Regional Integration and Liberal Economic order in SAARC: A Case Study of Trade Relations between and under SAFTA Regime (1997-2015)

Sarfraz Batool Ph.D. (Political Science) Roll No. 04 Session: 2013-2018

Supervisor

Prof. Dr. UMBREEN JAVAID

Department of Political Science University of the Punjab Lahore.

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Regional Integration and Liberal Economic order in SAARC: A Case Study of Trade Relations between Pakistan and India under SAFTA Regime (1997-2015)

This thesis is submitted in Partial fulfilment of Ph.D. in Political Science, University of the Punjab, Lahore. Session 2013 – 2018

Supervisor Prof. Dr. Umbreen Javaid Chairperson Department of Political Science

Submitted by

Sarfraz Batool Ph.D. (Political Science) Roll No. 04 Session: 2013-2018

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DEDICATION

I dedicate my thesis to my loving mother and caring husband, without their support and encouragement I could not have completed this thesis.

I also dedicate this work to the golden memories of my late father. May his soul rest in peace forever.

Ameen

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DECLARATION

I hereby declare that this thesis is the result of my individual research and I have not submitted this thesis concurrently to any other University or Institute for any other degree whatsoever

Sarfraz Batool

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Certificate of Approval

It is certified that this Ph.D. Thesis submitted by Sarfraz Batool on the topic of ―Regional Integration and Liberal Economic order in SAARC: A Case Study of Trade Relations between Pakistan and India under SAFTA Regime (1997-2015)” is an original work and result of her own efforts. In assessment of the ‗Examining Committee‘, this thesis is of sufficient standard to warrant the acceptance by the Department of Political Science, University of the Punjab, Lahore for the award of Ph.D. Degree in Political Science. Thesis Viva-voice Examiners:

Internal Examiner:

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External Examiner:

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Chairperson of Political Science:

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ACKNOWLEDGMENTS

First of all, I offer my gratitude to Almighty Allah for His mercy and guidance which have enabled me to do this rigorous work. Then I would like to pay best regards with full respect to my research supervisor Prof. Dr. Umbreen Javid, chairperson of the Department of Political Science for her continuous support during my Ph.D study and related research. Her insightful guidance has helped me in all the time of research and writing this thesis. I could not have imagined having a better advisor and mentor for my Ph.D. study. I am also thankful to all my Ph.D teachers for their guidance and support during course work. I have learned a lot from them, from their way of teaching, their acumen and their command over their subjects. I have benefited enormously from the assistance, encouragement, and insightful comments of many individuals, institutions and libraries at Lahore, and Rawalpindi during this research work. I would like to pay my sincere gratitude to all of them named and unnamed. I will remain indebted to their intellectual generosity. Mere the word of ―thanks‖ is not enough for my spiritual fellow Maryam Kamal. Her belief in me was the sole motivational force for me to meet the challenges of my Ph.D study. I would like to thank my family: my beloved mother, my siblings, my nieces and nephews and my in-laws for supporting me in every sense throughout writing this thesis. Last but not the least, my spouse and especially my kids, Awais Rumi, Najam-ul-Saqib and Abdul Hadi deserve a profound acknowledgement as they all have borne the real brunt of my labour and toil and preoccupation with my studies for Ph.D.

Sarfraz Batool

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Abstract

The South Asian Association for Regional Cooperation (SAARC) was established in 1985 with the aim to accelerate economic growth and social progress in the region. It was assumed by the proponents of SAARC that wealthier South Asia would be peaceful and powerful politico- economic entity, because increase in wealth and economic cooperation among states would improve human development index and decrease intra state political conflicts in South Asia. SAARC initiated trade liberalization policies since 1994 when SAARC preferential trade agreement was signed. Though the scope of trade liberalization was limited in the purview of SAPTA due to its positive list approach to intraregional trade, yet it paved the way for SAARC Free Trade Area (SAFTA). The establishment of SAFTA in 2004, boosted up the morale of SAARC and it started to visualize complete economic integration in South Asia in near future. However, SAFTA have not meet to its expected results and volume of intra- regional trade is still low and the goal of wealthier South Asia is still far away. In this context, this study is outlined to analyze the liberal economic dimension of SAARC. It highlights the evolutionary process of trade liberalization in the region of South Asia and analytically evaluates the contribution of SAARC towards economic integration of South Asia. In addition it highlights the international economic scenario in which the establishment of Free Trade Area had become desirable for SAARC member countries. For this purpose, the study emphasizes on three major research questions; why the liberal economic practices are desirable in SAARC? Why SAFTA has not been fully implemented yet? And what are the major hindrances in the establishment of Free Trade regime in SAARC? To evaluate the effectiveness of SAFTA, study emphasizes on the Pakistan – India trade relations under SAFTA regime for in-depth analysis. This part of the study uses comparative approach. It includes a comparison between overall economic structure of Pakistan and India and comparison of bilateral trade trend between India and Pakistan before and after SAFTA

vii through using statistical data. Further it covers all economic and non- economic hindrances to bilateral trade between Pakistan and India. During the study, primary data is collected through structured survey and open ended interviews from stakeholders. For static analysis, data is gathered from internationally recognized databases of , UNTACD, WTO and World Economic Forum. The study finds out that regional integration without trade liberalization is impossible. SAARC is working on the agenda of economic integration in South Asia through its apex body, SAARC Chamber of Commerce and Industry; though the process of integration is slow but it is steady. In the age of globally integrated trading system, protectionism will no more a good choice to protect domestic industries. South Asian countries will have to reform their domestic macro-economic policies for implementing trade competitiveness measures in their respective states. Regional connectivity and trade facilitation measures under SAFTA has boosted up the foreign direct investment to South Asia. Further, this study finds out that power asymmetries in SAARC have make the process of trade liberalization slow, India will has to reconsider its role in SAARC as through showing its hard and soft power, it has disrupt the trade negotiation process on the platform of SAARC on many occasions. However, the study contributes to understand the relation between regional integration and liberal economic order in the purview of SAARC.

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List of Abbreviations and Acronyms

United Nations Conference on Trade and UNCTAD Development UNICEF Children‘s Fund APT Asia-Pacific Telecommunity Economic and Social Commission for Asia and the ESCAP Pacific UNDP United Nations Development Programme United Nations Development Programme for UNDPC Combating Drug Trafficking EC European Commission ITU International Telecommunication Union CIDA Canadian International Development Agency WIPO The World Intellectual Property Organization WTO GATT General Agreement in Tariff and Trade GATS General Agreement in Trade in Services RTA Regional Trade Agreement FTA Free Trade Area SAPTA South Asian Preferential Trading Agreement SAFTA South Asian Free Trade Area SAARC South Asian Association for Regional Cooperation ASEAN Association of South East Asian Nations EU NAFTA North American Free Trade Agreement/Area MOC Ministers of Commerce MOFA Ministers of Foreign Affairs LIEO Liberal International Economic Order IMF International Monetary Fund

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WB World Bank South Asian Agreement in the Promotion of SAIT Investment and Trade SDPI Sustainable Development Policy Institution IPRI Islamabad Policy Research Institution ISSI Institute of Strategic Studies Islamabad SCCI SAARC Chamber of Commerce and Industry SADF South Asian Development Fund MFN Most Favored Nation NT National Treatment ITO International Trade Organization GSP General System of Preferences TNCs Transnational Corporations MNCs Multi-National Corporations FDI Foreign Direct Investment COMESA Common Market for Eastern and Southern Africa EFTA European Free Trade Area IGG Intergovernmental Group MERCOSUR Mercado del Cono Sur (Southern Common Market) NTM Non-Tariff Measures NTBs Non-Tariff Barriers SPS Sanitary and Phytosanitary PSR Product Specific Rules WDI World Development Indicators ITC International Trade Centre WITS World Bank Indicator for Trade Statistics

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CONTENTS

Page No.

Title Page i

Dedication iii

Declaration iv

Certificate of Approval v

Acknowledgments vi

Abstract vii

List of Abbreviations ix

Table of Contents xi

Page No

Introduction xxvi

Literature Review xxviii

Statement of Problems xxxvii

Significance of the Study xxxviii

Objectives xxxix

Research Questions xxxix

Methodology xl

Plan of the Study xlii

Limitation of Study xliv

References Xlv

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CHAPTER Page No. 1 Relation between Regional 2 – 54 Integration and Liberal Economic Order: A Theoretical Framework. 1.1 The Concept of Region 2

1.1.1 Etymological Interpretation of ‗Region‘ 3

1.1.2 Micro and Macro Regions 3

1.1.3 Usage of the word ‗Region‘ in Social Sciences 3

1.1.4 Usage of ‗Region‘ in International Relations 4

1.2 The Concept of Regional Integration 5

1.2.1 Theorizing the term ‗Integration‘ 6

1.2.2 The Usage of Integration in Social Sciences 7

1.2.3 Types of Regional Integration 8

1.3 Difference between Regional Integration and Regionalism 1.4 The Concept of Liberal Economic Order 13

1.4.1 History of Liberal Economy in Pre-World War-I 13

1.4.2 From Mercantilism to Liberalism 14

1.4.3 The Laissez- Faire Regime 15

1.4.4 Destruction of Pax Britannica after World War-I 16

1.4.5 Liberal Economic Order after World War-II 19

1.4.6 Establishment of Bretton Wood Institutions 20

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1.4.7 Establishment of ITO and GATT 20

1.5 Liberal Economic Order and 22

1.6 From GATT to WTO: Institutionalization of 23 liberal economy 1.6.1 Tokyo Round of Trade Negotiation under GATT 24 Tokyo Round of Trade Negotiation under GATT 1.6.2 Institutional Implications of Uruguay Round 25

1.6.3 Establishment of World Trade Organization (WTO) 25

1.7 The Role of WTO to strengthen Liberal economic 26 Order 1.7.1 The principle of Non-discrimination and National 27 Treatment 1.7.2 Optimistic Aspects of WTO 28

1.7.3 WTO and Developing Countries 28

1.7.4 The effects of 9/11 on Liberal Trading system 30

1.8 Relationship between regional integration and 31 Liberal economic order 1.8.1 The Role of MNCs and TNCs in Regional 31 Integration 1.8.2 Economic and Internalization of 32 Economics 1.8.3 The Popular Trend of Regional Integration 33

1.8.4 Trade and Macro-economic Arrangement through 34 RTAs 1.9 WTO and Regional Integration 36

1.9.1 History of RTAs 37

1.9.2 New Regionalism/ Economic Regionalism 38

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1.9.3 Major changes in the Pattern of Regional Trade 39 Agreements 1.10 Regional Economic Integration vs Global Economic 40 Integration 1.10.1 Impact of Regional Integration over Global 41 Integration 1.10.2 The Rise of Regional liberal economic order 42

1.10.3 Trade Creation and Trade Diversion 44

1.10.4 Political economy of Regional Integration 44

1.11 The Guiding Theories for this Research Work 45

1.11.1 A Working Hypothesis 48

References 45

CHAPTER Page No. 2 Relation between Regional 54 – 108 Integration and Liberal Economic Order: A Theoretical Framework. 2.1 History of South Asia 55

2.1.1 Colonial Legacy and the Economy of South Asia 55

2.1.2 Interstate Conflicts in South Asia 57

2.2 The Idea of Regional Cooperation in South Asia 58

2.2.1 The Idea of Regional Cooperation in South Asia 59

The Impact of Liberal International Trade on South 2.2.2 61 Asia 2.2.3 Collapse of Communist Regime 62

2.3 The Emergence of SAARC 63

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2.3.1 Meetings of Foreign Secretaries 64

Apprehensions of India and Pakistan towards 2.3.2 65 SAARC 2.4 The Charter of SAARC 66

2.4.1 The Objectives o SAARC 67

2.5 Significance of SAARC 68

2.6 Organizational structure of SAARC 71

2.6.1 Summit 71

2.6.2 Council of Ministers 74

2.6.3 Standing Committee (Article – 5) 75

2.6.4 Programming Committee 75

2.6.5 Technical Committee 76

2.6.6 Action Committee (Article – 7) 77

2.6.7 SAARC Secretariat (Article – 8) 77

2.6.8 Financial Arrangements (Article – 9) 79

2.6.9 General Provisions (Article – 10) 79

2.6.10 SAARC Regional Centers 79

2.6.11 SAARC Regional Apex Bodies 80

2.6.12 Other Recognized Bodies of SAARC 81

2.6.13 Areas of Cooperation in SAARC 81

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Cooperation of SAARC with International and 2.6.14 82 Regional Organizations A Brief over view on SAARC Achievements in 2.7 84 Regional Cooperation 2.7.1 First Summit Meeting 84

2.7.2 Second Summit Meeting 85

2.7.3 Third Summit Meeting 85

2.7.4 Fourth Summit Meeting 86

2.7.5 Fifth Summit Meeting 86

2.7.6 Sixth Submit Meeting 86

2.7.7 Seventh Summit Meeting 87

2.7.8 Summit Meetings of 9th and 10th 87

2.7.9 Eleventh Summit Meeting 88

2.7.10 Twelfth and Thirteenth Summit Meetings 88

2.7.11 Thirteenth Summit of SAAR 89

2.7.12 Fourteenth Summit Meeting 89

2.7.13 Sixteenth Summit Meeting 89

2.7.14 Seventeenth Summit of SAARC 89

2.7.15 Eighteenth Summit Meeting 90

2.7.16 Nineteenth summit Meeting 90

Struggle for Trade Liberalization and regional 2.8 90 Integration in SAARC

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The Meeting of National Planning Organizations of 2.8.1 91 SAARC 2.8.2 Committee on Economic Cooperation 92

The Agreement of SAPTA: A step towards Liberal 2.9 93 economic Order (Free Trade) 2.9.1 The Salient Features of SAPTA 94

SAPTA and Least Developed Countries (LDCs) of 2.9.2 95 SAARC 2.9.3 The Shortcomings of SAPTA 95

From SAPTA to SAFTA: Entry of SAARC in 2.10 97 Liberal Economic Regime 2.10.1 Salient Features of the Agreement of SAFTA 99

2.10.2 Rule of Origin under SAFTA 101

2.10.3 Development of Infrastructure and Transit Facilities 102

2.10.4 SAARC Trade Fairs 103

2.10.5 SAARC Business Leaders Conclave (SBLC) 104

The Establishment of South Asian Development 2.11 104 Fund (SADF) 2.12 SAARC- Special Fund 105

2.13 SAARC Agreement on Trade in Services (SATIS) 105

Reference 106

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CHAPTER Page No. 3 Pakistan-India Trade Relations 109 – 157 under SAFTA Regime (1997-2015) 3.1 History of Trade Relations between India and 110 Pakistan in Pre-SAARC period 3.1.1 Key Economic Indicators of India and Pakistan 110

3.1.2 Pakistan-India Trade Relations from 1947-1960s 111

3.1.3 The establishment of Trade protocol 112

3.1.4 Delhi International Trade Fair 112

3.1.5 The policy of Industrialization and Self-Sufficiency 113

3.1.6 Import Substitution Approach 114

3.2 SAARC and Trade Openness 114

3.2.1 Structural Adjustment Plans of IMF and WB 115

3.2.2 The Effect of WTO on Pakistan-India Economy 117

3.2.3 The Establishment of SAFTA 117

3.2.4 The Composite Trade Dialogue between India and 118 Pakistan 3.2.5 Mumbai Terrorists Attack 118

3.2.6 Resumption of Trade Normalization Process 119

3.2.7 Issue of Positive list and sensitive list 119

3.2.8 The Adoption of Negative list Approach 120

3.2.9 Pakistan-India Cooperation in Investment Sector 120

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3.2.10 The Decision of Granting MFN to India 120

3.2.11 The impact of Trade Liberalization between Pakistan 121 and India 3.2.12 Suspension of Trade Normalization Process 122

3.3 A Comparative Analysis of the Economies of 122 Pakistan and India 3.4 Trade Policy of Pakistan with India under SAFTA 126

3.5 India‘s Trade Policy towards Pakistan 126

3.6 Trade Facilitation Policies Acquired by Pakistan 127 and India under SAFTA 3.6.1 Amendment in the Maritime Protocol 128

3.6.2 Opening of Road Route 129

3.6.3 The Proposal for increasing the number of Trade 130 Routes 3.7 An Overview of Bilateral trade between Pakistan 130 and India 3.7.1 Trends toward Bilateral Trade 132

3.7.2 Top Ten Exports of Pakistan to India at HS-02 Level 134

3.7.3 Top Ten Imports of Pakistan from India (HS-02) 135

3.7.4 Top Ten Exports of Pakistan to India (HS-06): 136

3.7.5 Top Ten Imports of Pakistan from India (HS-06): 137

3.7.6 Top Ten Imports of Pakistan from India (HS-02) 138

3.8 Trade Potential between Pakistan and India under 138 SAFTA

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3.8.1 Pakistan‘s Top High Potential Export Sectors to 139 India 3.8.2 Pakistan‘s Top High Potential Import Sectors 139 from India 3.8.3 Pakistan‘s Top 20 High Potential Exports to India 140

3.8.4 Pakistan‘s Top 20 High Potential Import from India 142

3.9 Chart wise description of Bilateral Trade Relations 144 between Pakistan and India References 149

3.10.1 Chart wise description of Bilateral Trade Relations 151 between Pakistan and India References 156

CHAPTER Page No. 4 The Non-Tariff barriers to bilateral 151 – 192 Trade under SAFTA 4.1 What are Non-Tariff Barriers (NTBs) 152

4.2 A Comparative Analysis of NTBs in India and 153 Pakistan 4.2.1 A Brief Preview of Non-Tariff Restrictions on 153 Imports in India 4.2.2 Goods Covered Under Different NTBs 155

4.3 The Law/Regulations and Relevant Agencies on 158 NTBs in India 4.4 Pakistan Specific NTBs of India 162

4.4.1 Trade Facilitation and Customs Procedures 163

4.4.2 The SPS &TBT Measures 164

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4.4.3 Financial Measures 165

4.4.4 -Tariffs 165

4.4.5 Visas 166

4.4.6 Indian Subsidies to Agriculture 167

4.5 The Application of Non-Tariff Barriers in Pakistan 168

4.5.1 An Overview of the Non-Tariff Trade restricted laws 168 in Pakistan 4.5.2 Focus on Manufactured Goods 172

4.5.3 Regulations/Laws and Implementing Agencies for NTBs in Pakistan 173

4.6 NTBs of Pakistan which affect Indian Imports 174

4.6.1 Restrictions on Imports 174

4.6.2 Inadequate Land Transport Routes 175

4.6.3 Infrastructure Constraints and Related Bilateral 176 Protocols 4.6.4 Customs Procedures and Administration 177

4.6.5 Sanitary and Phytosanitary Measures (SPS) and 178 Technical Barriers to Trade (TBT)

4.6.7 Financial Measures 178

4.6.8 Para-tariff measures 178

4.6.9 Visas 178

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4.6.10 Subsidies by Pakistan to Agriculture 179

4.7 Issue of MFN/NDMA 180

4.8 Sub-Regional Free trade Agreements 182

4.9 Rise of Informal Trade 189

4.10 Sensitive and Negative list work as NTB to bilateral 186 trade 4.11 Interstate political Conflicts 188

4.11.1 The scheduled summit of 2005, Dhaka 189

4.11.2 The scheduled summit of 2016, Islamabad 189

References 191

CHAPTER Page No. 5 Primary Data Analysis 193 – 218

5.1 Survey Methodology 201

5.1.1 Observation of the Survey 213

5.2 Analysis of Open-ended Interview 214

CHAPTER Page No. 6 Conclusion 223 – 243 Bibliography 243 – 252 Annexure – 1 247 – 257 Annexure – 2 258 – 277 Annexure – 3 278 – 280 Annexure – 4 281 – 285

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List of Tables

Table No Title of Table Page No.

