Council formed early this year envisages closer co-operation between regional companies in the construction sector. This includes forming a consortium for undertaking regional infrastructure development activities such as the construction of bridges and highways.

Mr. Hashim said that besides tourism and construction, SAARC Councils for other service related industries like shipping, banking and insurance are expected to be established shortly.

Mr. Hashim also stressed the importance of forging a common front in connection with dealings with the outside world.

For instance, he noted that India and Pakistan which account for 60-65 percent of the world's cotton stock between themselves could well enter into an agreement specifying a minimum price for the product.

Likewise, Sri Lanka and India could enter into similar arrangements pertaining to tea and other commodities.

In former times what happened was that each country simply outbid the other in a highly competitive market scenario resulting in diminished prices for their products.

The common front strategy is thus expected to maximize the utilization of the region's resources for the greater benefit of its people.

As for the progress so far made in connection with the move towards the Free Trade Area, the second meeting of the Inter-Governmental Expert Group (IGEG) on the transition to SAFTA held in October last year has drawn up the framework of the action plan for realizing the Free Trade Area by the year 2001.

The study is planned to cover trade imbalances, identification of non-tariff barriers, regional impacts on national economic policies and the special needs and requirements of the LDC's.

The Free Trade Area will of course have far-reaching implications for regional trade and commerce as well as national economic activities and living standards, though it is expected to be a mutually beneficial exercise like SAPTA.

Sans Customs

Whereas under SAPTA every country retains sovereignty over its tariff and non-tariff regime, a free trade area necessarily implies that all customs barriers will be removed meaning that contracting states surrender their sovereignty to a harmonised import regime covering the whole region.

In the absence of such a system, the lowest import tariff in the region will become the effective tariff for all countries, subject of course to minor variations on account of transportation costs.

Thus even if countries formally retain sovereignty over import controls it will hardly serve any real purpose since the controls cannot apply to goods flooding in from other SAARC countries, contend proponents of SAFTA. Therefore they aver that it is much more sensible for all regional states to agree on a common external tariff.

A Free Trade Area, it has to be noted, does not mean the removal of all tariffs, but rather their reduction to suit a harmonised tariff regime since tariffs constitute an important source of government revenue. This is even the case with the EU and NAFTA.

Founder member and former Vice-President of the SCCI, Granville Perera who at present serves as an ex-officio member of the Executive Committee of the Chamber is however of the view that there are a number of shortcomings that have to be addressed before SAFTA is ratified.

In order to ensure a level playing field so as to make SAFTA a success, he points out that firstly, all non-tariff barriers including licensing schemes will have to be completely removed or else function on an equal basis.

He noted that in this connection, Sri Lanka has removed all its non-tariff restrictions on imported goods, save for sensitive items involving health, environment and security.

Other SAARC states, especially India and Bangladesh however still continue with licensing schemes for most imported products while Pakistan, Nepal and Maldives have removed most of their non-tariff restrictions.

Secondly, there is an urgent need for all countries to agree on a common tariff structure for the region whereby there exist no disparities on the concessions granted by the contracting states.

Mr. Perera pointed out that in this connection, Sri Lanka's three-band tariff structure which carries a 35 percent tariff for manufactured goods for retail sale, a 20 percent tariff for components and intermediate goods for industry and a 0-10 percent tariff for raw materials for industry, is an ideal model to be adopted by other SAARC countries.

He observed that Sri Lanka has undertaken a rationalization of its tariff structure which is sadly lacking in other regional states which have tariff structures of 10 bands or over.

Tariff rationalization is extremely important in a context where all concessions presently granted under SAPTA are based on the tariff structures of individual countries. Mr. Perera advocates that all regional states adopt a three band tariff structure beginning with tariff rates of 20, 10 and 0 where the upper levels could be progressively brought down with the passage of time.

Dominant State

Fears have been expressed in some quarters that the more developed nations, especially India, a regional superpower with a population approaching one billion (over 300 million of whom are included in the higher income bracket) and greater industrial capability, could easily dominate such a market.

