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Regional Economic Cooperation in South Asia Kathmandu, 14-16 August 2006 Special Treatment for LDCs in SAFTA With a special examination of what they will.

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Presentation on theme: "Regional Economic Cooperation in South Asia Kathmandu, 14-16 August 2006 Special Treatment for LDCs in SAFTA With a special examination of what they will."— Presentation transcript:

1 Regional Economic Cooperation in South Asia Kathmandu, August 2006 Special Treatment for LDCs in SAFTA With a special examination of what they will gain from Indian Market SAFTA Study UNCTAD

2 Background - Salient Features of 2006 LDC Report of UNCTAD UNCTAD’s 2006 LDC Report “Developing Productive Capacities” UNCTAD’s 2006 LDC Report “Developing Productive Capacities” Only 7 LDCs have experienced steadily sustained growth – Bangladesh, Bhutan, Burkina Faso, Cape Verde, the Lao People’s Democratic Republic, Lesotho and Nepal. Only 7 LDCs have experienced steadily sustained growth – Bangladesh, Bhutan, Burkina Faso, Cape Verde, the Lao People’s Democratic Republic, Lesotho and Nepal.

3 Background Between 1990–1993 and 2000–2003, half of the total increase in manufacturing value-added in the LDC group as a whole was attributable to the growth of manufacturing in Bangladesh. Between 1990–1993 and 2000–2003, half of the total increase in manufacturing value-added in the LDC group as a whole was attributable to the growth of manufacturing in Bangladesh. But Bangladesh will also account for 22% of increase in labour force in LDCs between But Bangladesh will also account for 22% of increase in labour force in LDCs between

4 Background Growth in Bangladesh Economy attributed to rapid growth in mainly services, construction and small scale industry on account of demand stimulus from Growth in Bangladesh Economy attributed to rapid growth in mainly services, construction and small scale industry on account of demand stimulus from a. Growth of garment industry b. Remittances c. Growing agricultural income Osmani (2005)

5 Trends in South Asian Trade Intra South Asian trade as a proportion of total South Asian trade fell from 19% in 1948 to 2% in Intra South Asian trade as a proportion of total South Asian trade fell from 19% in 1948 to 2% in This share rose from 3.7% in 1991 to 5.2% in This share rose from 3.7% in 1991 to 5.2% in Increase in trade from 1999 attributed to Increase in trade from 1999 attributed to Abolition of QRs by India in (1429 items) Abolition of QRs by India in (1429 items) Indo-Lanka and Nepal FTAs Indo-Lanka and Nepal FTAs

6 Major developments Generally more awareness in region on instability of international commodity prices and therefore also sensitivity to opening these to imports. (especially after spice imports under Indo-Lanka FTA) Generally more awareness in region on instability of international commodity prices and therefore also sensitivity to opening these to imports. (especially after spice imports under Indo-Lanka FTA) Most countries in region have moved towards market based exchange rate system, thereby disabling them from using currency rate control as an instrument of trade policy. Most countries in region have moved towards market based exchange rate system, thereby disabling them from using currency rate control as an instrument of trade policy.

7 SAFTA Studies I World Bank (2004) World Bank (2004) Potential for welfare reduction not great when compared to trade liberalisation versus rest of the world. Potential for welfare reduction not great when compared to trade liberalisation versus rest of the world. Losses in revenue and terms of trade will not get compensated by increased competition, economies of scale, or improved operating efficiency. Losses in revenue and terms of trade will not get compensated by increased competition, economies of scale, or improved operating efficiency. High chance of trade diversion in South Asia because of high MFN tariffs of India and Bangladesh. High chance of trade diversion in South Asia because of high MFN tariffs of India and Bangladesh.