1.1 Share of world Manufacturing Production 18

1.2 Collapse of World Trade 19

1.3 GATT Trade Rounds 23

1.4 Types of Regional Trade Agreements (in terms of scope) 35

1.5 Methods of Implementation of RTAs 36

1.6 Types of RTAs (in term of Volume of trade Liberalization) 36

1.7 Most Countries Belong to More than on RTA 40

2.1 Socio-Economic Indicators of South Asian Countries in pre- 57 SAARC period 2.2 Major Items of Exports and Imports of South Asia Countries 60

2.3 The Reasons of Postponement of scheduled SAARC Summits 72

2.4 A List of Secretary Generals 78

2.5 SAARC Cooperation with other International and Regional 82 Organization 2.6 The List of the Editions of SAARC Business Leaders Conclave 103 (SBLC) 2.7 The List of the Editions of SAARC Business Leaders Conclave 104 (SBLC) 3.1 Comparison between the Key Economic Indicators of India and 111 Pakistan in 2016 3.2 Intraregional Trade (Official) of India and Pakistan in relatively 114 Liberal Regime. 3.3 Summary of Tariff Structure in South Asia 116

3.4 Variant Growth Rates of the Economies of Pakistan and India 123

3.5 Comparative Trade openness of Economies of Pakistan and India 124

3.6 Comparative Balance of trade and Foreign Exchange Reserves (as 124 % of GDP) 3.7 Trade Direction of Pakistan and India 125

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3.8 Mode wise India‘s Total trade with Pakistan 128

3.9 3.9 Pakistan Trade with India 131

3.10 Data Discrepancies between Pakistan and India 131

3.11 Pakistan‘s Imports from India Vs India‘s Export to World 132

3.12 Pakistan‘s Export to India vs India‘s imports from the world 133

3.13 Share of Bilateral Trade in Country‘s Global Trade 134

3.14 Top Ten Exports of Pakistan to India 134

3.15 Pakistan‘s Top 10 Imports from India at HS – 06 Level 135

3.16 Pakistan‘s Top High Potential Export Sectors to India 136

3.17 Pakistan‘s Top High Potential Import Sectors from India 137

3.18 Trade complementary Index 139

3.19 Pakistan‘s High Potential Export and Import Sectors 140

3.20 Pakistan Top 20 High Potential Exports to India 141

3.21 Pakistan Top 20 High Potential Import from India 142

4.1 Goods Covered Under Different NTBs 155

4.2 NTM Laws/Regulations & Implementing Agencies in India 158

4.3 NTM Laws/Regulations & Implementing Agencies in India 158

4.3 Sanitary & Phtyosanitary Legislation 160

4.4 Subsidies to Agricultural Inputs in India 167

4.5 Subsidies on Agricultural Inputs in Pakistan 170

4.6 Trade Routes for Informal Exports from India to Pakistan (2012 – 173 2013) 4.7 Subsidies by Pakistan to Agriculture 179 4.8 Flow of Informal Trade in Pakistan 183 4.9 Trade Routes for Informal Exports from India to Pakistan (2012 – 183

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2013) 4.10 The Items which are informally traded from India to Pakistan 184 4.11 Duty Structure on Key informally traded items if they were to be 185 traded formally

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Regional Integration and Liberal Economic order in SAARC: A Case Study of Trade Relations between Pakistan and India under SAFTA regime (1997-2015).

Introduction

The Post World War II scenario changed the political and economic dimensions of the globe. Global policy makers, highly influenced by the liberal economic theory and the neoliberal institutionalists, laid down the foundation of international integrated systems in the fields of Politics and Economic and establish international bodies and institutions like United Nation Organization (UNO), Bretton Wood institutions (IMF & World Bank) and WTO etc. The idea behind that institutionalization was that the international cooperation in economic and political fields was necessary to manage or address effectively the socio-political conflicts among nation- states. So, liberal economic order characterized by privatization, deregulation, industrialization, market oriented economy and Free Trade was implemented by the West under the leadership of of America. Three institutions were set up to maintain Liberal International Economic Order (LIEO): GATT/WTO encouraged trade liberalization, World Bank and International Monetary Fund (IMF) promoted monetary stability and reduced barriers to the free flow of trade and capital through their structure adjustment plans. The proponents of LIEO, assumed that a wealthier world would prove to be a more peaceful world. So, the goal of LIEO was to increase global wealth and minimize global conflict.

Moreover, It was obvious that in the context of Liberal International Economic Order, Rousseau‘s ―isolationist‘‖ solution was no longer valid without enormous economic cost because none of the states was self- sufficient enough to keep pace with emerging liberal economies or to undertake that transformation alone (Rosu, 2013). This vulnerability of

xxvi nation-states led them into regional integration. The primary idea behind regional interdependence was that the governments of nation states were increasingly unable to cope with the growing global integration and interdependence individually because of its important international dimensions. So, states started sharing their resources and relinquished the substantial degrees of their sovereignty and autonomy in important socio- economic policy areas to create integrated communities and institutionalized cooperation to promote economic growth and solve regional issues. Furthermore, the nation-states through regional integration tried to get comparative advantage over extra regional states in terms of the economy of scale and lower product prices.

However, to meet the challenges of globalization and WTO the wave of regional integration arose in different regions of the globe and organizations like European Union (EU), Association of South East Asian Nations (ASEAN), (AU), North America Free Trade Area (NAFTA), The Union of South American Nations (USAN) and South Asia Association for Regional Cooperation (SAARC) etc. were came in to being. In all the above mentioned regional organizations EU has attained among them a distinct status as it is frequently mentioned as an example of effective regional cooperation because it has achieved a strong position on the global trading scene.

In this dissertation, the researcher‘s area of concern is the liberal economic dimensions of South Asian Association for Regional Cooperation (SAARC) which was established on December 8, 1985, at Dhaka, . SAARC initially comprises of India, Pakistan, Bangladesh, , and Sri-Lanka. has joined this regional bloc later on in 2005.

Though, the South Asian Countries share common heritage, history, linguistic, cultural and social practices, yet this region has proven to be the

xxvii least integrated region in the world. This region is distinctly characterized by complex security issues, multiple inter-state disputes, terrorism, high poverty rate, poor human index, untapped economic potential and high dependence on foreign Aid (Zaidi, 2007).

Like the other regional organizations, SAARC was also established with the aim to develop rich economies and collective self-reliance in South Asian countries. After the establishment of WTO, to meet the global free trade challenges SAARC members signed SAFTA in 1997 to establish liberal economic regime in South Asia. Proponents of Free Trade believed that macro-economic collaboration among SAARC nations would change the fate of the South Asia and make the region capable of playing its effective global role as SAARC nations comprise of 3% of the world‘s total area and contain 21% (around 1.7 billion) of the world‘s total population and are enriched with natural resources including Indian ocean which is a transit route between Asia and Africa (Kher, 2010). Moreover, two SAARC Nations, India and Pakistan, are nuclear powers, which is the matter of concern for international powers with respect to issue of global security. In the nutshell, this study focuses on the trade liberalization regime in the SAARC and its implications for its member countries. And trade relations between Pakistan and India under SAARC‘s liberalization practices would be accessed and analyzed as a case study.

Literature Review

The literature which has been selected to review for this study covers all dimensions of research topic i.e. regional integration, liberal economic practices in SAARC and in these context trade relations between Pakistan and India.

Alam (2006) has been edited a number of books on SAARC under South Asian Perspectives Network Association (SAPANA)‘s book series. In one

xxviii of his book ‗SAARC‘ he has included some mainstream policy area documents of SAARC. The study concludes that although the SAFTA is ratified in 2006 but in SAARC member countries, the preferred mode of trade remained through bilateral free trade agreements at the cost of regional trading while inter and intra state conflicts and overwhelming security concerns remained high on the agenda. SAFTA is clueless about how to make adjustment of reconcile with the bilateral treaties, such Bilateral Free Trade Area (BFTA), Indo-, Pak-SL, Indo-Lanka, growth quadrangle (India, Nepal, Bangladesh, Bhutan) and triangles (India, Maldives and ). Despite all these arrangements the project of interregional trade is not moving forward. Alam, on his personal note, concluded that conflict between the two powerful countries of the subcontinent India and Pakistan has in fact kept the region a hostage to their mind less rivalry.

Alam (2006) has described and analyzed the Poverty Alleviation policy in SAARC, in his 4th series book. The documents of SAARC poverty profile are included in this work. Poverty alleviation and SAARC social charter are discussed. The study concludes that the incident of poverty in the SAARC countries varies by regions states districts geographical locations. Thus policies and programs should be designed and implement to reduce the interregional variations in poverty

Alam (2006) in his other work focuses on regional cooperation and economic cooperation. The crux of the study is that the increasing pressure of globalization and the challenges posed by a uni-polar world, governed by the principle of might is right, warrant a collective South Asian response, not to challenge the uni-polar world system but to develop the Asian region

Alam (2006) in his edited book namely ―Trade, Tariffs and Customs in South Asia‖ deals with the trade policy related matters in South Asia. The book is consisted of eleven articles including SAPANA Conference

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Declaration. The study concludes that any move towards preferential trading without further liberalization is unlikely to work

Alam (2006) has also done work on ―Macroeconomic Coordination in South Asia‖. This book throws light on the macroeconomic policies of SAARC member countries. The contributors (authors of the articles) highlighted the regional cooperation in investment.

Chatterjee & George (2012) highlight that how South Asia is facing major policies challenges in reducing poverty while it is a home to more than 20% of the world‘s poor. This study is valuable in this context as it looks at the benefit of trade in enhancing consumer welfare. The crux of the study is that as compared to other regional trade agreements in different part of the world, SAFTA is less successful. The general reason identified behind the non-success of SAFTA is existence of a large number of products with intraregional trade potential under respective sensitive lists by SAFTA member countries with the objective of resisting possible imports surges. Consumer welfare on account of trade liberalization is largely ignored.

Chawla (2016) suggests that the religious, historical and political dimensions which are considered a base for Muslim identity were in fact meant for Pluralism and Co-existence. So instead of fighting against each other both the countries should understand the need of co-existence not only for the sake of maintaining pluralism but also the economic consequences.

Coleman and Goeffrey (2012) elaborate the relationship between theory of regionalism and the wave of global economic integration entire world. The book is useful for this study at the stage of building theoretical framework

Das (1995) deals with the issues of structural adjustments and trade cooperation in the SAARC Region. In his work he tries to identify potential areas of intra-regional trade in South Asia.

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Frieden and David (2000) elaborate the history of the international political economy. The study helps to understand the different dimensions of contemporary international political economy. The selections of the articles describe the major development in the history of the modern international economy from a variety of different theoretical viewpoints. This book is useful to understand the issue of liberal economic order on international level.

Genna and Hiroi (2014) described the nature of theoretical relationship between political liberalism and economic regional integration. They elaborate that political liberalism paved the way for economic regionalism.

Goel (2004) lighted the Indo-SAARC Trade Scenario through discussing the different declarations of SAARC summit. In this way it can be a good reference book for the researcher who working on ‗SAARC‘.

Grover (2015) covers initial decade of SAARC‘s performance. He highlights the relation of India with SAARC and the relation of Pakistan with the organization of SAARC.

Hammond (2012) throws light on the global destinies and regional choices in the liberal economic and order. He concludes that new technology, the rise and fall (and sometime collapse such as USSR) of nations, swelling populations, an increasing global economy, striking increase in literacy, and other profound social changes—all these are transforming our world with extraordinary speed. Under such circumstances, making wise choice about the future is not easy. This situation will affect our global destinies and regional choices at last

Hoekman and Kostecki (2009) provides an insight on introduction to the political economy of the multilateral trading system. Their work complement the legal and process-oriented literature on the WTO by providing a self-contained treatment of the policy, economic and

xxxi development related aspects of the trading system. The focus is on understanding the forces that drive processes and outcomes and the incentives for governments to abide by negotiated agreements

Kahler and Maclntyre (2013) try to explore the distinctive feature of regional institutions by comparing them to the experience of other regions from the more open EU model to the more modest American model. In this context they propose some changes to South Asia that could foster the regional integration

Kardar (2011) has conducted a study in the context of the possible role of ADB to enhance intra-regional cooperation in South Asian region. He throws light on direct and indirect barriers to trade in South Asia, potential intra-regional trade in goods and services and deepening investment integration in the region. He further concludes that the integrated South Asia is the need of the day for the development of this region. Moreover, SAFTA‘s distinguishing features, such as substantial negative lists, non- tariff barriers etc. and fears about asymmetry in gains (largely in India‘s favor), have made that regional integration ineffective.

Kher (2004) covers history and organizational setup of SAARC and its economic aspects such as poverty eradication, trade and economic cooperation, human development and regional conventions/agreements etc. In his book SAARC, he has been discussed it as living organizations. The book is written in the India‘s context. The study concludes that for South Asia where regional cooperation was non-existent due to combative attitudes of South Asian States towards each other, SAARC has become a welcome sign as through its platform some remarkable mutual cooperation efforts have been under taken. RS Kher emphasizes that for the expansion of regional cooperation, India will have to provide assurance to its neighbors of its economic and political good will.

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Maini & Malik (2013) highlight, in their study, the Indo-Pak Visa regime and people to people contact. The main thesis this study is that people to people contact is the foremost key to tear of the hatred between two hostile nations without a far cry that can only be hoped wiping off the border. Linkages between citizens of Pakistan and India are a favor to neither country, but the future of both while regrettably; people to people contact so far is the privilege of a small section of the population on both sides.

Mander and Goldsmith (1996) conclude that, although the development of the global economy, which has been institutionalized with GATT and the WTO, is supposed to usher in an era of unprecedented prosperity for all but as the contributors to this book have shown, this assertion is false. So, instead of seeking to create a single global economy, controlled by vast and ever less controllable transnational corporations, we should instead seek to create a diversity of loosely linked, community-based economies managed by much smaller companies and catering above all to local or regional markets. Hence, he says that instead of economic globalization, economic localization is desired.

Matti, (2010) examines wave of regional integration in nineteenth and twentieth century Europe, Latin America, North America and Asia since the 1950s. The book stresses the importance of market forces in determining the outcome of integration.

Muni (2010) focuses on the challenges of food and security in South Asia, SAARC and energy cooperation; social charter and human security etc. S.D. Muni in his analysis, describes the crux of these articles shows that SAARC‘s frame work spans across economic, strategic and security as well as social dimensions of regional cooperation in South Asia. The problem has largely been at the level of implementation. The political will is slow but steady towards its implementation.

