SAARC: Follow APEC, not NAFTA

Arvind Panagariya

 AT the end of this month, the heads of states of the member na tions of the South Asian Association of Regional Cooperation (SAARC) will get together in Colombo to discuss the future agenda of the Association. Should the countries follow the lead of the North American Free Trade Agreement (NAFTA) and limit liberalisation to member countries or should they emulate the Asia Pacific Economic Cooperation (APEC) forum and thus adopt a nondiscriminatory approach to trade liberalisation?

 Despite much enthusiasm on the part of some regional leaders and policy analysts, the creation of a discriminatory trade bloc in the region, dubbed the South Asian Free Trade Area (SAFTA), along the lines of the NAFTA will be a mistake. The region's interests will be served by following the APEC model which calls for full adherence to the Most Favoured Nation (MFN) principle and, hence, nondiscrimination in trade policy.

 It may be recalled that at their celebrated summit in Bogor, Indonesia in 1994, the APEC members had agreed to free up all - trade by the year 2010 in developed member countries and 2020 in developing member countries. At the time, the agreement neglected to specify whether such liberalisation was to be discriminatory as in NAFTA or nondiscriminatory as pursued by the Asian countries. Despite some sentiment in favour of the discriminatory approach on the part of the United States, the Asian members prevailed at later summits and the APEC is now fully committed to the MFN principle.

 The original inspiration for the SAARC had come from the Association of Southeast Asian Nations (ASEAN), founded in 1967 by Brunei, Indonesia, Malaysia, the Philippines, Singapore and Thailand. Often viewed as a preferential trading agreement, the ASEAN actually began as a cultural organisation and, until as late as 1997, had no economic component.

 Though the ASEAN Preferential Trading Area (APTA) was introduced 1977, it led to little action. In January 1992 the ASEAN members did sign a framework agreement to form the ASEAN Free Trade Area (AFTA) by the year 2007 (later revised to 2003) but they wisely included a provision - which permits member countries to fulfil their obligations by liberalising trade on a nondiscriminatory basis.

 One may argue that preferential trade agreements may still be good if trade creation dominates trade diversion. In recent years, economists have gathered sufficient empirical evidence to suggest that trade diversion can be a serious problem, however. Especially in the context of south Asia, this is a major worry. Trade diversion would be minimal if, for most products, the world's most efficient suppliers were located within the region.

 There is no doubt that some countries in the south Asia region do not trade nearly as much with each other as will be justified by their location and other factors. But that is principally due to high barriers to trade in general rather than a lack of trade preferences. In particular, India and Pakistan, who are both among the 23 original signatories to the General Agreement on Tariffs and Trade, effectively do not extend even the MFN status to each other.

 Some analyst argue that despite trade diversion, SAFTA may be a desirable instrument of keeping the process of trade li beralisation moving ahead. This is also a misguided argument since such liberalisation is likely to become a binding constraint on true, nondiscriminatory liberalisation. Countries such as Mexico and Brazil have virtually abandoned their programmes of nondiscriminatory liberalisa tion since entering preferential trade agreements. Indeed, following such arranegments, they have raised external tariffs.

 In the wake of the peso crisis, Mexico raised its external tariffs on nonNAFTA countries from less than 20 per cent to 35 per cent in the case of 503 items.ikewise, after the Asian currency crisis, the members of the Southern American Common Market, including Brazil, raised their average external tariff from 9 per cent to 12 per cent.

 In my judgement, we should leave to SAARC precisely the task suggested by its title: the promotion of cooperation among member countries. There may be road, water, electricity or other projects that are justified if undertaken jointly by two or more members. SAARC can help advance such projects. The APEC agenda may offer an insight into further areas of fruitful cooperation.

Economic Times, July 29, 1998