8 Much growth in regional trade on account of increased competitiveness of India Significant increase in India’s formal exports to South Asian partners between , but not in products in which preferences were granted. (probably on account of increased competitiveness of Industry in this period) Significant increase in India’s formal exports to South Asian partners between , but not in products in which preferences were granted. (probably on account of increased competitiveness of Industry in this period)

9 India’s Exports to SAARC grew at an average of 25% per year between Year Indias Exports to SAARC ($ Million) 19991, , , , , ,306

10 Textiles and Clothing Highly Protected in Region Despite substantial liberalisation, in industrial goods tariffs, several tariffs of India on items of export interest to neighbours continue to be highly protected. Despite substantial liberalisation, in industrial goods tariffs, several tariffs of India on items of export interest to neighbours continue to be highly protected. While ad valorem tariffs on par, India may actually have higher tariffs in Textiles on Clothing on account of specific duties While ad valorem tariffs on par, India may actually have higher tariffs in Textiles on Clothing on account of specific duties

11 Weighted Tariffs in Textiles Reporter Name Ad Valorem Rates Bhutan27 Bangladesh25 India26 Sri Lanka0 Maldives20 Nepal10 Pakistan17 Average South Asia17 Source: WITS/TRAINS

12 Tariffs in Apparel Reporter Name Ad Valorem Rates Bhutan30 Bangladesh30 India29 Sri Lanka7 Maldives25 Nepal21 Pakistan25 Average South Asia21 Source: WITS/TRAINS

13 Why assessment of likely gains to LDCs is an important step ? LDCs buy in is very important to support SAFTA ++ as well reduction of negatives lists in coming rounds of negotiations. LDCs buy in is very important to support SAFTA ++ as well reduction of negatives lists in coming rounds of negotiations. Ind, Pak and Lanka are to give 0-5% duty access to Bangladesh, Bhutan, Maldives and Nepal, but subject to the negative lists of the former. Ind, Pak and Lanka are to give 0-5% duty access to Bangladesh, Bhutan, Maldives and Nepal, but subject to the negative lists of the former. Since India is the biggest market in the region we examine what India’s SAFTA commitments will mean to the LDCs. Since India is the biggest market in the region we examine what India’s SAFTA commitments will mean to the LDCs.

14 Does SAFTA Offer Additional Market Access to PTAs/FTAs and other concessional schemes Plethora of FTAs (FTAs in Asia – “The Great Maze” UNDP 2005) Plethora of FTAs (FTAs in Asia – “The Great Maze” UNDP 2005) Plenty of Bilateral, Regional and Bilateral Arrangements already in place. Plenty of Bilateral, Regional and Bilateral Arrangements already in place.

15 Trade Arrangements in South Asia GSTP GSTP GSTP (LDC) GSTP (LDC) SAPTA SAPTA SAPTA (LDC) SAPTA (LDC) Bangkok Agreement Bangkok Agreement Pakistan- Lanka FTA Pakistan- Lanka FTA Indo-Lanka, Indo-Bhutan, Indo-Nepal Indo-Lanka, Indo-Bhutan, Indo-Nepal

16 Measuring Actual Access Created by SAFTA To Assess actual access generated by SAFTA i. Negative lists of all members. ii. MFN tariffs only products are already between 0-5 there is no additional access created by SAFTA iii. Check if preferences already exist under other schemes

17 Measuring Actual Access Created by SAFTA (Partners Global Imports) India Banglad eshPakistan Sri LankaNepalBhutan Maldive s India 85%86%1%0% 85% Banglades h23% Pakistan70%72% 70%72% Sri Lanka1%35%34% 35% Nepal0%52%46% 52% Bhutan0%68%66% 68% Maldives34%35%34% 35% Note Column I Denotes Concession Givers ; Row I Partners. % denotes share of global imports of concession giver in products in which access will be provided to partners.

18 Measuring Actual Access Created by SAFTA (Partners Bilateral Imports) Note Column I Denotes Concession Givers ; Row I Partners. % Denotes the proportion of present bilateral imports that will received additional market access. India Banglad eshPakistan Sri LankaNepalBhutanMaldives India 92%90%0% 97% Bangladesh25% 22%45%76%9%25% Pakistan86%69% 66%74%47%100% Sri Lanka1%10%8% 82%#DIV/0!52% Nepal0%71%#DIV/0! 82%#DIV/0! Bhutan0%6%#DIV/0!0%22% #DIV/0! Maldives26%#DIV/0!33%26%100%#DIV/0!