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Naqvi & Sammad (1992) analyzes that regional cooperation has emerged as a major politico-economic item on the global agenda of development co- operations and economic integration in the recent years. Their book is published in the initial period of SAARC. It provides econometric models of all SAARC member countries which highlight the structure of the economies of the different countries of SAAR and the structural changes realized therein and examine the existing and potential trade linkages among them. The numerical equations enriched articles have made the issue vague for the students of political science. The book concludes that instead of country model approach a regional Link Model would be the best medium for organizing a fruitful research effort to address the significance of regional economic integration, in South Asia

Oatley (2004) covers the interests and institutions in the global economy. His work provides an extensive discussion of domestic politics than most other International Political Economy (IPF) textbooks. He believes that it is impossible to understand why interest groups desire certain policies and why governments adopt specifics policies without knowledge of how economic processes affect groups within society, it also highlighted the area of in the South.

Panday et al. (2012) analyze that main hindrances to fast-tracking projects for facilitating intra-regional connectivity and accelerating economic growth, social progress and cultural development in the region through joint endeavors remain to be the protected political issues between the states in South Asia. However, the improvement is seen in last years in Indo-Pak and Sino-Indian ties and this improvement can be improved through ―Track Two‖ diplomacy (People to People Contact) instead of conventional patterns of diplomacy

Rahman (2001) analyzes that South Asia‘s appalling poverty and deprivation require a total commitment to economic cooperation and

xxxiv acceleration of intra-regional trade, so that the spirit of collective self- reliance becomes the bastion of strength and enhance the negotiating power to deal with globalization and world monetary agencies to create geo- economics order based on equity for the developing nations of the world. The study further elaborates that how the legacy of mistrust between Pakistan and India is the basic impediment to peace and cooperation in South Asia Region. So, the confidence building measures should be taken between two nations to make the regional integration process effective.

Razzaque & Basnett (2014) give an objective assessment of trade and economic co-operation among South Asian Nations and highlight the policy issues to foster regional integration in South Asian region.

Rehman et al (2012) and Makay et al (2012) discuss in their work that although ‗development‘ is considered the material advancement of people, especially the world‘s poor but here development is understood as a process not just of growth or at its most benign, poverty alleviation, but also of empowerment‖. The study claims that growing tendency towards localism is increasing the pressure to put decision making into the hands of the people. So, development covers variety of socio-economic and political issues i.e. human resource development, market economy, regional integration and so on. The book is useful for this study as it highlighted the significance of good governance, accountability, liberal economy and regional market to gain the target of development in developing countries.

Rehman et al (2012) in his book includes a selection of studies on the process of South Asian‘s regional cooperation and integration. His book is a result of collaborative efforts between ADB and two knowledge network partners-South Asia Centre for Policies Studies (SACEPS) and South Asia network of economic research institution (SANEI). The study concludes that regional public goods (climate change impact, food, security, energy security and so on) require strong ―regionalism‖. As illustrated by the

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SAFTA, Regional Cooperation and Integration in South Asian continue to progress but it must be accelerated. Saurabh & Preti (2001) analyz different SAARC related articles i.e. addressing human security concerns in South Asia: The Role of SAARC: by Nalini Kant Jha, Refugees in South Asia and Security Challenges: Intervention of SAARC: by Bhavana Sharma and Saurab Sharma: and International Trade and economic threats in South Asia: Addressing through SAARC by Monika Kannan etc. The crux of their edited book is that during an unbiased, speedy globalizing world, no local grouping can wish to function in isolation. SAARC should broaden effective hyperlinks with the adjacent regions and beyond. In step with this spirit, SAARC has been expanding in latest years. This growth has taken vicinity in two approaches- one via addition of latest participants then with the aid of starting up of SAARC to the ‗observers‘ from outside the area. SAARC borrowed the concept of ‗observers‘ from ASEAN. At Delhi SAARC summit in 2007, seven international locations joined SAARC as observers namely , U.S.A, , ECU Union, Japan, and . The study concludes that there will be hope in the area that the inclusion of foreign powers as observers could stimulate opposition a number of the outsiders for assist once and have an impact on resulting in some dynamism, inside the South Asian growth tale.

Singh (2012) analyzes the significance of regional integration through SAARC‘s platform. He concludes that if South Asia region want to become a developed part of the universe it has to cooperate at the regional level. There are many areas where their cooperation will yield brilliant results. He takes the example of energy cooperation. India and Pakistan both are facing energy crisis and its negative impact on their industrial development. While smaller countries like Bhutan and Nepal have enormous energy potential but weak infrastructure. So, energy supply from Bhutan and Nepal will be a great boost for Pakistan and India in this regard. In return it will also propel

xxxvi the economy of Nepal and Bhutan. Hence, he concludes that for the pursuance of the success of SAARC, it is utmost need to make it more popular among the stakeholders.

Volz (2011) describes comparative perspective on regional integration in different region of the world while at the same time analyzing the various facts of integration, relating to trade, FDI and monetary policy.

Zaidi (2007) analyzes and interprets the facts about Pakistan‘s economy. His emphasis is on Pakistan‘s economy and development today. The word ‗development‘ implies transition and a process need to be traced back to better understand the present and possibly attempt to look into the future. The book also covers the macro-economic development in Pakistan and the political economy of neighborly relation. Trade relations of Pakistan with India and its benefits and constrains are discussed in detail.

Statement of Problem

The South Asian Association for regional cooperation (SAARC) was established in 1985 having the aim to accelerate economic growth, social progress and cultural development in the region by providing all individuals the opportunity to live in dignity and realize their full potential. It was assumed by the proponents of SAARC that wealthier South Asia would be more peaceful and powerful politico-economic entity that could play its global role in future, because increase in wealth and economic cooperation among states consequently would improve human development index and decrease intra state political conflicts in South Asia.

For the purpose in achieving above mentioned objectives SAARC initiated South Asia Free Trade Area (SAFTA) in 1997 after amending its first trade liberalization agreement SAPTA. Although SAFTA has been signed in 1997 but so far intra-regional growth rate is not reached to assumed fruitful level. People to people contact on intra-regional level is still weak. ‗Poverty

xxxvii alleviation‘ in South Asia is still a long way to go. The volume of extra- regional trade (which may be expensive and of high cost) is greater than intra-regional trade volume (which may be less costly).

Intra-state and intra-regional political conflicts are arising and mounting day by day. Even SAARC member countries have signed many bilateral trade agreements with each other in the presence of SAFTA. The contemporary regional organizations such as ASEAN, EU, and NAFTA are considered to be success stories in regional economic integration whereas SAARC is viewed as less effective in this regard.

So, this situation raises a number of questions on the effectiveness of SAFTA, organizational flaws of SAARC and the spirit of regional integration within the framework of SAARC. This study would analyze that why SAFTA has not delivered the desired result in the regional integration of South Asia within the framework of SAARC. Moreover, it would also throw light on the stumbling blocks which have hampered the speed of economic cooperation among the member states of SAARC.

Significance of the Study

In the age of IMF and WTO (liberal economic institutions which regulate international trade and monetary system) developing countries are bearing enormous pressure to promote privatization and deregulation at domestic level and Free Trade at external level. South Asian countries are also members of the WTO and IMF and are bound to harmonize their economic policies according to the Agreements of WTO and conditions of IMF as well. So, this study would be helpful to understand the significance of closed regional economic integration in South Asia. It will high light that whether the liberal economic regime in SAARC is unanimously desirable by its members or it is a compulsion under the global trading scenario? This study will also give detailed analysis on the strength and weaknesses of SAFTA and explore the constraints (internal as well as external) with regard

xxxviii to the effectiveness of SAFTA. The study will also throw light on the prospects of liberal economic order in SAARC.

Objectives of the Study

The objectives of the study are: 1. To explore the nature of relationship between regional economic cooperation and international economic cooperation. 2. To analyze the internal, external, economic and non-economic, barriers in the way of promotion of Free Trade practices in SAARC. 3. To highlight the importance of the harmonization in domestic macro-economic policies to enhance the potential of intraregional trade. 4. To analyze, through comparative regionalization approach, the performance of SAARC in economic development of South Asian Region. 5. To draft a better policy option that can ensure a sustainable regional economic integration in South Asia.

Research Questions

1. Why the liberal economic practices are desirable in SAARC? 2. What is the relationship between phenomenon of regional integration and Free Trade? 3. How restriction of liberal economic practices affect the regional integration in South Asia? 4. Why SAFTA has not been fully implemented yet? 5. How can we evaluate the effectiveness of SAFTA in the growth of intra-regional trade? 6. What types of changes are required in macroeconomic policies of individual SAARC member countries to make the SAFTA effective?

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7. What type of internal and external constraints are creating hindrances in the establishment of Free Trade regime in SAARC? 8. Whether regional integration in South Asia without effective trade liberalization mechanism is possible? 9. Whether SAARC as a regional organization has been failed to accelerate the economic integration of South Asia Region? 10.How many objectives of the SAFTA have been achieved yet?

Methodology

The methodology adopted by a researcher to investigate a phenomena is a back bone of any research project. A clear, explicit and specific methodology provides with a comprehensive guideline to a researcher about the framework of the research to be conducted.

There are three major approaches to conduct a research i.e. qualitative, quantitative and mix method. All of these three approaches require different set of knowledge which demands different strategies for inquiry and procedural methods for data collection. For instance, if the research is qualitative in its very nature, the knowledge it claims is constructivist assumptions, advocacy or participatory assumptions. In case of constructivist assumptions, the strategy of inquiry will be ethnographic design and the suitable data collection method will be field observation. While in case of advocacy or participatory assumptions the strategy of inquiry would be narrative design and suitable data collecting method procedure would be open-ended interviews. The quantitative approach of research claims post-positivist assumptions. To investigate these assumptions the suitable strategy of inquiry is experimental design and the method of data collection procedure would be measure attitude with score.

Moreover, qualitative research is thematic in its very nature and best suitable to descriptive research while quantitative research is heavy loaded with statistical analysis that is extracted from numerical data. This is a

xl popular approach in the field of business administration, psychology, social work and pure sciences.

As for as the social sciences are concerned the exclusively qualitative or exclusively quantitative approach to research makes the social phenomenon vague and ambiguous. Therefore, mix method approach is a suitable alternative to avoid the ambiguity in the research. The term multi- methodology was first used in the book ―Multi-method Research: A Synthesis of Styles‖ written by John Brewer and Albert Hunter published by Sage Publications in 1989. During the 1990s and at present the term ‗mix methods research‘ has become more popular for the research movement in behavioral, social, business and health sciences. This approach uses the multitrate-multimethod matrix to investigate a phenomenon. Mix method approach arises out of actions, situations, and consequences rather than antecedent conditions. It claims the pragmatic assumptions as it concerns with the applications-what works and solutions to problems. So instead of focusing on methods, researchers emphasize the research problem and use all approaches available to understand the problem.

Mix method approach overcomes the limitations of a single design. It is useful to explain, interpret or explore a research phenomenon. It is also effective to develop and test a new instrument to address a research question at different levels. In addition, mix method approach can serve and address a theoretical perspective at different levels.

Hence, to inquire the questions raised by the research and achieve the proposed objectives of this study, multi-model research design is adopted. So this research would be historical, descriptive and analytical at the same time and strategy of inquiry would be sequential exploratory mix method design. This design is characterized by an initial phase of qualitative data collection and analysis followed by a phase of quantitative data collection

xli and analysis. The purpose to employ this strategy is to explore the correlation between regional integration and liberal economic practices and to do SWOT analysis of SAFTA regime for South Asia with special reference to Pakistan and India.

Although trade liberalization is not a new concept but it is still a burning issue for less integrated South Asia region. So, case study would prove to be a suitable method for this research. As South Asia has some intrinsic problems such as location time political and economic structure, hostile history and slow development but trade relations between India and Pakistan are taken as a case study in this research so that SWOT (strength, weakness, opportunity and threats) analysis of trade liberalization in SAARC could be fully illustrated.

Both Pakistan and India have colonial legacy and history of the hostile relationship since the communal cessation in the sub-continent (the rest of the SAARC countries have also colonial legacy and more are less ethno- political conflicts with each other). Both India and Pakistan are the members of WTO (World Trade Organization) and have opened up their borders for foreign direct investment and extra-regional liberal trade. As both Pakistan and India are the main actors of SAARC so, results of the study may easily be generalized for the rest of the SAARC member countries.

In the end, to gather the required data for the investigation of the phenomenon all the primary and secondary sources will be used. For a primary source, unstructured, open ended interview method will be used. While as a secondary data, related government‘s documents, government publications, earlier researches conducted on this phenomenon, censes, database of (ADB), IMF and World Bank about SAARC‘s intra-regional trade share, trade intensity, intra-regional FDI flow

xlii and portfolio share will be consulted to extract the required information which is already available.

Plan of the Study

The study is divided into five chapters. The tentative design of chapterization is given below:

Chapter No.1

First chapter deals with the theoretical interpretation of relationship between the concept of regional integration and liberal international economic order. For logical inference, different theories of regional integration and liberal economic order is discussed and analyzed.

Chapter No.2

Second chapter covers the evolutionary process of trade liberalization in SAARC and will also describe in detail the organizational structure of SAARC. It critically analyzes the slow, lengthy and complex process of negotiation for trade liberalization in SAARC. Further, this chapter highlights the international economic scenario in which the establishment of SAFTA became desirable for SAARC member countries. Objectives, functions and the contents of SAFTA agreement are viewed in detail.

Chapter No.3

Third chapter analyzes the Pakistan-India economic relations under SAFTA regime from 1997-2015. It thoroughly discusses the fluctuant history of economic relation between the two relatively bigger economies of SAARC, India and Pakistan.

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Chapter No. 4

Fourth chapter describes in detail the real hindrance in trade under SAFTA. The focus of the chapter is tariff and non-tariff barriers which are applied by Pakistan and India to each other‘s trade items. Interstate political conflict is discussed here, in the sense of non-tariff barrier.

Chapter No.5

This chapter is consist of the primary data analysis (structured survey and open-ended interviews from stakeholders of trade policy in Pakistan).

Chapter No.6

This is the last chapter of this study. It is comprises of the findings on the overall research and policy recommendations as a conclusion.

Limitation of the study

 The study contains secondary source to collect numerical/statistical data and information. For that purpose it relies on the internationally well reputed databases i.e. WITS, ITC, WTO, and WDI.  Primary data, through structured survey and open-ended interviews from the stakeholders of trade policy, is collected from Pakistan only. Due to continuous tension on LOC last four years, it was not feasible for researcher to visit the India to collect primary data.

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References

Priyanka Kher, (2010) ―Political Economy of Regional Integration in South Asia‖. Background Papers RVC. 5. UNCTADD. Romana Alexandra Rosu, (2013) ―Asymmetric Interdependence Power and Crisis in integration systems‖. Romanian Review of International Studies. Vol. 2. Page No. 1. S. Akbar Zaidi, (2007). ―Issues in Pakistan‘s Economy‖. Oxford University Press. Pakistan. Page No. 486.

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Chapter 1

Relation between Regional Integration and Liberal Economic Order: A Theoretical Framework.

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This chapter examines the idea of regional integration, its history and typologies in detail and finds out the logical link between liberal economy and phenomenon of Regional integration. It also examines the International liberal economic order in detail. Further, it analyzes the phenomena of regional integration in the context of different theories of regional integration to find out the best suitable theory which can guide this research work properly.

1.1 The Concept of Region

To elaborate the phenomena of regional integration and its relation with liberal economic order, it is essential to have a good understanding of the term ‘region’. The term region has a long tradition of interdisciplinary treatment (Claval, 1987), with common application in biology, psychology, anthropology and other social sciences (like political science, international relations, economics and sociology). Each discipline defines the term according to their subject matter. From the mid-eighteen century several forms of descriptions, classification and analysis techniques had been created without the intention to develop a more scientific point of view about the term region(Contel,2015).These concerns had become more common in the early twentieth century, when the systematization of a ‘regional geography’ began to take its preliminary shape, both in Europe and in the United States (Whitlessey, 1954).There were three main geographers who developed the first theoretical definitions on the regional phenomenon: Alfred Hettner, in , Vidal de la Blache, in , and A. J. Herbertson, in Great Britain (Duarte, 1980). Andrew John Herbertson was the first person who proposed the systematic definition of the term region in his article dated 1905 (Contel, 2015).

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1.1.1 Etymological Interpretation of ‘Region’

As for as the word ‘Region’ is concerned, its origin is a Latin word regio which gives the meanings of direction (marriam Webster Dictionary). In some dictionaries, it is referred to regere (the verb in Latin language) which means to rule. Region is also used as an interchangeable word of province. In social sciences, the word ‘region’ is used in polysemous way. For instance, social scientists use it to define a geographical space and to elaborate the economic interaction of states. In addition, this word is used to determine the institutional or governmental jurisdiction in a certain territory.

1.1.2 Micro and Macro Regions

As for as the scope of ‘region’ is concerned, basically it is a space within the boundary of a state that distinguishes national government from local government (it can be said as a second tire of government). This type of space which situated between the local and national boundaries of a certain state is called the micro-region. While there is also existed the term of macro- regions, its usage is in a broader perspective, for vast area. In this regard more than two states constitute a new region on varied basis (most of the time on the basis of physical proximity) which is called a macro-region (Soderbaum, 2007). Nye (1971) also strengthen this concept of macro-region in his work.

