Exploiting regional trade could compensate loss of GSP+ – Economist

By Azhar Razak

Sri Lanka could try and exploit its under-utilised trade agreements with South Asian regional countries to compensate for the looming loss of General System of Preferences (GSP) Plus in mid August 2010, a senior economist has said.
Executive Director of the Institute of Policy Studies (IPS), Dr. Saman Kelegama says that strengthening of trade links with other South Asian countries apart from India and Pakistan will now be important as the preferential access to the EU market via GSP-Plus is presently in doubt.
“Sri Lanka already has bilateral Free Trade Agreements (FTA) with both India and Pakistan and is in the process of strengthening its trade links with other South Asian countries. This is particularly important at a time when preferential access to EU market via GSP-Plus is in doubt,” Dr. Kelegama said at the launch of a new book titled, ‘Promoting Economic Cooperation in South Asia,’ jointly edited by Dr. Saman Kelegama, Vice Chairman of the Policy Research Institute of Bangladesh, Sadiq Ahmed, and Economic Advisor at the World Bank for South Asian region, Ejaz Ghani.
Kelegama says that according to the book that was recently released, three fourths of intra-regional trade potential remains to be exploited which South Asian Free Trade Area (SAFTA) can hope to realise.
“This market still remains unexploited and there are opportunities for ‘win-win’ cooperation,” Dr. Kelegama said pointing out that intra-SAARC trade still hovers around 5% compared to 25% of intra-regional trade in the Association of Southeast Asian Nations (ASEAN), 54% in European Union, and 59% in North American Free Trade Agreement (NAFTA).
“We should not forget that out of the regional population of 1.5 billion, 550 million of them belong to the middle class category, which is a bigger consumer market than EU and NAFTA combined,” Kelegama said adding that the South Asian intra-regional trade is less than 1% of South Asia’s GDP compared to 20% in ASEAN.
“The existing pattern of intra-regional trade in South Asia fails to capture the extent of complementarities in the region due to high incidence of non-tariff barriers (NTBs) and informal trade,” Kelegama stressed.
He said that the book argues that South Asia can face this challenge much more effectively with deeper regional economic integration.
“The book shows that in addition to policy and institutional reforms aimed at removing domestic constraints to growth and job creation, regional market integration ought to be a key element of a strategy for removing the dichotomy and eliminating poverty in the longer term,” he said, adding that there is an urgent need for extending the coverage of SAFTA to ‘substantially all trade’ in the region as per the World Trade Organisation (WTO) requirements.
“In this context, the incorporation of trade in services to the SAFTA agenda in 2008 was a positive step,” he noted.
Elucidating the new book, Kelegama said that the book highlights the importance of developing supply capacities of Least Developed Countries (LDCs), improving trade facilitation measures, promoting transport connectivity and promoting people-to-people contact.
Identifying the need for greater intra-regional investments to take place, Kelegama noted that South Asia should seriously look at intra-regional investment tapped by the help of ASEAN FTA and the ASEAN Investment Area in the ASEAN region to exploit the investment-trade nexus in the region.
“The South Asian region has not exploited the potential for intra-regional Foreign Direct Investment (FDI) inflows, especially with Indian companies undertaking relatively large investments in different parts of the world,” he said.
He added that the book also shows that unlike East Asian countries, South Asian countries have been slow in upgrading their export profile in favour of knowledge-intensive and high value added goods that are fast moving.
“The production structure in South Asia is still dominated by labour-intensive, highly price-sensitive, and low value added goods such as textiles, garments, leather goods, and primary products. The book argues the case for-regional cooperation through intra-industry specialisation and vertical integration that has the potential in strengthening the competitiveness in the region,” he added.
“The book shows that Trade Facilitations measures could be equally effective, if not more than tariff preferences in moving trade in the regions. The book shows that for many of the US trade partners the transport cost barriers outweighed the trade barriers,” he added.
Countries in South Asia experience high trade costs due to inadequacy in transport facilitation and South Asian trade is constrained by poor infrastructure, congestion, high costs, and lengthy delays.
“These problems are particularly severe at border crossings, many of which post significant barriers to trade. Thus, improving connectivity to facilitate trade and investment flows in the region is important,” Kelegama noted.
The book launching event was jointly organised by the IPS, World Bank, United Nations Development Programme-Regional Centre in Colombo and the Asian Development Bank and held at the Galadari Hotel, Colombo.