19 Measuring Actual Access Created by SAFTA (Partners Global Exports) Note Column I Denotes Concession Givers ; Row I Partners. % Denotes the proportion of partners global exports which will receive additional market access under SAFTA. India Banglad eshPakistan Sri LankaNepalBhutanMaldives India 18%57%4%0% 60% Banglades h51% 44%33%44%10%5% Pakistan70%23% 28%44%62%80% Sri Lanka2%92%50% 63%66%34% Nepal0%15%23%21% 26%40% Bhutan0%10%23%33%37% 26% Maldives69%78%82%74%82%75%

20 Examining the Case of India’s Concessions under SAFTA and its Impact on LDCS

21 Trends in SAARC LDCs Exports to India ($m)

22 However Little in Comparison to SAARC LDCs global exports (USD Million)

23 Effect of Bilateral FTAs on Trade Exports from SAARC countries have been highly responsive to bilateral FTAs with India Exports from SAARC countries have been highly responsive to bilateral FTAs with India Three of India’s FTAs with SAARC countries Three of India’s FTAs with SAARC countries Bhutan (1995) Bhutan (1995) Nepal (1997) Nepal (1997) Sri Lanka (2002) Sri Lanka (2002)

24 India- Bhutan FTA (1995) Bhutan’s Exports to India (USD m)

25 Indo-Nepal (1997) and Indo-Lanka (2002) FTA. (USD m)

26 Trends in SAARC LDCs Trade with India In the early 90s Agri products more than 50% of LDCs total exports to India. This share has declined to about 20%. The share of chemicals in total exports has also declined. In the early 90s Agri products more than 50% of LDCs total exports to India. This share has declined to about 20%. The share of chemicals in total exports has also declined. Textiles exports has been fluctuating Textiles exports has been fluctuating Slow but steady increase in trade in export of plastic products and metals. (trade deflection?) Slow but steady increase in trade in export of plastic products and metals. (trade deflection?)

27 Changing Composition of Trade with India

28 What SAFTA means for LDCs market access to India The determinants of market access under SAFTA are therefore I.Whether SAFTA offers additional market access over MFN tariffs (This will be determined by India’s negative list for LDCs) II.If (I) is true whether SAFTA offers benefits in addition to those that already subsist under regional / bilateral / unilateral / other arrangements. (eg. country like Bangladesh some of its products may receive preferences under SAPTA (LDC), GSTP (LDC), Bangkok Agreeement etc)

29 What SAFTA means for the 1500 products that Bangladesh Exports to the World

30 Gains for Bangladesh - I Bangladesh will receive market access in products which constitute about 73% of existing trade. (about 137 items) (mainly jute / urea fertilizers ) Bangladesh will receive market access in products which constitute about 73% of existing trade. (about 137 items) (mainly jute / urea fertilizers ) In addition to preferences 35% of imports from Bangladesh already under 0-5% MFN tariffs. Thus effective market access for only % of present value of imports. In addition to preferences 35% of imports from Bangladesh already under 0-5% MFN tariffs. Thus effective market access for only % of present value of imports.

31 What it means for present composition of Bangladesh’s exports to India

32 Negative list does not offer access to most of T&C market which is protected by high specific tariffs About 17.5% of imports from Bangladesh already under preferences (Bangkok Agreement, etc. about 21 products).About 17.5% of imports from Bangladesh already under preferences (Bangkok Agreement, etc. about 21 products). India’s negative list has the effect of not allowing additional market access in products which constitute more than 70% of Bangladesh’s Global Exports (mainly garments (knit t.shirts and woven garments like trousers and woven textiles) India’s negative list has the effect of not allowing additional market access in products which constitute more than 70% of Bangladesh’s Global Exports (mainly garments (knit t.shirts and woven garments like trousers and woven textiles)