1.1.3 Usage of the word ‘Region’ in Social Sciences

The frequent use of regions is seen, in the social science, in its geographical context but it is still unclear that how one can determine their physical boundaries. Furthermore, many scholars are agreed that regions are more than a geographical entity. For example, Bruce Martin Russett (1967) interprets the region in multi-dimensional way. Along with its geographical meaning, he also takes it as a socio-cultural homogenous entity, and a politico- economic interdependent entity. It is true that in some way or other, geography lies at the heart of the most of discussed before definitions of

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Region: but some scholars define it in non-geographic terms also. Behavioral political scientists emphasize that political practice and interaction can alter a region’s composition. (Monsfieldand and Solingen, 2010). As Katzenstein (2005) defines “regions are politically made”. According to Solingen (1998) region’s boundaries can be determine with respect to different domestic political coalitions (Deutschetal, 1957).

1.1.4 Usage of ‘Region’ in International Relations

The scholars of international relations are not convinced on any particular definition of the region. Even some scholars think that regions are metaphorically treated as persons (Slocum and VanLangenhove, 2004). They give the reason that region and states can be attributed actorness in much the same way that persons are. For example we are used to read and listen to such word about states and regions when we read a newspaper or watch a TV: ‘ Warned’, ‘US reacted to’, ‘India Blames’ or ‘Europe Behaves’ (Slocum and VanLangenhove, 2004). In this regard, Thomas Hobbes, an English philosopher, was the first person who compared states with persons. In his book Leviathan, he considered that states as entities can talk on behalf of others. For Hobbes, the notion of personality fuses elements of authority, representation and the capacity to behave as one politically constructed actor. So, personality plays a crucial role in the establishment of a State as the Sovereign power is seen as an artificial person. (Pettit, 2008). Hence, conceptually neither state nor region speaks itself, whereas they speak, act and react on the behalf of other persons (their subjects). Usually, the concept of region is used when people are talking about territory or matter of governance or identity. (Longenhove, 2011). It is most interesting to note that these three elements are the attributes of a Nation State too. So, although ‘region’ is not a state but it has and enjoys some statehood properties. The concept of region is thus a discursive tool that uses to point to a certain aspect of reality. (Longenhove, 2011).

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Although, regions are not states but these have some resemblance of the state. So principally one can say that every geographical area in the world that is not a state, could be considered as a region if it can be attributed fundamental (proprieties, to some extent) In this manner, regions can be positioned as actor in the international system. It means that these regions may be capable of performing certain acts, such as making treaties, joining international organizations, condemning the behavior of states, and so on. Regions (like states) are not a given part of the reality, but these are the result of a process of social construction. (Langenhove, 2011).

1.2 The Concept of Regional Integration

The concept of Regional Integration is multi-dimensional in its very nature. It uses as an act or process (or instance of integrating such as incorporation as equals into society) or an organization of individuals of different groups (such as races). It can be used as a coordination of mental processes into normal effective personality or with environment (Merriam-Webster Dictionary). The concept of integration is also used as the operation of finding a function whose differential is known or the operation of solving differential equation (Merriam-Webster Dictionary).

Thus, the regional integration proceeds when states enter into regional agreements in order to enhance co-operation through regional institutions and legal framework. The nature of the agreements could be economic, political or environmental, although it has typically taken the form of political economy initiative where commercial interests are the focus for achieving broader socio-political and security objectives, as defined by national governments.

The benefits, which states, want to get through integration may vary case to case but one thing is certain that states want to be strong on international scenario through integration with a regional group. In the process of

5 integration, states voluntary handover some part of their decision making powers to a supranational level and establish a new level of political power, which supersedes the state (Heinonen, 2006). In this context states limit their sovereignty in some extent when they go into the process of regional integration. According to traditional international relation thinking states hold the Supreme decision-making powers within their territories and there is no authority above them. While integration seems to challenges this concept such as states withdraw some part of their sovereignty voluntarily. In reality integration has included considerable handing over of decision making power and limitation of sovereignty to a supranational level only in Europe in the case of European Union (Heinonen, 2006).

1.2.1 Theorizing the term ‘Integration’

As for as theorizing the term integration is concerned, the scholars of social sciences have not made a consensus yet. For some scholars, the term integrations is used to describe a process of integrating the individuals of different group (or races) or states to stay aligned. Ernst Hass (1956), the founder of neo-functionalism, considers it a process for the creation of political communities defined in institutional and attitudinal terms. Another renowned political scientist, Karl Deutsch (1957), take integration as a process which leads to the creation of security communities. There is a slight difference between two stated above definitions. Ernst Hass and Karl Deutsch both are agreed that integration is a process but Karl Deutsch is considered that the process of integration leads to security communities while Ernst Hass has of the view that process of integration leads to political communities. On the contrary, some scholars considered that the term integration can be used to describe both a process as well as an end state of the process. For instance, Philip Jacob and Henry Teune regard integration both as a process and as a terminal condition, “a condition achieved when an unspecified threshold is passed by an unspecified mix of ten process variables” (Hass, 1971). Although, apparently these definitions of integration are dominated by the

6 political dimension of integration, but integration can also have many other dimensions as well.

1.2.2 The Usage of Integration in Social Sciences

However, ‘integration’ is used in multi-dimensional ways in social sciences. For instance, in political science the term is used for the analysis of such changes which occurred among more or less sovereign political units (Hass,1956) while in the study of international relations the terms is confided to the analysis of cumulatively changing relations among states, resulting in their acceptance of some new central authority. (Haas, 1964). Historically, such authority has commonly been imposed by military force by a conquering group upon vanquished (Hass, 1964). So, only one thing distinguishes Integration from the forcible establishment of empires that in integration, the erosion of local autonomy is based on deliberate and voluntary decision, but it may never rest on force. Hence, Ernst B. Haas refers, regional integration, to that process among two or more states on a geographically confined scale, at a level below that of global integration, which sums up such world-wide phenomena as international law, the United Nations and the world trade or population movements. So according to Ernst B. Hass findings, regional integration has been an identifiable process in ancient century North America, and nineteenth century Germany, to cite some obvious instances (Hass, 1958). While Regional integration since 1945 has been an observable phenomenon in both Eastern and Western Europe, in the Atlantic Area, the Middle East, Africa, Latin America, an in the western hemisphere as a whole when regional integration occurs, the result is not simply a sum total of the component parts but the process yields system properties or attributes that were not in existence at the individual component level.

Thus, regional integration is not only ever-closer cooperation of states in a political field, or evolution or a collective decision making system among states over time (Lindberg, 1971) but it can also take place in the field of

7 economics, security, and environment. When we look at the conceptual history of regional integration, the early theorizing related to the European integration process emphasized the processual nature of the phenomenon. (Heinonen, 2006). Integration thus seems to be a process in which states engage themselves in cooperation with other states, which will bring them all the time closer together. The problem with this procedural definition is that it does not describe the terminal condition of the process at all. For instance, what would be the end result of political integration? A new political community, super imposed over the pre-existing ones as described by Ernest Hass (1968) or what would be the end result of economic integration: customs union, common market or monetary union? So, we can say that regional integration generally, is a process, which involves different phases on the way towards ‘integrated community’. But at some point when the process achieves a rather advanced stage it can be referred as an integrated community. Amitai Etzioni, which is considered an expert on political theory and international relations, called this advance stage (integrated community) integration (Etzioni, 1965). The same case is with economic integration. Economic cooperation between countries can occur on three levels. First, they voluntarily aligned their national policies to co-operate with each other in economics sector. Second, they adopt common legislation to achieve harmonization in economic policies while integration is the highest level of economics, cooperation where regionally integrated market emerged and some traditional decision making power of nation states hand over to the regional level. At this stage regional rules and decisions supersede national legislation. Hence, integration can refer both to the process as a whole, but also to certain advanced level of cooperation.

1.2.3 Types of Regional Integration

Furthermore, Regional integration features two different dimensions: it can be formal or informal by its very nature. Formal integration is a state led process, whereas in the informal process, non-state actors are predominant.

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When states cooperate in the field of economic policies and encourage trade through removing tariff barriers, they create opportunities also for actors in private sector to initiate cooperation or activities that cross national borders. In many cases, the political integration process creates a new framework for human activity, which benefits also non-state actors, for example in the economic field. So according to William Wallace (professor in International Relations), formal integration is an outcome of deliberate political actions and includes the establishment of institutions, policies or legislations. Informal integration on the other hand refers to a process that has effective consequences without formal, authoritative intervention (Wallace, 1990).However, formal integration does leads to informal integration while in some situations, cooperation of non-state actors can also create pressures for deepening the formal integration process.

1.3 Difference between Regional Integration and Regionalism

In the literature pertaining to international relations and political science, both of these two terms regional integration and regionalism are used simultaneously and interchangeably to address the issues of regional cooperation. But theoretically, both concepts are contradictory in their very nature. Integration is about unification along legal, political and economic lines as is the case among the members and candidates of European Union. While regionalism brings about the idea of diversification: regions as actors. Basically, regionalism is a political ideology that focuses on the national or normative interests of a particular region, group of regions or another sub- national entity. As for as international relations are concerned, regionalism is the expression of a common sense of identity and purpose combined with creation and implementation of institutions that express a particular identity and shape collective action within a geographical region.

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However, political-economic interdependence is not new in the realm of regional integration. The European sovereign debt crisis highlighted that an economic union could not work without a political union (Fligstein, Polyakova and Sandholt, 2012). So, in my opinion the term regionalism implicit an institutional and politically driven regional integration plan whereas the term Regional integration in its very nature is an ‘economic integration’ which initiates institutional and economically driven regional integration plan. But it does not mean that regionalism is used exclusively in political manner nor regional integration has solely economic scope. The early academic literature of regional integration is based on the assessment of European Union Model of integration whereas the same literature is belongs to elaborate the phenomenon of regionalism and usually the period 1950 to 60s is considered the first wave of regionalism in international relation’s discipline. Theory of Federalism and Federation, Neo- functionalism are remained closely associated with the study of European integration. These theories provide an analytical framework to understand political events such as the creation, growth and function of the European Union. All of the above mentioned theories emphasized on the political dimension of regional integration. On the other hand, Economic studies, generally, placed little emphasis on the political conditions that shaped regionalism. (Monsfield and Milner, 1999).

Thus, the classical theories of economic integration i.e. trade creation and trade diversion also, through the study of European mode of integration, highlighted the solely economic dimension of regional integration guided by regional trade theory. Jacob Viner’s book ‘The customs union issue’ (1951) is most often referred to as the first study of the benefits of economic integration. (Catudal, 1951, Solera, 1951).However it is quite interesting that political and economic theorists made ‘European integration’ the center of their work. So it is a self-opinion that both of these terms regionalism and regional integration are two sides of the same coin because political and

10 economic fields are closely interdependent that is why the phenomena of regional integration can best be understood in the context of international political economy. The earliest regional integration debates strengthen my point of view as these debates affirmed that economic integration must led to political integration and not the inverse (Pareto, 1889).

Vilfredo Parto, a well-known sociologist, argues that customs union and other international economic organizations constitutes powerful instruments for improving political relationships. Even the theory of economic integration of Bela Balassa (1961) explains that political unity is a crucial means towards achieving economic integration. The theory gives priority to economic motives rather than political motives and it relates political union to an instrumental role (Balanos, 2016). Balassa considers that political unification is the end product of the process of economic integration. Contrary to these economic integration theories, Ernest Haas’ (1958-71) approach (neo- functionalism) is that political aspects prevail over economic ones in the pursuit of regional integration.

Moreover, despite of being one of the most studied topics in economics the very definition of regional integration is still controversial. Fundamental differences persist not only between the major schools of thought but also among authors of the same school of thought (Suarez, 2009). So it is self- opinion that the term regional integration implicit the necessity of political integration as a subsequent step of economic integration. Whereas literature of regionalism proposes that political integration is a necessary prior step of economic integration. Interestingly, today’s regionalism (after 1980s to onward which is called new regionalism) is closely linked with the shifting nature of global politics and the intensification of economic globalization. Much of the existing research on regionalism centers on international trade. Various recent studies indicate that weather states choose to enter regional trade arrangements and economic effects of these arrangements depend on the preferences of national policy makers and interest groups, as well as the

11 nature and strength of domestic institutions (Mansfield and Milner 1999). Some analyses define regionalism as an economic process whereby economic flows grow more rapidly among a given group of states (in the same region) than between these states and those located elsewhere. An increase in intra- regional flows may stem from economic forces, like a higher overall rate of growth within than outside the region, as well as from foreign economic policies that liberalize trade among the constituent states and discriminate against third parties (Krugman, 1991, Stein and Wei, 1995). Albert Fishlow (a renowned economist, his more work is on Latin America) and Stephan Haggard (center of his research lies at the intersection of comparative politics, international relations and international political economy) define regionalism as a political process characterized by economic policy cooperation and coordination among countries (Fishlow, 1992 and Haggard, 1997). Defined in this way, commercial regionalism has been driven largely by the formation and spread of preferential trading agreements (PTAs) between/among the States on governmental level. Through these agreements, states get preferential access to members markets for example the European Union, the European Free Trade Association (EFTA), NAFTA, and the council for Mutual Economics Assistance (CMEA); many of them also coordinate members’ trade policies vis-a-vis third parties. (Bhagwati, 1993).

In short, regionalism is understood as a political construction conducted by states and materialized by agreements in order to organize inter-country relationships and promote multi-faced cooperation between nations (Figure and Guilhot, 2006). While economic regional integration is understood a combination of regionalism and regionalization (the term is defined as a concentration of economic flows within a given geographic area). An area is said to be regionally integrated only if it reports both a concentration of trade flows and institutional coordination, which permanently establishes common rules, between the concerned nations (Figuiere and Guilhot, 2006). Because of generalizations made by the World

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Trade Organization (WTO), since 1980, the term regionalism has gradually replaced that of regional integration in reference to any form of institutional arrangement that aims to liberalize and facilitate trade at any level other than multilateral (Bolanos, 2016).

1.4 The Concept of Liberal Economic Order

The term liberal economic order is referred to “capitalist economy of the modern mixed variety which relies on private enterprise and competition although there may exist monopolies, oligopolies, or government enterprises in some areas” (Haberler, 1978). The liberal economy or the market economy is, commonly, considered the opposite of a planned economy, where major aspects of economy such as import, export’s decisions and price mechanism etc. are highly centralized and regulated by the state. Whereas, in a market economy, economic decisions and prices are determined by market forces rather than by central planning. Here, market forces refer to the collective effect of the decisions made by individual participants in the economy such as consumers and producers according to their free will. However, there are no pure market economics in the world, and few pure planned economies, because all countries choose some level of central decision and regulations. Hence, most countries, such as western democracies, are mixed economies. This means they operate partly according to random market forces, and partly according to centrally planned rules and decisions.

Theoretically liberal economy or economic liberalism is an economic system based on Free trade, private property in the means of production and open competition (Adams, 2001).

1.4.1 History of Liberal Economy in Pre-World War-I

Historically, liberal economy emerged as the reaction to mercantilism. Mercantilism was a political doctrine which emphasized on the importance of Balance of payment surpluses as a device to accumulate gold (Frieden and

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Lake, 2000). Proponents of mercantilism, therefore, advocated tight government control over economic policies as they believed that laissez-fair policies (the idea that business should be free to develop without the involvement or control of government) might lead to loss of gold. Mercantilist believed that only raw-material could be imported, this idea led to colonialization, because, only a colony could provide the raw-materials a nation would need without having to pay someone else for them.

1.4.2 From Mercantilism to Liberalism

Near about four centuries, from the mid-1400s to the mid-1800s, the world was drawn into an economic and political order dominated by European capitalism. This order was organized around the overseas colonial empires of the Atlantic powers- such as Spain, Portugal, Netherland, England and France (Frieden, 2011). This was the first international economy which was controlled by its European founders. The economic system they built has come to be known as mercantilism. The mercantilist economic order relied on systematic government intervention in the economy, particularly in international economic transactions. With some variation, all mercantilist governments tried to stimulate demand for domestic manufactures and for such national, commercial and financial services as shipping and trade. They did this, through, importing raw-material from their colonies at lower prices and sold out to the manufactures to their colonies at higher prices. Hence, the political economy of mercantilism was largely based on an implicit or explicit “alliance between the government, the crown and the merchants, manufacturers and investors that carried out the bulk of economics interaction with colonies” (Ekelund and Tollison, 1997). Although the nature of this alliance varied from country to country but the result was same as mercantilist policies benefited the favored metropolitan business (larger units), at the expense of the colonies (and consumers) (Ekelund and Tollison, 1997).

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Interestingly the leading colonial powers having capitalist mode of production at home were eager to take advantage of what the rest of the world economy offered that time. But at the same time, to keep their home market and national product protected from foreign competition, they adopted mercantilist policies towards foreign trade. So the tension between the desire to take advantage of international economic opportunities, on the one hand, and the fear of harm from foreign competition, on the other hand, was a scarring theme in capitalist attitudes toward the world economy. Moreover, mercantilist period experienced the tension between state and markets. Market actors wanted economic freedom whereas governments were aggressive in their intervention in the economy on the name of real or imagined national security and military power (Ekelund and Tollison, 1997).