It has also been argued that in a context where there exists wide disparities in levels of development, smaller states will be liable to share the burden of adjustments entailed in the transition process to a greater extent than the bigger nations.

Such apprehensions will however prove to be unfounded if we consider the experiences of other regional trading blocs such as the EU where smaller states such as Belgium and Luxembourg enjoy equal status with the larger countries like Germany and France.

Indeed what really matters in such a set-up is equal status where every member state is treated as a full member of the free trade area with the same rights and obligations as all other member states, irrespective of its GNP, population or geographical size. This necessarily includes equal decision-making and voting rights.

As for the contention that smaller countries are likely to share a greater burden of the adjustments, a look at such trading blocs as ASEAN and MERCOSUR of Latin America will render this argument invalid.

The experience of MERCOSUR consisting of Argentina, Brazil, Paraguay and Uruguay which display vast disparities in terms of its GNP, population and size, clearly shows that given the necessary encouragement and incentives, regional states can move towards a free trade area within a relatively short period.

Singer chief on non-tax paying millionaires

Continuing its healthy growth trends, Singer (Sri Lanka) Limited has recorded increases in turnover and profits during the first quarter this year. Turnover was Rs, 942 million as compared with Rs 809 million in the same period last year thus recording a 16.4 percent increase. Profit after Tax was Rs 63 million, a near 20 percent increase from Rs 53.5 million during the corresponding period last year.

Singer has maintained its pattern of continuous growth established over the past 14 years, irrespective of environmental fluctuations. Meeting the prediction made earlier that revenue growth will return to double - digit levels, the Company recorded a 13.7% growth in 1997 exceeding the Rs 3 Billion mark.

"We strengthened our market leadership positions and the growth was in tandem with overall growth achievements', Singer Chairman Hemaka Amarasuriya summed up last year's performance.

Meanwhile, last week Singer entered into an agreement with MB Financial Services Limited to issue an unsecured Singer Note (Zero Coupon) to the face value of Rs 100 million for a period of one year.

The Company believes that it will enable Singer to access the money market direct though retail investors and help to diversify its borrower platform while participating in the development of the secondary market.

The issue which opened on May 20, has been issued in smaller denominations to facilitate retailing and to provide the retail investors with an opportunity of investing in a low risk high yielding debt security of Singer.

As regards Singer's performance last year, sewing machines and home appliances, where Singer is market leader contributed 80% to the turnover, which amounted to Rs 3,065 million as compared to Rs 2,695 million in 1996. Following a restructuring, revenue doubled in the Industrial Sewing Products division also helped by the garment industry remaining buoyant.

Stiff opposition in the dealer market halted the Argo Division's substantial growth patterns of past years. "Competition, in a desperate bid to stop Singer's march forward, distributed on consignment and used dumping as a mode to fill up dealer retail space. The nature of the marketplace is that such strategy results in chaos in year 2 followed by low collection levels and bad debts", Mr Amarasuriya warned.

Though revenue grew at double-digit level, Profit after Tax did not reach the same levels. Profit before tax recorded Rs 254 million, a 5.2% increase over the previous year, profit after tax was Rs 164 million, a 3.9% growth.

Commenting on this, Mr Amarasuriya said that though margins improved over prior year, the proportionate marketing expenses grew at a faster rate than revenue resulting in lower precentage growth overall. Labour unrest and strikes at the associate factory companies too affected Singer's performance.

"Some substitution was possible through hurried imports from overseas Associates, but this did not compensate fully for the void created" Mr Amarasuriya said. "Also these imports resulted in a stock pile up as inventories moved up from Rs 507 million to Rs 628 million from year to year and we could not fully benefit from the interest rate declines experienced in 1997."

Mr Amarasuriya expressed concern over two matters that haunt the Company's business and that of the household consumer durable sector. One is the duty free channel of imports, which was aimed at providing relief to expatriate returness but continues to be the centrepoint of leaks into the open marketplace.

