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Last Updated: Tuesday, 6 January, 2004, 11:03 GMT
Uphill task for South Asian trade pact

Mary Hennock
BBC News Online business reporter

The pact by seven South Asian nations to set up a free trade area looks like good news for some of the world's poorest people.

Sri Lanka
It promises to open the markets of seven developing countries to each other, bolstering regional trade and firing economic growth.

The seven agreed on the free trade area (FTA) at a summit which also set poverty reduction and welfare goals and, most importantly, talks between India and Pakistan over the disputed border territory of Kashmir.

Tension between India and Pakistan, regional economic heavyweights who have hovered on the brink of war over Kashmir for decades, has played a big role in stalling regional trade.

'Considerable challenges'

There is lot a hard talking ahead before the vision of the new South Asian Association for Regional Co-operation (Saarc) becomes reality. Peace is a pre-requisite, but economic frictions and structural problems also stand in the way.

Women shovelling grain in Bangladesh
The free trade pact aims to kickstart development

"This is a good first step but there are considerable challenges to actually achieving a free trade area," says Gill James, Chief Economist for the Middle East and South Asia at Standard Chartered Bank in London.

The region's bigger players, particularly India, fear that the poorer Saarc nations could flood their markets with cheap goods.

Wages in India average 66 US cents an hour, but in Sri Lanka they are less than half of this. As the region's economic powerhouse, India's attitude can make or break the fledgling trade zone.

Trade as % of GDP, 2001
India - 19.5%
Pakistan - 33.8%
Bangladesh - 33.2%
Nepal - 39.5%
Sri Lanka - 67.5%
Source: World Bank

But there is another catch - India, Pakistan, Bangladesh, Sri Lanka, Nepal, Bhutan and the Maldives currently export pretty much the same types of goods.

The region's biggest players compete to export textiles, garments, and agricultural commodities like tea, coffee and sugar.

Intra-regional trade forms a paltry 5% of the total trade by Saarc nations, says Ms James. It is worth a mere $3bn a year.

By contrast, European Union (EU) members do 60% of their trade with each other.

Saarc's bigger players look to the United States - which takes nearly a quarter of all exports from India and Sri Lanka - and EU. They trade with the rest of the world more readily than with each other.

Slow steps

Smaller nations like Nepal and Bhutan trade mostly with their neighbours, but it would take big structural changes for the region's larger economies to do so.

Pakistani security forces
Military tensions have hurt trade

Saarc plans to tackle some of these problems by phasing in tariff cuts and allowing countries to nominate industries for special treatment. Smaller economies have 10 years to fully implement the deal.

Political traditions may prove tricky too. South Asia has a long history of protectionism, still manifest in widespread political opposition to sell-offs of state-run industries.

Newly independent India raised hurdles against foreign goods as part of its struggle to establish home-grown industries after shaking off British rule.

Protectionist traditions are fading though. "There has been a reorientation towards looking outwards and greater integration into the world economy," says Ms James. Saarc members have made "a concerted effort" to cut tariffs since the early 1990s.

Big incentives

Economists dismiss the suggestion that the world's newest free trade zone may be little more than Saarc's way to ensure an upbeat summit communiqué.

South Asian countries are being pushed towards a free trade zone by the vogue for everyone around them to team up.

For instance, the neighbouring Association of South East Asian Nations is busily founding the world's largest common market with China and Japan - a powerful incentive for Saarc to makes its own zone work.

Plentiful proof that free trade zones do deliver is also pushing Saarc towards greater integration.

Trade between India and China has jumped seven fold thanks to their free trade agreement, which is still less than five years old, says Ms James.

Two-way trade between India and Sri Lanka is already one and a half times bigger than before their two-year-old bilateral free trade pact, she adds.

Saarc members offer each other a combined market of 1.4 billion people, one in five of the world's population.

Despite India's internationally successful high-tech industries, most of the region's people are desperately poor - about three quarters of them are farmers - and much in need of viable local growth strategies.

The deal comes at a time when most economies in the region are strengthening and trade balances are improving, making them well-placed to take advantage of new markets.

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