1.4.3 The Laissez- Faire Regime

By the early nineteenth century, mercantilist trade restrictions were come under widespread attack, particularly in Great Britain. Mercantilism was replaced by the Laissez Fair Policies enforced by Britain. The ideology of Laissez Fair was initially originated by a Scottish Philosopher and economist, Admin Smith. He wrote a Book namely ‘wealth of Nation’s in 1776. Smith’s views on labour (division of labour would enhance specialization which would further lead to economy of scale) brought a revolutionary change in industrial capitalism. He emphasized on consumption rather than production which considerably broadened the scope of economics. Smith was optimistic about the change of improving general standard of life. He called attention to the importance of permitting individuals to follow their self-interests as a means of promoting national prosperity. So Britain followed the liberal writings of Adam Smith, David Ricardo, Richard Cobden and other Manchester Industrialists and led the fight for free trade, which culminated in 1846 in the abolition of the corn Laws1 (Frieden and Lake, 2000). It was the last major mercantilist impediment to free trade in Britain. Other countries soon followed this example. When Britain raised the slogan of free trade, that

15 time, it effectively dominated the world economy. Its Navy was controlling the sea, one fourth of the world’s terrestrial surface was under its direct imperial control, and even the city of Landon was the world’s financial center and was alone capable of financing the industrial expansion that free trade could make possible (Frieden and Lake, 2000).

Hence, under Britain’s leadership, Europe entered into a period of free trade that lasted from 1860 to 1879 (Delong, 2001). During that period England succeeded in creating an all embracing world system of virtually unrestricted flow of capital, labor, and goods. Only the U.S. remained systematically protectionist, though it slowly began to reduce its duties in 1832, continuing to 1861, and again between 1861, and 1865 during the civil war (Delong, 2001).However, this trend towards free trade was reversed in the last quarter of the nineteenth century. There were variant causes of this reversal, including the decline of British hegemony, the onset of the first Great Depression (1873-1890), and the new wave of industrialization on the continent, which led to a new wave of protectionism. To protect domestic manufacturers from British competition nearly all the major industrialized countries had once again imposed substantial restrictions on imports. Coupled with this trend toward increased protection was a new wave of international investment and formal colonialism. England had already begun to expand its holdings of foreign territory during the period of free trade, and after 1880, it was joined by Germany and France in 1879, 67% percent of the world’s territorial area (A large area of Africa, Asia, Latin America and Pacific) had been colonialized by Europeans. By 1914 the figure had risen to 84.4 percent (Frieden and Lake, 2000).

1.4.4 Destruction of Pax Britannica after World War-I

The terrible devastation caused by the World War-I (July28, 1914- November11, 1918) in Europe was weaken the traditional world powers. Many analysts believe that one of the major causes of WW1 was the race for

16 colonies. However the war period severely destroyed the elements of the Pax Britannica, while it brought unexpected prosperity for The U.S. The mantle of leadership, which had previously been borne by Britain, was now divided between Britain and the United States. World War-I was indeed a watershed in American international involvement. The allies (including Britain), who were short of food and weapons, bought excessively from American suppliers. To finance their purchases, they borrowed heavily from American banks and, once the United States entered the war, from the U.S. government (Frieden and Lake, 2000). As a result, industrial production had been nearly doubled during the war years in America.

Moreover, European powers because of the war, neglected many of their overseas economics activities. American exporters and investors took the advantage of that situation and they moved to areas they had never been before. When the war began the U.S. was a net debtor of the major European nations; by the time it ended, however, it was the world’s principle lender and all the Allies were deeply in debt to American banks and the U.S. government. The American Banks and corporations continued to expand abroad very rapidly. Even at the end of WW1, the United States’ share of world manufacturing output had been twice as large as Great Britain’s (Kennnedy, 1989).American economic power continued to rise during the next 20 years, and by the end of the World War II, the United States was producing near about half of the world‘s manufactured goods (see the table1.1).The dominant position of the American economy, created an American interest in liberal international trade.

However after the WW1, while European countries including Britain were tried to reconstruct the world economy in 1920s, the United States refused to join the league of nations (which was initiated by the European countries to rehabilitate the Europe from the destruction of WW1) or any of the other international organizations created in that period and again raised the tariff level, which had been reduced previously on the eve of world war-I. In other

17 words, the U.S. adopted the policy of isolation. When the New York stock market crashed in 1929 and the world economy subsequently moved into a depression (an economic situation in which demand for goods negatively affected due to decline in world trade) the weak world trade system collapsed into rival trade blocs and rising protectionism (Oatley, 2004).So in the Smooth-Hawley Act of 1930, the United States dramatically increased its tariffs. Other countries also followed the United States’ example and formed discriminatory trade blocs. Britain created the Imperial Preference System in the 1932, a trading bloc based on one underlying principle: “home producers first, Empire producers second, and foreign producers last” (Richardson, 1936).As the wave of protectionism broke out, world trade fell sharply, from $35.6billionin 1929(the year before the depression hit) to $11.9billionin in 1932(see table 1.2) and by 1933 the world was engulfed in a bitter trade and currency conflict. However increased protectionism contributed to collapse of world trade and made difficult to international recovery from Depression. Table 1.1: Share of World Manufacturing production

Countries 1880 1900 1913 1928 United States 14.2 23.6 23.2 39.3 Great Britain 22.9 18.5 13.6 9.9 Germany 8.5 13.2 14.8 11.6 France 7.8 6.8 6.1 6.0 Source: Kennedy 1988, p259. After the bitter experience of great Depression, U.S. decided to provide leadership to establish a liberal system of world trade. U.S. congress accepted the proposal of President Franklin Roosevelt, and granted him authority to negotiate bilateral tariff agreements through Reciprocal Trade Agreement Act (RTTA) in 1934 (Oatley, 2004).During 1934 to 1938 United States negotiated bilateral treaties with 19 countries under RTTA (Butler, 1998). Although these treaties did little to liberalize trade but they had great impact for future international economy. For instance, this initiative first time showed the American willingness to exercise leadership in the international

18 trade system. Moreover, these bilateral treaties were based on two principles, reciprocity and nondiscrimination; later these principles become the central component of post-World War II multilateral liberal economic order. Table1.2: Collapse of World Trade Year Average Monthly World Trade $U.S. millions 1929 2,858 1930 2,327 1931 1,668 1932 1,122 Source: Kindleberger1987, p140.

1.4.5 Liberal Economic Order after World War-II

Post World War II wracked politico economic situation of Europe totally changed the world power structure. European countries had lost their strong economic position due to war expenditures, so, the process of decolonialization started rapidly, because to maintain direct control over the colonial territories was no longer affordable for them. As a result, a number of nation states emerged and the formal colonialism came to an end. In addition, the political and economic leadership of the world was transferred from Brittan to America. Previously, Britain was the world’s leading economy. The U.S.A was, now, the leading economy in the world and dollar became the monetary basis of international financial system. American trade interests had been changed since mid-1930s, when American government officials recognized that American industry could capture the world markets and that lower tariffs at home posed little threat to American manufacturing firms. That was the right time for the slogan of free trade. Although U.S. had been started negotiating bilateral tariff reduction agreements with other countries under RTTA since 1934 but those treaties could not be effective to liberalize the international trade. Hence, American council on foreign relations organized a meeting in 1939 at Washington D.C. in which corporate representatives from private sectors and foreign policy officials from public sector, jointly discussed to how to formulate such policy framework which

19 can serve to the economic vested interests of American private and public sector (Mander and Goldsmith, 1997).

1.4.6 Establishment of Bretton Wood Institutions

Furthermore, during the War period ,the Roosevelt administration used the political leverage afforded by the lend lease agreements it signed with the allied powers to secure the commitment of European governments to post war negotiations aimed at creating a nondiscriminatory and liberal international trading system(Otalay, 2004).So, the United State started mutual discussions with Great Britain to formulate the postwar trading system in 1942 which continued to be held periodically till 1945.These discussions eventually led to the famous Bretton woods conference of 1944 and by the end of this historical conference, the World Bank and International Monetary Fund (IMF) had been founded. Both institutions, the World Bank and the IMF played a key role to promote economic growth and globalization. Through structure adjustment programs (SAPs), the World Bank and IMF had pressured countries (ex- colonies of European countries and U.S and in the period of declonialization, they emerged as independent states but had third world status due to their low economic development rate) to open their borders and change their economies from self- sufficiency to export production.

14.7 Establishment of ITO and GATT

Alongside the establishment of Bretton Woods’s institutes, the United State attempted to establish, an international organization which exclusively deal with trade matters and regulate international trade. At the first meeting of the Economic and Social Council of the United Nations in February 1946, a preparatory committee was set up to work on the charter of an international organization for trade for an International Trade (Little, 1991). In addition, United States was engaged in negotiation with its war time allies to conclude a multilateral agreement for the reciprocal reduction of tariffs on trade in

20 goods. As the result of these negotiations General Agreement on Tariff and Trade was signed by eight countries in October, 1947.Those eight counties were the United States, the , , Australia, France, Belgium, the Netherland and Luxembourg (Bossche and Zdouc, 213). The GATT was intended to form one component of a broader International Trade Organization while the ITO was intended to facilitate trade liberalization (Oatley, 2004).According to ITO charter, governments were responsible for economic development and full employment, and to achieve those objectives they would include a mechanism for intergovernmental consultation and policy coordination.

The charter of ITO provided developing counties significant exceptions to GATT rules particularly concerning to nondiscrimination which was not acceptable for America. The essence of the United States position was that most favored nation treatment should apply to tariffs, quota restriction and export subsidies should be out lawed, and that all countries (including the developing counties) should commit themselves to a program of reciprocal tariff reductions. U.S. proposal was opposed by both developed and developing countries, both in the preparatory committee and at the full Havana Conference which included fifty-six countries (Little, 1991). Hence the U.S. congress did not ratify the charter of ITO and raised objection to it. Without the participation of United States, the ITO could not survive and GATT (which did not require senate ratification) became the central international trade institution. Although GATT was not the ITO, because agreement on bilateral trading rules could not be reached in 1947, yet the philosophy of GATT was still largely that of the United States conception of an ITO: that government interference with the working of the price mechanism, where it seriously affected international transactions, should be quite strictly limited by international agreement (Little, 1991).

Initially, GATT was signed as an international agreement to set out the rules for trade liberalization but due to the demise of ITO, it also became a

21 provisional international organization to support the agreement of GATT. Developing countries became critical to GATT-centered trading system because they believed that it embodied the interest of United States and European countries and neglected the concerns of developing countries. The governments of the developing countries believed that liberal and nondiscriminatory international trade promoted by the GATT would limit their ability to develop the manufacturing industries that they believed were the central to economic development. Consequently, many developing countries withdrew from the GATT process of trade liberalization.

1.5 Liberal Economic Order and Cold War

In late 1940s a cold war started between Capitalist America and socialist Soviet Union. The war had dual impact on liberal economic order. Frist, U.S. supplied monetary aid to Europe under Marshal Plan package to reconstruct its capitalistic economy to contain the expected influence of Soviet led communism in a vulnerable, war weakened Europe. The Organization for European Economic Cooperation (OEEC) was created as part of Marshal Plan. Sole purpose of this Organization was to liberalize trade within Europe. Second, United States unilaterally liberalize the trade during 1948to 19581(Oately,2004).The United States increasingly opened its market to European exports even though Western Europe continued to discriminate against American goods. Hence, cold war strengthens the GATT-based liberal economic system as it motivated the United States to help Western European economies to make them capable of participating in liberal international trade. U.S. Plan towards reconstruction of Europe, on one hand, and its unilateral trade liberalization policy towards Europe, on other hand, made possible the economic recovery and impressive growth in Europe. The developed Europe made it possible to achieve more far-reaching trade liberalization in 1960s.So, it is obvious that postwar multilateral trade system thus reflected the interests of powerful countries, and in particular the interests of the United State which was enjoying the hegemonic position in

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international liberal economic system due to its dominant economic position entire the globe.

1.6 From GATT to WTO: Institutionalization of liberal economy

Since its establishment eight rounds of multilateral trade negotiations were held at GATT’s platform. Table: 1.3 GATT Trade Rounds

Name/place Year Subject Covered Countries Geneva 1947 Tariffs 23

Annecy 1949 Tariffs 13

Torquay 1951 Tariffs 38

Geneva 1956 Tariffs 26

Geneva 1960- Dillon Round 1961 Tariffs 26 Geneva Tariffs and Kennedy 1964- Anti-dumping Round 1967 Measures 62 Tariffs, non-tariff measures, Geneva 1973- “framework “agreements Tokyo Round 1979 102 Tariffs, non-tariff measures, rules, Geneva services, intellectual property rights, 1986- Uruguay dispute settlement, 123 1994 Round. Textiles, agriculture, creation of WTO, etc. Source: WTO Official website https://www.wto.org The primary concern of GATT negotiations was the inhibitive effect of tariffs on expansion of trade. During first five rounds of multilateral trade negotiations (from Geneva Negotiations till Dillon Round) the reduction of tariffs was the central theme of GATT. The seventh round, i.e., the Tokyo Round, which took place during 1973-79, included several other areas, viz. non-tariff measures (NTMs), in the negotiations. The next round of multilateral trade negotiations (MTNs), i.e., the Uruguay Round (1986-94), was a very comprehensive round, covering tariffs, NTMs and also two areas

23 outside trade in goods, viz., services and intellectual property rights. From Geneva negotiations (1947) to the Kennedy Round (1964-68), the negotiations were mainly among the developed countries. The developing countries participated in large numbers for the first time in Tokyo Round (1973-79). The Uruguay Round saw still larger participation of the developing countries. Tokyo Round and Uruguay Round of GATT are very important because they provided the institutional implications to the liberal economy.

1.6.1 Tokyo Round of Trade Negotiation under GATT

There were some important features of the Tokyo Round which had institutional significance. 1. The area of trade was expanded from tariffs to non-tariff barrios to free trade. The area covered in this exercise was: subsidies, dumping, technical barriers to trade, customs valuation and import licensing and dispute settlement. 2. The earlier GATT framework of rights and obligations was common to all sectors. While in Tokyo round, some sectors became the subject of specific sectoral agreement, viz., civil aircraft, dairy products and bovine meat. This was a significant shift in liberal trade negotiations. 3. The results of the Tokyo Round were included in agreements (commonly known as Tokyo codes) which were not ab initio binding on the countries. It was decided that the rights and obligations of a code would be applicable only to the countries that accepted that particular code. This was extremely significant as it totally uprooted the MFN (most favorit Nation) principle in these areas, which had been a basic pillar of the GATT. Earlier, the countries that were the contrasting equal, whereas these codes divided the countries into various classes. A set of countries that were signatories to a code had different rights and obligations than the others. The latter would not get free

24 entry to the meetings of the committees created under these codes (Das, 2003). They could enter at best as observers and that too only if the participants so decided. All this resulted in fragmentation of the GATT structure.

1.6.2 Institutional Implications of Uruguay Round

The Uruguay Round involves more fundamental institutional implications: 1. It gave an institutional base to the multilateral trading framework. It created the World Trade Organization (WTO), which had the status of an intergovernmental body. 2. It introduced a more effective system for the enforcement of rights and obligations through dispute settlement mechanism. 3. The coverage of the WTO was expanded beyond the international trade in goods, which had been the limit of the GATT’s domain.

1.6.3 Establishment of World Trade Organization (WTO)

At the end of Uruguay round, GATT, the international agency, was replaced by World Trade Organization. While GATT, the agreement, was still existed. It was amended and update. When GATT was created after the Second World War, international commerce was dominated by trade in goods; therefore GATT 1947 was only dealt with reduction of tariff in goods. Since then drastic changes had been come in service sector(Transport, Banking, Telecommunications etc.) and trade related intellectual property sector( Ideas-innovations, designs, trademarks etc.) due to technological advancement. Therefore, the amended version of the GATT (which was named GATT 1994) extended its sphere of influence in services and intellectual property rights. The WTO brought the three agreements i.e. General Agreement on Tariff and Trade(GATT),General Agreement on Trade in Services (GATS) and agreement on Trade Related Intellectual

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Property Rights(TRIPs) within a single organization, a single set of rules and single system for resolving disputes(see WTO official website).

Moreover, WTO was not a simple extension of GATT but it was much more than it. For instance, GATT wasan adhoc and provisional, and it never ratified by its members’ parliaments. In addition, GATT was only a platform for trade negotiations; it had no authority to impose them by force. Whereas WTO and its agreements had permanent status. The WTO had a strong legal system because its members had ratified the WTO’s agreements in their respective parliaments. So, WTO had a mandate to work as a single body institution: to operate global system of trade rules, to act as a forum for trade negotiations and to settle trade disputes between its members. The most distinguish feature of WTO was its authority to enforce its agreement by levy economic sanctions on those States which refused to follow its laws (Mujahid, 2001).

Furthermore, an important aspect of WTO’s mandate was to cooperate with IMF, WB and other multilateral institutions to achieve greater coherence in global policy making. Hence GATT adopted a separate Ministerial declaration at the Marrakesh Ministerial meeting in 1994 in order to address this issue. The declaration recognized the inter- linkage among different aspects of economic policy and called on the WTO to develop its cooperation with the international organizations responsible for monetary and financial matters i.e. the World Bank and International Monetary Fund(see the official website of WTO).

1.7 The Role of WTO to strengthen Liberal economic Order

The primary objective of WTO was to make rules to facilitate economic growth through multilateral trade system and effectively handle the trade disputes to help the trade flow as freely as possible. In addition, being a form for trade negotiations, it was sole responsibility of WTO to achieve further

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liberalization of trade on global level. For that purpose, it had mandate to monitor national trade policies of its member countries and to cooperate other international organizations. To make the less developed countries effective part of market economy and to spread free trade entire the globe, the WTO was responsible to provide technical assistance to developing countries (see official website of WTO).