"Unfortunately the Middle East returnees receive the least benefit and a new class of non-tax- paying millionaires have emerged. We continue to request the authorities to control these leaks with limited success.The damage done to the economy as a result of this cannot be quantified, as two out of three refrigerator factories were closed during the year under review due to the imperfect market conditions, one sector complying with Government regulations and tariffs and the other sector not".

The other concern is the spreading of unaccompanied baggage warehouses which has resulted in them being used as a channel to bring in duty free goods into the open market as close customer surveillance is not possible considering the wide expansion that has taken place in a short span of time.

Products, which have brand popularity in Sri Lanka and have established models, are moved from Middle Eastern markets utilizing the service and warranty support of established distributors to seek duty free niches, further weakening the future of established tax- paying businesses in the country.

"We request the authorities to study these situations and bring about administrative measures to prevent revenue evasion," Mr Amarasuriya insisted.

Seminar on GST

June 4: Seminar on the Practical Implications of the Goods and Services Tax, 2 p.m., Ground Floor Auditorium, Ceylon Chamber of Commerce.

P. Guruge, Deputy Commisioner - GST of the Department of Inland Revenue will address the participants on the Practical Implications of the GST. A panel discussion will follow.

Further details could be obtained from the Secretariat of The Ceylon Chamber of Commerce, 50, Navam Mawatha, Colombo 02.

Gateway to open two more computer schools

Gateway Kids' School of computing has emerged as the market leader in computer training for kids in 15 months. The student population has grown to 800 during this period due to the high quality training offered by the organization, a media release says.

Due to the increasing popular demand, Gateway will open 2 more branches in Bambalapitiya and Borella within the next month. The Chairman of Gateway, R. I. T. Alles emphasized that more students especially in the outstations would be provided with greater opportunities to learn information and communicaiton technology in the near future with the envisaged rapid expansion programme.

The training at Gateway is based on the British National Curriculum for Information and Communication Technology. Gateway is the only organization in South Asia which is approved by the International Curriculum & Assessment Agency (ICAA - formerly NDTEF) of the United Kngdom.

Due to this affiliation Gateway is able to offer the Primary and Secondary Information Technology Certificate of Competence (ITCC) schemes, to kids from 4 - 14 years. These schemes are currently offered in more than 2000 centres in the world. These include UK, Hong Kong, Singapore and Malaysia.

The training is structured in 3 Key Stages: Key Stage 1 (4-7 years), Key Stage 2 (7-11 years) and Key Stage 3 (11-14 years).

DIMO Automart opens in Matara

Taking a new concept in autocare out of Colombo, Diesel & Motor Engineering Co. Ltd (DIMO) will venture into auto care franchise operations with DIMO Automart; the first 'Automart" opened its doors recently to customers in the South.

Located at Matara, the DIMO Automart will be managed by Galle Motors Pvt Ltd. DIMO views the South as the centre for economic boom, says Ananda Mapalagama, AGM - Marketing & Distribution Divison - DIMO and Matara will serve as a central location that can serve their customers in the entire southern region,covering Ambalangoda to Kataragama and Deniyaya to Embilipitiya.

He calls the DIMO Automart a concept that takes professional autocare out of Colombo , to the outstations.

The DIMO Automart will not only stock genuine spareparts for brands represented by them in Sri Lanka. Mercedes Benz, TATA and Proton - but also spareparts for Japanese makes, Mr. Mapalagama says. "As a pioneer concept in the autocare business, we believe this caters to a long fell need for professional and reliable autocare services in the outstations where a great number of our customers are located" he adds.

"We hope to extend the concept, countrywide Automarts will commence operations in Kurunegala, Kandy, Anuradhapura and Galle, among other key towns.

Our primary objective is to provide our outstation customers with genuine spareparts".

The second stage of the Automart will be an all inclusive auto service operation covering lubrication, tyre servicing, fuel injection service etc, DIMO officials confirm; the expertise and professionalism for which DIMO has acquired a name in automotive circles will be extended to the outstation customers through this, the officials add.

The Automart will house more than auto spares. It will also offer Osram energy saving lamps and have a dedicated section for Bosch power tools.

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