33 Products for which SAFTA may immediately create trade potential for Bangladesh Urea Jute raw, fiber & fabric Cotton wastes Processed intermediate leather Fruit & Vegetable Juices Potatoes & Tubers Home textiles Assorted Electronic products ; like batteries Furniture; wooden

34 What SAFTA means for the 400 products that Maldives Exports to the World

35 What it means for present composition of Maldives’ exports to India

36 Gains for Maldives- I Maldives will receive 0-5% duty access in in 5 out of the 7 products that it presently trades with India. Most of these are ferrous and non- ferrous waste/ scrap. Maldives will receive 0-5% duty access in in 5 out of the 7 products that it presently trades with India. Most of these are ferrous and non- ferrous waste/ scrap. These items constitute about 96% of Maldives trade with India. These items constitute about 96% of Maldives trade with India. But the preference may not mean much as most metal waste is as it is imported at a duty rate of % (and likely to fall in coming budgets) But the preference may not mean much as most metal waste is as it is imported at a duty rate of % (and likely to fall in coming budgets)

37 Gains for Maldives- II Maldives may therefore have to make gains in products that it hasn’t been trading with India (but has with other countries) but can do so now on account of SAFTA. Maldives may therefore have to make gains in products that it hasn’t been trading with India (but has with other countries) but can do so now on account of SAFTA. These are likely to be limited to fish products like tuna and assorted manufactures like aircraft piston engines and textiles machinery (industrial sewing machines). These are likely to be limited to fish products like tuna and assorted manufactures like aircraft piston engines and textiles machinery (industrial sewing machines). Note: this is based on EXIM stats and these items, particularly manufactured products may be in the nature of re-exports.

38 Nepal and Bhutan Bhutan and Nepal already have FTAs with India from 1995 and 1997 respectively. Bhutan and Nepal already have FTAs with India from 1995 and 1997 respectively. India has a comprehensive FTA with Bhutan with no exceptions/no negative list. India has a comprehensive FTA with Bhutan with no exceptions/no negative list. In the Nepal FTA there are restrictions the exports of only 70 products from Nepal. In the Nepal FTA there are restrictions the exports of only 70 products from Nepal. 90% of Nepal’s exports to India are already at 0 duty. 90% of Nepal’s exports to India are already at 0 duty.

39 Rough GTAP Simulations GTAP Modeling employed to make rough estimation of gains in welfare, production, employment and trade. GTAP Modeling employed to make rough estimation of gains in welfare, production, employment and trade. GTAP Version 6.02 (limited release) version only captures results for India, Bangladesh, Sri Lanka Pakistan and Rest of South Asia (Nepal, Bhutan Maldives & Afghanistan). GTAP Version 6.02 (limited release) version only captures results for India, Bangladesh, Sri Lanka Pakistan and Rest of South Asia (Nepal, Bhutan Maldives & Afghanistan). Therefore not possible to estimate separately for Nepal, Maldives, Bhutan. Estimates for these are made as a combination Therefore not possible to estimate separately for Nepal, Maldives, Bhutan. Estimates for these are made as a combination

40 GTAP Simulations – Stage base tariff taken for India base tariff taken for India. On the basis of the extent of market access that the negative list will provide, shocks are administered to simulate import tariffs concessions that all SAARC members will reduce undertake under SAFTA. (to equate situation in ) On the basis of the extent of market access that the negative list will provide, shocks are administered to simulate import tariffs concessions that all SAARC members will reduce undertake under SAFTA. (to equate situation in ) Results of the ensuing equilibrium are gathered and this new equilibrium is preserved. Results of the ensuing equilibrium are gathered and this new equilibrium is preserved.