1.7.1 The principle of Non-discrimination and National Treatment

To liberalize the free trade, the principle of Most Favored Nation (MFN) and National Treatment (NT) were designed to act against trade discrimination. Although the literal meanings of ‘most favored nation’ suggested some kind of special treatment(relax tariffs and non-tariff barriers) for one particular country which one is the favorite most , but in WTO it means a policy of non- discrimination would be adopted by each member country. Each member would be bound to treat all the other members equally as most favored trading partners. But there are allowed some exceptions such as the generalized system of preferences (GSP).It is a scheme under United Nations Conference of Trade and Development (UNCTAD), under which developed members can grant preferential treatment to members. However, in general terms, MFN was intended to ensure that each WTO member treats other members equally. As for as other principle NT was concerned, it was meant that imported and locally produced goods should be treated equally. The same rule should be applied to foreign and domestic services, and to foreign and local trademarks, copyrights and patents (see the official website of WTO).

However, charging the customs duty (tariff) on an import was not considered a violation of national treatment clause even when the locally produced products were not charged an equivalent tax. While these tariffs were permitted, members negotiated their reduction and binding for WTO. Once tariffs had been reduced or bound, raising them unilaterally was prohibited. 27

But in some exceptional circumstances such as a balance of payment crisis, raising the tariff, unilaterally, was allowed.

1.7.2 Optimistic Aspects of WTO

From its creation to 2017, total eleven Ministerial Conferences (the top decision making body of WTO which held after every two years) of WTO have been held. Its membership has increased up to 160.Many countries has observer status, its mean they are in the process of accession. Out of 160 member countries, more than 125 countries are developing countries. One of the commonly used yardsticks to measure the success of WTO is the volume of world trade (Kwa, 1998). In this regards world trade statistical review provided by WTO secretariat shows optimistic aspect of world trade. World exports of manufactured goods increased from US$8 trillion to US$11 trillion in 2016.World export of agricultural products have increased by 70% since 2006.The world export of commercial services has increased from US$ 2.9 to US$ 4.8.Travel and other commercial services have increased the most, with both being 1.7 times higher than in 2006 (world trade statistic review, 2017).While WTO members account for 98.2% of world merchandise trade. Asia Europe and North America account for 88% of this total. The merchandise trade of WTO members has increased to US$15.4 trillion, up from US$ 11.7 trillion in 2006(world trade statistic review, 2017).

1.7.3 WTO and Developing Countries

Although, the volume of world trade increased in the realm of WTO but the greater beneficiaries of this increased volume of trade are a few developed countries instead of a large number of developing countries. As WTO trade statistics itself exposed the reality that only top ten trader countries in merchandise trade count for more than half (53%) of the world’s total trade. While all developing countries (more than one thirty), accumulatively, had a 41% share in world merchandise trade in 2016(world trade statistic review,

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2017). Actually, since inaugural ministerial conference of WTO (the top decision making body of WTO) in (1996) developing countries were reluctant to accept the agenda of WTO (reciprocal free trade). Free trade was a right notion for highly industrialized and technologically advance capitalistic economies but it was harmful for semi-industrialized and semi capitalistic newly independent third world countries. Developing countries having this consciousness showed resistance to liberal practices of WTO. Though Protests against neoliberal globalization had been going on in many parts of the world for years, yet Battle in Seattle (a series of protests surrounding the WTO Ministerial Conference of 1999 in Seattle (see WTO official website for details) finally expressed the sentiments of people against the agenda and institution of WTO.

Hence, to raise their voice effectively during trade negotiations developing countries formed coalitions in the WTO. Major groups which emerged during Cancun round were, G20, the 33 alliance and alliance. The G20 was consisted of several developing countries which were opposing to the joint proposal on agriculture submitted to WTO by the EU and USA (Actionaid International, 2014). For its parts the 33 alliance for special products and a special safeguard mechanism was aimed to defend food security and rural livelihoods in developing countries from the threat of the import regime liberalization under the WTO’s Agreement on Agriculture. While the G90 alliance of the African Union, least developed countries and countries of the African, Caribbean and Pacific bloc was presented joint positions across a range of negotiating issues. Single issue alliance (like minded group) were also formed to resist the European Union’s attempts to launch negotiation on the four Singapore Issues of investment; competition policy, government procurement and trade facilitation, and also to campaign against cotton subsidies in EU and USA which were responsible for undermining the livelihoods of millions of cotton farmers in developing countries (Action Aid International, 2014).

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Developed WTO members were not prepared for these new developing countries alliances, and their first reaction was overwhelmingly negative. They tried to threat and pressurize the developing countries to break their groupings. For instance, US president George Bush had personally telephoned the heads of state of Brazil, India, Pakistan, South Africa and Thailand and putting pressure on them to abandon the G20’s strong stance on agriculture (Grassley, 2003). This changed situation was not celebrated by WTO officials because to develop a consensus on further trade liberalization became difficult for them due to strong resistance and powerful voice of developing countries. As a result trade liberalization process became slow due to developing countries’ disagreement over agriculture, industrial tariffs and non-tariff barriers, services and trade remedies (Fergusson and Ian, 2008).The most significant differences were between developed nations led by EU, US, Canada and Japan and the major developing countries led by and mainly presented by Brazil, India, China and South Africa(Fergusson and Ian, 2008).So, developed countries tried to attack(both privately and officially) the new groupings and particularly the G20 in order to undermine their unity.

1.7.4 The effects of 9/11 on Liberal Trading system

Interestingly, 9/11 attacks on world trade center (which was called twin tower) dramatically changed the situation in the favour of WTO officials and rich countries’ stance. It proved a boon for free traders, their liberal agenda and institutions they promote it. Many developing countries which had very firm position against WTO agenda changed their mood suddenly. All of that done because developed countries used 11 September incident as a tool to pressurize the third world countries during Doha Round Conference (Kwa, 2002). US trade represented Robert Zoellick, toured the world with the message that the new round of WTO on trade negotiation would stamp out terrorism (Kwa, 2001). So, support for the war on terror was quickly equated with support for neoliberal globalization.

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1.8 Relationship between regional integration and Liberal economic order

History of regional integration shows that an important motivation of the formation and development of regional trading blocs was to compete with the outside world. Actually, US led multilateral trading system transformed the very fabric of world politics and world economy. Previously, international relations were based on Westphalian system in which state had absolute sovereignty on its subjects, within its territory. While under the process of economic globalization Westphalian system became weaker as state’s autonomy had been limited and state was no more capable to control fully the activities of economic subjects within its territory. The European concept of welfare state was replaced by the new liberal state order. In former concept, state was responsible for the protection of public interest, for that purpose state had right to regulate the market forces, while in later concept, state was only responsible for the supply of public goods through promoting competitive private sector based on capital mode of production.

1.8.1 The Role of MNCs and TNCs in Regional Integration

In the new liberal state order, the importance of the transnational and international companies within the economy of particular state is growing, and the sphere of foreign direct investment and imports are growing up (Kucverova, 2008). A multinational corporation (MNC), sometime called a transnational corporation (TNC) is an enterprise that controls and manages production establishment plants in at least two countries (Caves, 1996). Multinational corporations are situated at the intersection of production, international trade, and cross border investment (Oatley, 2004). MNCs have become important actors in liberal economic regime. According to the United Nations Conference on Trade and Development, 80% of world trade takes

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place in value chains (a set of activities that an economic organization carries out to create value for its customers) linked to transnational corporations (UNCTAD, 2013). In addition, a large part of international trade is based on intra-firm trade, that is, trade that take place between an MNC parent and its affiliates in other countries (Oatley, 2004). These MNCs, to cope with the competitive liberal environment, aim to have their expenses as low as possible and for this purpose they extensively rely on out sourcing at means the transferring of production to another place where the expenses are advantageous (where tax system and social benefit laws are relaxed). So most of the MNCs, in WTO realm, have shifted their production unites towards developing countries in the search of cheap input.

1.8.2 Economic Globalization and Internalization of Economics

The market economy increased dependence of all the participating states (in liberal trading system) on international trade, international capital flows, and the migration of labour forces and the exchange of scientific technical information (this transformation of world economy is referred to globalization). Consequently, the nature of international division of labour and traditional structure of production changed under globalization forces. Economic globalization accelerated the process of internalization of economics, for example at the same time state wanted to attract foreign direct investment within national boundaries and tried to expand its domestic capital abroad. To meet the challenges of overall global competitive economic environment, the need of regional cooperation increased. The first initiative towards regional integration was taken by Europe. In post-World War-II scenario, the western European countries had once been very dependent on the Unites States. Therefore, since their economic recovery after the 1960s, they began to search for economic and political independence. In order to compete with the U.S. and Japan and some other developed countries, the

32 western European countries started to search for ways of cooperation in many fields in the early 1960s and in result EU came into existence.

The fast development of European Union (EU) and Japan remanded the U.S. of its relative falling position in the world economy. According to Mason and Turay, “Business and political leaders saw that the USA was become less and less competitive with Japan and EC. In the 1970, and 1980s. US manufacturers lost their strong market position in several key sectors, including consumer electronics, commercial aircrafts, apparel, machine tools, semiconductors and automobiles” (Mason and Turay, 1994, P.17).

Hence, U.S began to think about Canada and Mexico, two of its nearest countries. Although, both Canada and Mexico have had difficult economic and political relations with USA but at the same time, both of them hoped that their products could enter the American market and they could attract more of American investment. Therefore, in 1992, the three countries formed the North American Free Trade Agreement (NAFTA). This was the first time a regional Trading bloc made up of countries with a considerable disparity between them came into being.

1.8.3 The Popular Trend of Regional Integration

The success story of EU, ASEAN and NAFTA changed the pattern of world economy. Regional integration became the popular culture in the world. The driving force behind regional integration is economic development led by regional trade agreements. Theoretically Regional Trade Agreements (RTAs) are formed to minimize trade barriers and increase the flow of trade between/among members at regional level. RTAs can be linked to economic development in many ways. When a country remove trade barriers it means it open its market for foreign producers which leads to competition and efficiency in the market. Openness and transparency are essential for attracting foreign direct investment (FDI) which is a key ingredient for economic development, especially in developing countries. The theory of 33

RTAs was first introduced by Jacob Viner (1950) in his book The Custom Union Issue. He defined a perfect Custom Union as the complete elimination of tariffs between the members, the implementation of a uniform tariff on imports outside the union, and the distribution of customs revenue between the members accordance with an agreed formula. Viner’s theory of custom union is based on the two concepts of trade creation and trade diversion. According to him the process of regional integration is imply a system of custom discrimination among nations while importing the same product within and outside the regional integrated political units. The tariffs are reduced between the integrated groups of states while tariff or non-tariff barriers are maintained against imports from outside the region.

1.8.4 Trade and Macro-economic Arrangement through RTAs

However, the achievement of economic gains and sustainability of trade policy through using RTAs are closely linked to the stability of macroeconomic policies (Drabek, 2005).Because trade surpluses and deficits are heavily reliant on national savings and investment, both of which are dependent on macroeconomic policies. Thus, the coordination of RTA members’ policies is crucial to its success. Trade and macroeconomic arrangements resulting from a RTA can directly influence investment and development in member and non-member countries, emphasizing the importance of their effective use. Changes in trade preferences have the ability to transfer investment into or away from member countries which will affect development (Pomfret, 1997).So policy makers of state go toward RTA to regulate the international trade. There are different types of RTAs, for example, free trade area, custom union, and partial scope agreements. The aim of all types of RTAs is same, to liberalize the trade at other than WTO level. In a free trade area, member states eliminate tariffs and non-tariff barriers among themselves and keep separate tariff with the third countries. Custom union is also a free trade area members are bound to keep common

34 external tariff according to mutual agreement. While partial scope agreements belong to limited liberalization as such agreements cover only product specific reciprocal trade liberalization policy. It is difficult to quantify the benefits of any RTA before its final implementation because all types of RTAs have different scope and coverage, and countries have differing objectives when entering in negotiations.

Table: 1.4 Types of Regional Trade Agreements (in terms of scope) Types of Description Example Agreements

Multilateral Multilateral (or regional) EU , ASEAN, SAARC, e.tc Agreements. They set rules of trade between several countries of the same region (minimum members of Bilateral the trade bloc should be more than Indo-Sri Lanka Free trade two from the same region such as Agreement NAFTA) They set rules of trade between two countries of the same region. Source: Author’s compilation The design and the implementation technique of the regional agreement become critical to its effectiveness (see table 1.5). States are motivated to inter into RTAs for different reasons. For instance, developing countries are interested in RTAs to improve their economic position, to gain the benefits of comparative regional trade advantages. They are also interested to create trade blocs to make their voices strong against powerful states in multilateral negotiations at WTO. While developed capitalistic countries go into RTAs as a second best option, when multilateral trade negotiations fail, despite lesser gains being realized (Laird, 1999). They also entered in RTAs to effluence multilateral trade talks i.e. European Union. Furthermore, RTAs provide grantee to market access to its member countries.

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Table: 1.5 Methods of implementation of RTAs Method of implementation

Scope of beneficiaries Reciprocal Unilateral Preferential: selected countries NAFTA, EU, COESA, GSP, AGOA, EPA, and other RTAs EBA, Cotonou Nondiscriminatory GATT/WTO (MFN): all countries multilateral agreements Autonomous liberalization Source: World Bank staff Table: 1.6 Types of RTAs (in term of volume of trade liberalization) Three Types of RTAs 1. Free Trade 2. Custom Unions(CUs) 3. Partial Scope Agreements (FTAs) Agreement Zero tariffs between A custom union is a type Partial Scope member countries and of trade bloc which is agreements have each country retains the composed of a free trade limited ability for independent area with a common liberalization. It trade policy with the external tariff allows reciprocal rest of the world. trade and covers only certain products. Source: Author’s Compilation However, many regional integration endeavors are based on the believed that increasing trade reduces the risk of conflict (WTO, 2003). Founding fathers of European Union were also believed on this notion (Milward, 1984). Thus, RTAs can become the cause of conflict itself if the income generated from the RTAs distribute among its members unfairly.

1.9 WTO and Regional Integration

The proliferation of regional trade blocs (the physical manifestation of regional integration) has become the popular trend in WTO led liberal trade

36 regime. Although, RTAs represent a fundamental departure from the core WTO principle of nondiscrimination (MFN), but at the same time WTO provides legal cover to proliferation of regional trade agreements and preferential trade agreements through the General Agreement on Tariff and Trade (GATT) Article XXIV, General Agreement of Trade in Services(GATS) Article V; and the Enabling clause (the 1979 Decision on differential and more Favorable Treatment, Reciprocity, and fuller participation of developing countries) dealing with trade in goods between developing countries. Hence WTO recognizes three exceptions to Most Favored Nation principle. First, developed countries can give non-reciprocal trade preferences to developing countries within General System of Preferences (GSP). Second, developing countries can grant partial trade preferences to each other within the so called Enabling Clause. Third, developing countries can, according to Article XXIV of GATT, form custom unions or free trade areas if they cover substantially all the trade. WTO directs its member countries to notify the WTO secretariat of any RTA they enter into. The provisions of any RTA are subject to review by WTO. However, the review processes in practice, ends with the committee’s queries of the parties and has not led to a subsequent report to the membership or formal WTO endorsement in any case (World Bank, 2005).

1.9.1 History of RTAs

History of RTAs goes back to several centuries but its center was Europe. The classical example is the German Custom Union, Deutscher Zollverein. The German custom union integrated those states with each other which had previously been linked in three smaller custom unions and paved the way for German unification (Gale, 2006). In the period between WWI and WWII, there were many preferential trade agreements existed between European powers and their colonies. In post Second World War scenario, when the process of decolonialization was started, U.S laid the foundation of GATT with aim to establish globally integrated multilateral trading system. The

37 system of GATT was based on the policy of Non-discrimination (the most favored nation principle of article 1 of the GATT agreement). Although, Europe was receiving economic aid from U.S.A under Marshal Plan but it was reluctant to open its borders for U.S products. Developing countries (ex- colonies of European counties) were also resisting reciprocal liberal trade policy GATT. So, larger the pressure from Europeans, Article XXIV of GATT allowed for preferential regional trade agreements. Members of RTAs were not bound to inform GATT when they entered into an agreement. The legitimization of RTAs by GATT provided the basis for the establishment of European Union in 1958 and The European Free Trade Agreement (EFTA) in 1960 respectively. European agreements did not meet the criteria for RTAs specified in the GATT, but U.S did not opposed them because it wanted European support to cope with the security threats which it was facing from USSR during cold war period. The rapid growth of Europe through RTA led regional integration (the initiative of EU beginning from sectoral cooperation in the European Coal and Steel Community in 1952) promoted a wave of imitators in Africa and Latin America in 1960. In addition, Central American Common Market was implemented in 1961. This agreement was a custom union involving Guatemala, El Salvador, Honduras and Nicaragua (Siddique, 2007). Thirteen RTAs were brought into force during 1968-78. The period 1978-1990 saw only a total of ten agreements brought into action (WTO, 2003).

1.9.2 New Regionalism/ Economic Regionalism

Although GATT had permitted preferential Trade agreements for decades but a very few regional economic blocs emerged prior 1990. The global trend towards regional trade agreements and preferential trade agreements accelerated after 1991. This period is often referred to as second or new regionalism and this time the US provided the primary driving force behind the take-off and acceleration of RTAs (Bhagwati, 1993). The major proponent of multilateral trading system, U.S.A. itself, entered into a trilateral

38 agreement in 1994 (NAFTA) to establish regional trade bloc. Indeed, many U.S. trade observers argued that opening NAFTA talks was designed primarily to support multilateral trade negotiations to motivate Europeans and rest of the world into acting on the Uruguay Round (World Bank, 2005). After the approval of trade promotion authority, however, U.S. gave much greater emphasis to securing bilateral free trade areas(FTAs) in tandem with its efforts to achieve multilateral liberalization through the WTO (World Bank, 2005).

1.9.3 Major changes in the Pattern of Regional Trade Agreements

Hence, several major new trends emerged in the pattern of regional trade agreements. For example, U.S. shifted its position towards bilateral preferential trade agreements, especially since Cancun WTO ministerial conference in 2003.Euoropean Union also became an active sponsor of bilateral arrangements with individual countries and groups of countries. EU signed three types of agreements (Europe Agreements, Euro-Mediterranean Agreements and Economic Partnership Agreements) which were intended to stabilize the region. Third major trend was the effort of handful developing countries to open markets through RTAs. On these lines, during 1991-96 thirty RTAs were signed (WTO, 2003a). From 1997 to 2005, more than one thirty agreements were signed and implemented (Crawford and Fiorentino, 2005). The figure of RTAs has reached to more than 400 which are reported to WTO till 2015 (WTO, 2015). Most countries belong to more than one RTA (see table below) and some are party to more than one agreements. So this second wave of regionalism has increased focus on institutional coordination, along with the conventional increased in trade in goods and services. New regionalism focused on deeper economic integration which was not only confined to tariff reduction, but also coordination of other economic policies, for example common legislation and standards relating to environmental, industrial and social policies (de Melo et al., 1993). New regionalism brought

39 one or more small countries together with a larger on, reflection perhaps the importance of guaranteed market access for smaller countries. According to Eithier (1998), regionalism play a transitory role in the movement towards multilateralism as these agreements have a long timeframe. Table: 1.7 Most Countries belong to more than on RTA

East Europe Latin Middle South Sub- North Total Asia & & America & East & Asia Saharan Pacific Central the North Africa Asia Caribbean Africa Number of Countries 32 36 39 21 8 48 25 209 North-South bilateral Countries belonging to at 4 12 6 10 0 2 10 44 least one RTA Average number of 2 1 2 1 -- 1 4 2 RTAs per country Maximum number of 4 4 4 3 0 1 24 24 RTAs per country All Other Countries belonging to at 24 22 33 20 8 47 10 164 least one RTA Average number of 2 6 8 5 4 4 8 5 RTAs per country Maximum number of 3 12 17 12 9 9 15 17 RTAs per country Total Countries belonging to at 26 26 35 20 8 48 11 174 least one RTA Average number of 2 6 8 5 4 4 11 5 RTAs per country Maximum number of 7 12 19 13 9 9 29 29 RTAs per country Source: (Global Economic Prospects, the World Bank Report # 34437)

1.10 Regional Economic Integration vs Global Economic Integration

When we look at the relationship of regional economic integration and multilateral or global economic integration (WTO is established to aim with global economic integration), we find out that states are the very basic

40 members and factors of international trade organization and regional trading blocs and are of great importance. No matter a country joins a regional bloc or multilateral trade, its ultimate purpose is to get as much economic interest as possible from it. This purpose is beyond the so-called regional or global economic interest. A country joins a regional trading bloc not because of the abstract supranational regional interest, but because it wants to reach its economic, political and other purposes with the power of the bloc. It cannot be denied that in order to compete with EU and Japan. U.S. formed the NAFTA with Canada and Mexico. Under the pressure brought by the EU and the NAFTA, Japan also strongly promotes the economic cooperation among the East Asian countries. Another good example is ASEAN, which consist of smaller countries, because each of them does not have sufficient strength to compete with big countries, they hope that they will have it by getting together. On the contrary, if the regional trading blocs cannot give what their member countries want, there would most probably be problems that will slow the process of regionalization. For instance, the reason why Germany and France compete for the regional economics leadership and the UK is out of euro system is that the above three countries interests conflict with the whole region’s interest.

1.10.1 Impact of Regional Integration over Global Integration

The impact of regional integration over global integration/multilateralism is a controversial phenomenon and widely discussed by the pro-globalization academicians worldwide. Pro-globalization scholars are divided into two schools of thoughts; one school of thought is in favor of regional and bilateral trade agreements as it considers the regional integration a complement to multilateral liberalization and a positive externality of the globally integrated trading regime led by WTO. In this context regional and bilateral preferential trade agreements are seen as building bloc towards multilateralism as proliferation of these agreements paved the way to defuse the stalemate situation that WTO once faced at trade liberalization talks before Cancun

41 round of trade negotiations in 2003. The future of WTO was hung up in the air that time, and a lot of ice was piled up between developed (U.S. and EU) and developing countries. U.S. changed her mind and signed a series of bilateral preferential trade agreements with developing countries. She opted to bilateral free trade agreements as second best option and alternative to comprehensive multilateral liberal trade. European Union was already sponsoring regional and bilateral free trade agreements.

Developing countries soon followed the example of U.S. and EU and they tried to enter into RTAs to secure market access. For instance, Mexico, alongside NAFTA, signed agreements with Costa Rica, Bolivia, Nicaragua, EU and Japan. Chile signed agreements with Canada, Peru, EU, EFTA, and the United States. Many existing regional organizations in Africa also moved aggressively to intensify preferential trade liberalization during the 1990s. For example, the Common Market for Eastern and Southern Africa (COMESA) was formed in 1993 which replace the preferential trade agreement with free trade agreement. This Free Trade Area was later replaced by Custom Union in 2004 (World Bank, 2005). In addition, the East African Community and SADC Trade Cooperation Protocol were signed as a part of an effort to reintegrate South Africa into the regional economy after the end of apartheid. Asian countries have launched similar negotiations since 2001. From the platform of South Asian Association for Regional Cooperation (SAARC), SAPTA was signed by all member countries which are considered the first institutional attempt towards trade liberalization in South Asia. SAPTA had a limited trade liberalization spirit that is way it was eventually replaced by Free Trade Area in 2004.

1.10.2 The Rise of Regional liberal economic order

Indeed, above discussion shows that free trade is much more practiced in regional trading blocs than on the global level. e.g. the most appreciated regional trading bloc EU has not only formed a market in which essential

42 factors of production can be traded freely, but also launched a common currency called euro, which is great significance to regionalization. But the WTO has only reduced tariffs and restricted some non-tariff barriers. Obviously, the global free trade is not as developed as the regional free trade. On the other hand, it cannot be deduced that regional trading blocs are barrier to globalization as the trading blocs never ever stop or even slow the process of globalization. The multilateral talks of the WTO and its predecessor, the GATT, constantly reached many agreements. Since the 1990s, the world market mechanism has been formed as well as global financial market.

Moreover, many countries join regional trading blocs with the hope that the power of the blocs would help them to speak louder in multilateral talks. They want the blocs to be their “Speakers”. To achieve this, all the member states in one trading bloc have to speak in one voice, which represents their economic interest. And if one of the member countries’ interests is out of the whole, it will surely speak in different voice. And what the country what do next is probably to seek other cooperation, such as bilateral and other multilateral talks, which could help them with their economic development. Again a good example of this is the formation of NAFTA. Why does the U.S. needs NAFTA? One of the important reasons is that it found the GATT was unable to eliminate the competitive advantage that Japan’s industrial structure and distribution system and the EC’s agricultural and high- technology subsidies provided. (Mason and Turey, 1994, P.17).In another words, no matter what means a country uses, it is always oriented by its interest, especially the economic interest

On contrary, the scholars that consider the regional integration as a stumbling block argue differently. Regional integration, according to them, creates new trade barriers. Regional blocs, through free trade or relative free trade among the member states try to increase the economic efficiency and the competitiveness of their productions, which surely increase their dependence on each other. While the World Trade Organization (WTO) is trying to

43 eliminate trade barriers throughout the world, trading blocs are maintaining and even increasing them under the name of regional cooperation. So, regional blocs through facilitating its member countries, build barriers to the outside world. In this way, they damage the foundation or global cooperation and increased the difficulties of trade negotiations between countries, thus blocking the real global integration.

1.10.3 Trade Creation and Trade Diversion

Virtually, the literature on this subject matter proves that the question that whether regional integration is a stumbling block or building block to global trade integration is very much based on the design and implementation of RTAs. They can help or hinder the viability of multilateral free trade. From the perspective of international economy, if an RTA is based on trade diverting model, it is harmful to multilateral liberal trade because in this case import shifts away from efficient external producer to inefficient producer of member country due to high external tariff. On contrary, if an RTA is based on trade creation model then it would be considered helpful to open external trade. As a positive externality of an RTA, the prices of goods decrease which leads to an increase efficiency of economic integration, which further decrease the cost of production and create new trade flow ( as trade among the Free Trade Area increased due to custom tariff elimination ). The concept of trade creation and trade diversion is first discussed by Jacob Viner (1950). Viner considers Custom Union as a trade creating model because due to elimination of tariff and nontariff barriers on member countries’ borders and single external tariff towards nonmember counties trade within Union members drastically increased.

1.10.4 Political economy of Regional Integration

In short, if we look at the effects of regional integration with lens of international political economy, we find out that participation in any RTA is a political decision. If governments are simply interested in national welfare

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(consumer welfare) in their countries, they would sign only trade creating and welfare improving RTAs (Freund and Ornelas, 2010). But governments have not absolute authority over decision making in liberal trade regime especially in trade and economic matters. Different social and economic interest groups through lobbying influence the governments’ decisions. In this context, Grossman and Helpman’s (1994) ‘protection for sale’ model explains the political economic motivation of governments for signing RTAs to some extent. They argue that governments’ initiative towards trade is producer welfare oriented instead of consumer welfare. This creates a motive for setting relatively high tariffs. But RTA weakens this motivation, Producers’ gains can also effect the implementation of an RTA with its full strength because RTA redistributes the production processes as production shifts from inefficient domestic providers to efficient RTA members. In addition, free access of partner’s exporters to domestic market; lower the share of domestic market in trade. If government sets higher external tariff to compensate her domestic supplier this surplus would be absorbed.

1.11 The Guiding Theories for this Research Work

The in-depth and extended discussion on the theoretical background of regional integration and liberal economic order has provided a comprehensive guideline to conduct this study. Now it has been obvious from theoretical debate that the focus of all theories of regional integration was European integration and the European Union. Theory of regional integration itself emerged in 1950s and 60s with a broad comparative and regional organizational scope. It tried to elaborate the formation of regional international organizations. The main focus of the theory of regional integration was how and why the states decided to partially withdraw from their sovereignty and shifted their authority to the intergovernmental regional organizations. There are different offshoots of the theory of regional integration emerged with the passage of time, some highlighted the political aspects of regional integration and some tried to make prominent the

45 economic features of regional integration. The theories who emphasized on the process of the regional are intergovernmentalism, neo-functionalism and post-functionalism. All of these theories’ central point of debate is the position of national government. Intergovenrmentalists considered that national governments themselves decided to go into the arrangement of regional interdependence to strengthen its security, economic and political position at global level. So, they proclaimed that national government had sole authority to decide that whether the concerned state be a part of the process of regional integration or it should remain the isolationist but once a regional organization emerged, the organization itself control the behavior of its member states and the further process of regional integration. On contrary, neo-functionalists assumed that national governments remained the power to control the process of regional integration in spite of being the part of a regional organization. However, they proclaimed that multi-national and transnational corporations, supranational actors and domestic interest groups also affect the process of regional integration and they tried to mold this process in their favour. So, due to the effects of global integration process (which is called the spillover effect) regional integration has beyond the intergovernmental bargain. The most of the debate about regional political integration is occurred between the variants of intergovernmentalism and neo-functionalism. While the essence of the economic theories of regional integration is the explanation of the possible results and effects of European integration on European society i.e. economic prosperity and regional peace. Though theories of economic integration (static and dynamic analyses of the benefits and constrains of regional integration) have also their political aspects because economic integration is also a state led process, but the focal point of discussion behind this States’ act is economic logic instead of political necessity. However, the phenomena of regional integration can be best understood in the light of international political economy, as it has typically taken the form of political economy initiative where commercial interest are the focus for achieving broader socio-political and security

46 objectives, as defined by national governments and vis versa. It has also been clear from the in-depth discussion that regional integration and international liberal economic order go hand in hand and (even) the theory of economic integration is developed by the liberal economic thinkers.

Virtually, the liberal economic order is the base of global integration as well as regional integration. Economic liberalism, basically, is a political doctrine that believes on the right of the individual on property and political freedom. Further, it also believes on the separation of power between state (a political institution) and market (an economic institution). It means that it opposes the government’s interference in business and economy, because its proponents proclaim that the unregulated market would provide the fair competition in business which ultimately enhance the efficiency of the business (because in open competition only efficient one could survive for a long run). The efficiency in business leads to increase in the volume of production (which, in result, lowers the prices) and enhance the quality of product simultaneously. Liberal economic theory is an ardent proponent of free trade (trade without tariff). It considers that trade is equally beneficial for the consumers, producer and government as well. Such as consumers get high quality public goods on lower price in the result of open market competition whereas efficient producers have opportunity to boost their production through specialization. On other hand, trade is the great source of revenue for governments in the form of custom duties.

Initially, economic liberalism emerged as a reaction to mercantilism and feudalism. Today, it also opposes the all types of non-capitalist economic orders such as planned economies, protectionism and socialism due to its great support for market economy and free trade. Indeed, removal of trade barriers moved the states toward cooperation and coordination in other fields such as freedom of the movement of labour and capital. As the theory of economic integration also developed in the result of the analysis of the effects of the European integration (EU). So, it suggests that economic integration

47 contributes to raise the level of income and enhance public welfare. Although, global economic integration is considered the best option but the success story of European Union proves the regional integration the second- best option towards achieving economic growth and public welfare through collective action which may further has its spillover effect in other issues of great concern such as social development (as it assumed that living standards would be raised in result of free movement of labour and capital within the region), political stability (as it assumed that the possibility of war would be reduced in integrated economies due to the fear of expected collateral damage) and security concerns.

The establishment of South Asian Association for Regional Cooperation and its struggle for trade liberalization are viewed in the light of international liberal economic theory and theory of economic integration. For guidance purpose a working hypothesis is developed which is given below.

1.11.1 A Working Hypothesis

“The benefits of free trade are often defused and hard to see (as the real beneficiary of free trade are the consumer) but are far reaching, while the benefit of protecting domestic interest groups from foreign competition are often immediate and visible (as governments secure their vote bank and secure their political tenure) but have limited scope, So, this illusion fuels the common perception that trade liberalization between Pakistan and India would be negative prospects on their domestic economies. For this reason both nations (though have been entered into free trade agreement under SAFTA) apply non-tariff barriers to each other export to secure the interest of their domestic business community. Trade liberalization could be possible when both states would adopt consumer oriented trade policy instead of producer oriented”.

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Note

1. Corn Law, in English history, any of the regulations governing the import and export of grain. The laws became politically important in the late 18th century and the first half of the 19th century, during the grain shortage caused by Britain’s growing population and by the blockades imposed in the Napoleonic wars

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David Ricordo’s theory comparative advantage become core avocate for internal trade.

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Chapter 2

Evaluation of Liberal Economic Order in SAARC

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This chapter throws light on the evolution of trade liberalization in SAARC. The organizational structure of SAARC is discussed in detail. The contribution of SAARC towards economic integration in the region is evaluated critically. Further, it highlights the international economic scenario in which the establishment of Free Trade Area becomes desirable for SAARC member countries.

2.1 History of South Asia

Like other Third World countries, South Asian States incorporated after world war – II into a global system over which they have little control. The ancient chronological and historical background of South Asia is comprised of three different phases. The first phase is from Indo-Aryans 2000 BC to the emergence of in 700 AD, the second phase is consisted of Muslim dominance and control till the eighteenth century, and the last phase is under the imperialistic powers. South Asia was never united under one absolute power, “the region was diversified under different monarchies, and they expanded within the region according to their power and militia, occupying easily controllable princely states”. (Hussain, 1996). Now, South Asia comprises of eight developing countries, Bangladesh, Bhutan, Sri Lanka, Maldives, Afghanistan, Pakistan and India. This region is blessed with immense natural resources and geographic variety and has huge potential for prosperity.

2.1.1 Colonial Legacy and the Economy of South Asia

Unfortunately all South Asian countries have the colonial legacy. Britain, like other colonial masters having mercantilist approach, exploited cheap labour and raw material from their South Asian colonies but planted few manufacturing units over there. In addition transnational companies (TNC) of Britain had intra-industry trade (trade between parent companies of a compiling country with their affiliated abroad

55 and trade of affiliates under foreign control in this compiling country with their foreign parent group) agreements with their colonies during colonial period. Naturally, the South Asian countries soon after getting independence from Britain established trade ties with European countries due to colonial era’s practice. The economy of south Asian States were the most reliant on export of primary products and they were highly dependent on foreign capital. So, their domestic economy becomes increasingly integrated with the market mechanism (Wingnarraja and Hussain, 1989). In the result of growing integration with global capitalist system, South Asian countries lost the fruits of growth in the domestic economy as their resources were transferred to developed world (North) through the market mechanism (in the form of tariff and no-tariff) barriers imposed by developed countries, and monopoly prices of imported technology.