41 Rough GTAP Simulations – Stage 2 The resultant equilibrium is to determine the likely effect of members liberalisation for South Asian LDCs. The resultant equilibrium is to determine the likely effect of members liberalisation for South Asian LDCs. Next, a best case scenario is assumed and comprehensive Intra-South Asian liberalisation shock is introduced on import tariffs of all South Asian countries. Next, a best case scenario is assumed and comprehensive Intra-South Asian liberalisation shock is introduced on import tariffs of all South Asian countries. This second stage result is meant to be a rough estimation of best case scenario in This second stage result is meant to be a rough estimation of best case scenario in 2016.

42 Key Macro Results Bangladesh % Change Output Effect on Unskilled Employm ent Export s to South Asia Global Export s Global Imports

43 Key Macro Results Bhutan, Maldives Nepal (BMN) % ChangeOutput Effect on Unskilled Employme nt Exports to South Asia Global Exports Global Imports

44 Bangladesh Employment Gaining Sectors 2008 Winning Sectors Employment Increase % Meat products n.e.c Crops n.e.c.1.19 Motor vehicules and parts0.77 Plant-based fibers0.75 Mineral products n.e.c.0.26 Animal products n.e.c.0.16 Metals n.e.c.0.10 Raw Milk0.09 Paddy rice0.08 Forestry0.08

45 Bangladesh Employment Gaining Sectors 2016 Winning SectorsEmployment Increase % Wearing apparel5.90 Leather products3.60 Chemical, rubber, plastic products2.32 Cereal grains n.e.c.1.48 Wood products1.25 Forestry1.20 Metals n.e.c.1.12 Beverages and tobacco products0.81 Processed rice0.73 Electricity0.64

46 Bangladesh Employment Losing Sectors 2008 Wheat-0.55 Leather products-0.53 Textiles-0.39 Petroleum, coal products-0.39 Electronic equipment-0.30 Transport equipment n.e.c Metal products-0.21 Oil seeds-0.20 Wearing apparel-0.19 Paper products, publishing-0.15

47 Bangladesh Employment Losing Sectors 2016 Petroleum, coal products Meat products n.e.c Transport equipment n.e.c Electronic equipment-6.21 Dairy products-5.67 Metal products-2.88 Machinery and equipment n.e.c Gas-2.17 Crops n.e.c Sugar cane, sugar beet-1.95

48 BMN Employment Gaining Sectors 2008 Metals n.e.c.8.36 Meat products n.e.c.6.67 Animal products n.e.c.3.31 Raw Milk2.86 Ferrous metals2.70 Chemical, rubber, plastic products2.55 Forestry0.73 Wood products0.56 Vegetables, fruit, nuts0.45 Minerals n.e.c.0.45

49 BMN Employment Gaining Sectors 2016 Metals n.e.c Meat products n.e.c Crops n.e.c Ferrous metals10.95 Animal products n.e.c.8.02 Chemical, rubber, plastic products7.90 Raw Milk7.85 Vegetable oils and fats2.97 Sugar cane, sugar beet2.29 Vegetables, fruit, nuts2.12

50 BMN Employment Losing Sectors 2008 Motor vehicules and parts-3.51 Wheat-2.81 Electronic equipment-2.71 Transport equipment n.e.c Machinery and equipment n.e.c Dairy products-1.78 Oil seeds-1.66 Textiles-1.33 Leather products-1.18 Manufactures n.e.c.-1.16

51 BMN Employment Losing Sectors 2016 Motor vehicules and parts Transport equipment n.e.c Petroleum, coal products-9.09 Manufactures n.e.c Wheat-8.35 Machinery and equipment n.e.c Electronic equipment-7.07 Textiles-6.78 Wearing apparel-6.17 Plant-based fibers-5.68

52 Some Conclusions Gains to LDCs modest in first phase of liberalisation. LDC gains are significant in 2 nd phase, provided there is complete liberalisation and elimination of sensitive lists by Bangladesh significant gains in employment in Apparel Sector (5%) and Leather sector (3%). Losses is some manufacturing products (electronics, transport and machinery/equipment). BMN, gains in some agri and chemical products. Losses in manufacturing including Textiles and Apparel. But overall employment effects positive for Bangladesh and BMN. Issue of Revenue Compensation Still needs to be evaluated.


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