Along with slow growth rate and unequal distribution of development assets South Asian states were unable to fulfill the basic necessities of large strata of their subjects. The picture of political and social structure of Asian Countries was also bleak. The parliamentary model of democracy inherited by the most of newly independent states of South Asia, virtually centralized political power in the hand of the elite. This practice proved problematic in a pluralistic society which was consisted of heterogeneous ethnic, religious and linguistic groups and suffering from extreme level of poverty. Under these circumstances, a centralized political system kept alienated a large part of society from participating in decision making process that adversely affected their economic, social and cultural existence. Hence, South Asian countries had to carry wrecked socio-economic indicators as a colonial heritage.

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Table: 2.1 Socio-Economic Indicators of South Asian Countries in pre-SAARC period Country Populatio Per Adult Life Infant n capita Literac Expectanc Mortalit (millions) incom y y y e At birth (US$) (years) Banglades 101.5 135 26 46 136 h Bhutan 1.4 96 N.A 44 150 India 762.2 193 36 52 123 Maldives 0-15 418 N.A N.A N.A Nepal 17.0 145 19 44 150

Pakistan 99.2 360 24 50 126 Sri Lanka 16.4 340 85 66 44 Note: (Data is based on 1985 figures) Source: World Development Report (1987).

2.1.2 Interstate Conflicts in South Asia

Although, the regional integration was a popular trend on international landscape but South Asian Countries avoid to go any regional cooperation move for a long period of time due to interstate political, territorial and ethnic clashes. The region is India centric because out of seven South Asian States India is a big country in terms of area of land it covers, the population it has and size of economy it has got inherited (most of princely states which were the hub of Britain’s trade and economic activities during colonial period were lied in Indian territory) and India had political and territorial clashes with nearby all South Asian countries.

The second big country is Pakistan which is, previously, part of British India but has gotten independence in 1947 and emerged as a new independent state Due to memories of bloodshed which was occurred during execution of partition plan Pakistan and India both have grievances towards each other yet. At the time of transfer of powers Britain remained some territorial issues

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(Durand line issue and issue) unresolved which aggravated the tension in south Asia region as newly emerged State of Pakistan had to face border clashes with India and Afghanistan.

Pakistan was based on two wings East and West Pakistan, the both of two wings had not connected through land route. The area between two parts of Pakistan was lied in Indian premises. So, the lake of people to people contact between East and West Pakistan evolved structured misunderstanding between political elites of both sides. The situation became ad versed when Indian backed ‘Makti Bahni’ started liberation movement against the West Pakistan. Eventually, Bangladesh emerged as an independent state on the World Map on March 26, 1971.This was the third war which was fought between India and Pakistan. Previously both of them had fought two wars in 1948 and 1965 orderly on the issue of Kashmir but the issue remained unresolved yet. Sri Lanka and Nepal had also experienced long-running conflicts with India. The result of these interstate conflicts was human misery, destruction of infrastructure, and social cohesion and death.

2.2 The Idea of Regional Cooperation in South Asia

Despite of interstate political conflicts within region, the South Asian countries compelled to consider the importance of regional co-operation due to global political and economic circumstances. For example, since the late sixties, regionalism had become the viable policy alternative for developing countries to elaborate their economic diplomacy collectively and to make their bargaining position firm during trade liberalizing negotiations at GATT (Das, 1992). Actually, post Second World War scenario changed the political and economic landscape internationally. Several new politico-economic terms were coined to understand and explain the changing political and economic systems, for example ‘Nation State’, ‘third world’, ‘Collective security’, ‘Free Trade’ and ‘Globalization’ etc. Academically, in pax- America regime, the world divided into three categories;

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(comprised of U.S.A. and western European countries having capitalistic mode of production), Second World (consisted of socialist USSR and Eastern Europe), and Third World (all previous colonies of Asia, Africa and Latin America were considered the part of Third World).

Third world countries’ profile was characterized by low saving rate, under development, semi- industrial economy, inflation, poverty and unstable political and economic system. The rich and developed countries of North America and Western Europe (they are called now global North) floated the idea of collective security and global trade integration and laid the foundation of United Nations and International financial and trade institutions (IMF, WB and GATT (now WTO).

2.2.1 South-South Economic Integration Trend

Soon after joining those institutions Third World countries (they are called global south) realized that they had no say in these institutions and their extreme dependency on those institutions would make their socio-economic fabric of society more vulnerable. After this realization, Third World countries tried to integrate their economies with other third world countries because in the existing international economic system, developing countries were not gaining much through their trade with developed countries. The advocates of South-South economic integration trend, proclaimed that it would be an important instrument (a) to achieve collective self-reliance among the developing countries (b) to articulate their economic interests collectively and present them with single voice at international institutions (IMF&WB) and World Trade Organization (WTO) and (c) would be helpful to improve their macro-economic indicators as well.

Indeed, South Asian states were also the part of global south due to their poor socio-economic indicators. Most of the south Asian countries had to adopted the import led growth policy because they were needed to develop the necessary infrastructure (industrial equipment and technology) to shift their 59 economy from agriculture to industrial lines (Hariharan and Jebaraj, 2003). Previously, like other third world countries South Asian countries’ foreign exchange earning was also mostly depended on export of agriculture commodities to developed countries (see table). The demand for these goods effected in two ways (a) developed countries replaced the commodity based economy with knowledge based economy and (b) near about all South Asian countries were competing with each other to supply the same agriculture commodities to developed countries which decreased the price of agriculture commodities in international market. In this situation, the prices of agricultural commodities fluctuated more and sometimes they came down below the cost of production (Hariharan, 1993). This became an additional constraint for exports for South Asian countries. Table: 2.2 Major Items of Exports and Imports of South Asia Countries Country Exports Imports Bangladesh Jute goods; raw jute Manufacturers: and Mesta, readymade Machinery and garments, transport, Frozen food items and Wheat, minerals, fuels leather. and Lubricants, Animal and veg. oil and fats. India Agriculture and Allied Petroleum, oil and products, minerals, lubricants, Fertilizers fuels and lubricants, and textile fabrics and Chemicals , Machinery manufacturers and Gems and Jewelry, Appliances, non- Machinery and metallic Transport Mineral, Equipment and non- manufacturers, iron Iron and Steel manufacturers

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Nepal Readymade garments, Petroleum products, Carpets, Pulses , Hides Machinery and and transport equipment, Skins, Raw jute and Textiles and yarn, jute goods Chemicals and related products, Iron and Steel Pakistan Cotton yarn, Raw Machineries, Petroleum cotton, products, Chemicals, Leather, Rice, Fish and Transport equipment, fish Iron and Steel and their preparations, Cotton manufacturers cloth Sri Lanka Tea and mate, Clothing Food and drinks, and Fertilizers, Petroleum, Accessories, Crude and Machinery and materials, Mineral equipment , fuels and Textile Crude rubber

Source: RBI, “Report on Currency and Finance” (1985-86), Vol.1 (Satyanarayan, 1986).

2.2.2 The Impact of Liberal International Trade on South Asia

In the advanced mechanism of international trade, South Asian countries like any other third world country were losers. They had inadequate transport facilities and they were not well equipped to process agriculture goods to convert them into exportable commodity. This situation was exploited by the middle men living in developed countries. R.K Sinha (1985) explain the situation in this way that “for twelve agriculture commodities imported from developing countries, consumers living in the developed countries pay 200 billion of US dollars per year. However, from this total amount , the producers living in the developing countries receive only 30 billion of US dollars, remaining 170 billion of US dollars is taken away by the middle men living in developed countries in the name of packaging, advertisement and transport” (Sinha, 1985). So, there was realization prevailing in South Asian countries that if they could develop these facilities in their countries they could reduce their loss in the mechanism of international trade.

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Developed countries’ dual trade policy was more damaging for developing counties exports as at the same time they were eager to tariff free market access for their products in developing countries whereas they discourage especially manufactured and industrial good’s export from third world countries through various trade restrictive policies. They were used to levy heavy tariff and non-tariff barriers on imports from developing countries. In those circumstances, developing countries were compelled to explore other possibilities to seek market access for their exports. In addition, third world countries were facing intensive external debt crisis as they had borrowed much from IMF and WB under structural adjustment plans in sixties and seventies (Zaidi, 2005). Those countries were not able to repay loan with interest (in terms of foreign exchange reserves). They did not have liberal credit facilities in international financial market while the cost of commercial credit was relatively higher (Hariharan and Jebaraj, 2003).

2.2.3 Collapse of Communist Regime

Though, various efforts from the side of developing countries at multi-lateral global level were done to improve the existing international economic order and internal economic reforms, yet developing countries were still facing uncertainties of capital market, out growing trade conflicts, fluctuations in exchange rates, un manageable balance of payment crisis, actual debt problem and external debt problem and persisting inflation (Das, 1992). In addition, a massive rejection and the collapse of deep-rooted communist regime created by Lenin and Stalin in the whole of the Eastern Europe paved the way for market driven (Free Trade) welfare state system. In that turmoil period (1980s), the middle income countries like South Asia and South American countries experienced very low growth rates accompanied by very high debt and debt service ratio (Das, 1987).

Such global economic issues along with insufficient co-ordination in the macroeconomic policies in the world economy aggravated the complexities

62 of continuous stalemate situation in the style and substance of North-South interdependence since 1960. Hence, those circumstances led to the emergence of the foremost and increased concern with South-South trade in 1980s (Bhajwati & J.N, 1985). That time the trend of South-South bilateral and regional trade agreements was more a result of practical compulsion rather than a clearly perceived advantage over North-South trade (Madaiah and Zubari, 1983). So, economic integration through regional trade agreements intensified in Africa, South East Asia, Asia Pacific and South Asia as well.

2.3 The Emergence of SAARC

SAARC is abbreviated for South Asian Association for Regional Cooperation. It is an intergovernmental regional organization. Initially, SAARC was set up by seven South Asian countries; India, Pakistan, Bangladesh, Sri Lanka, Nepal, Bhutan and Maldives on December 8, 1985 at Dhaka in Bangladesh. It was aimed to accelerate the process of economic and social development in its member countries through regional cooperation.

Though, the above – discussed international economic scenario had provided solid ground for regionalism in south Asia, yet the first practical step towards regional cooperation in South Asia was taken by Pakistan and India in June 1972 at Simla when governments of both countries signed an accord to resolve their mutual conflicts and confrontations and promote friendly relations to maintain peace in the region (Mansingh, 2003). The tripartite agreement between Pakistan, Bangladesh and India in 1973 represented the similar sentiments of cooperation.

However, the Idea of regional organization in South Asia was first initiated by Bangladesh in 1980 (Asif, 1996, Das, 1992, and Grover, 1997). The former President of Bangladesh, Ziau Rahman, emphasized to address many crucial issues that South Asian States were facing that time such as poverty,

63 inflation and unemployment. He called for a summit meeting of South Asian Countries in this regard and published a paper of “Regional Cooperation in South Asia”, in which he targeted the possible eleven areas for regional cooperation. He advocated that south Asian region could become a conflict free area if the members of the states and people of south Asian region build maximum consensus on the concerns which are vital for the progress. A greater degree of assistance and cooperation is compulsory for the achievements and developments and security of south Asia. .There is a need of the hour to make some serious efforts to create close understanding between the people of south Asia and develop a sense of brotherhood which is very important for building of peace and harmony in the region. (Ahmar, 1982).

There is another perspective that SAARC appeared due to the need of the small states for equal and sovereign regional representation and as a security guarantee from the growing Indian hegemony. So, initially they showed their consent for regional cooperation, while Pakistan and India were hesitant to enter into such regional arrangement. Pakistan was afraid of the potential Indian hegemony in this regard, whereas India was concerned about a possible threat from the collective cooperation ‘ganging up’ by the small South Asian states (Javaid, 2013).

2.3.1 Meetings of Foreign Secretaries

However, the regional co-operation in South Asia gained momentum in the form of a series of consultative meetings at the foreign secretary level. The first meeting in this respect was held in Colombo, Sri Lanka in April, 1981. Sri Lanka set the Stage for further comprehensive discussions through charted out a course of action for Regional Cooperation. For this purpose, a series of meetings held in Katmandu (Nov.1981), in Islamabad (Aug. 1982), in Dhaka (Mar. 1983) and in Delhi (Jul.1983). The active participation of all of the seven South Asian states in this series of meetings proved a solid

64 ground for the formulation of the conceptual framework for Regional Cooperation (Das, 1992).

Five years of ministerial level formal negotiations had succeeded to create a favorable political environment for the leaders of the seven South Asian nations to hold a summit meeting for regional cooperation. “The first Summit meeting of the Heads of State or Government of the South Asian countries was held at Dhaka during December 7–8, 1985. The Summit meeting formally launched the SAARC by adopting its Charter” (Dash, 2008).

Although, regionalism in the shape of the SAARC was set in motion over three decades ago but the progress towards regional cooperation, economic integration, and creation of the security community in South Asia has been mostly paralyzed. Regionalism in South Asia, however, has faced a number of challenges; the establishments of SAARC in 1985 did not had the total support of the elites from some of the states (Pakistani and Indian political elites). So, to keep aligned the whole region’s elites to back regionalism is, therefore, the first political challenge that needs to be addressed seriously (Pattanaik, 2011).

2.3.2 Apprehensions of India and Pakistan towards SAARC

At initial stages of negotiations for regional cooperation, India and Pakistan both were less enthusiastic in comparing with the rest of the negotiating partners. Pakistan was not inclined to enter into a regional agreement due to expected Indian hegemony, while India was concerned about a possible threat from the collective cooperation by the small South Asian states. However, the seven countries met at Colombo in 1981 at the first conference of the Foreign Secretaries proceeding for the formation of SAARC approaching the economic, cultural and social spheres of life. They met again in Katmandu in the same year heading for regional mutual prosperity and then they had a meeting in Islamabad in 1982, followed by the first South Asian Foreign Ministers meeting at in 1983 in which they defined their

65 objectives and principles. After couple of meetings in New Delhi and Male, the Foreign Ministers of South Asia finally met at the Dhaka Summit in 1985 and proclaimed for the regional cooperation through SAARC under a defined and agreed charter by the “seven countries India, Pakistan, Bangladesh, Nepal, Bhutan, Sri Lanka and Maldives”. (Javaid, 2013).

2.4 The Charter of SAARC

The Welfare of South Asian people through Peace and economic development is the core idea which lies in the charter of SAARC. The charter emphasized that the member states of SAARC would increase mutual cooperation on the basis of (a) respect for the principle of sovereign equality, (b) territorial integrity, (c) political independence, (d) non-interference in the internal affairs of others states and (e) mutual benefits (see Annexure 1)

The Charter outlined two important principles of interaction in the organization that (a) the cooperation under SAARC shall not be a substitute for bilateral and multilateral cooperation but shall complement them so (b) it shall be inconsistent with bilateral and multilateral obligations (Article 2). It bounds Heads of the states to meet at least once a year. The spirit behind this is seen that this top level meetings would provide a strong political will to execute the decisions made by SAARC. The Charter also maintains that regional cooperation should not be viewed as a substitute to bilateral or multilateral interaction and cooperation. These three approaches, bilateral, regional and multilateral, supplement each other to promote peace harmony and stability (Rizvi, 2006).

However, the Charter of SAARC focuses on the idealistic framework for the regional cooperating organization, it totally neglect the intense security threats existing within the region. The process of South Asian integration never met the integrating essential ingredients as neither a collective external threat nor a strong political system with shared ideologies or nationalism is

66 existing in South Asia (Asif, 1996). When President Zia-ur-Rehman proposed the idea of SAARC, his point of view was that it would provide a security guarantee against India’s hegemony. On contrary, the SAARC formula, which developed after a prolonged discussion among South Asian political leaders, was to keep security problems aside and address them through national action and bilateral or multilateral cooperation through other channels rather than SAARC. While the objectives of SAARC were set to enhance economic and other field of non-military cooperation among South Asian countries. It was thought that increasing cooperation in the economic area (low politics) and other soft areas would eventually lead to stability, development, and peace in the region. (Obion, 2009)

2.4.1 The Objectives o SAARC

The Charter of SAARC classifies many perceptions in orders to achieve the cooperation in South Asia, as follows:  Promotion and welfare of South Asian people and the development of their quality of life.  Accelerate of economic progression, social improvement and cultural development in South Asia; provide opportunities “to the people to live in dignity and to realize their full potentials”.  Strengthen of mutual self-reliance among the member states.  Efforts towards understanding, mutual trust, and gratitude of one another’s problems.  Dynamic collaboration and mutual trust in the field of economic, social, cultural, technical and scientific.  Strengthen of assistance with other developing countries.  Promotion and strengthening of cooperation among the states of South Asia on international forums on matters of shared interest.  Cooperate with international and regional organizations that have similar aims and objectives.

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Main goals and objectives of SAARC are, to promote economic growth in the region, and quality of life, to support collective self-reliance, to encourage energetic collaboration in the field of economic, social cultural, technical and scientific fields, to increase sharing of information among the SAARC members and people to people contact. SAARC’S structural frame work and its configuration have all the required ingredients for regional cooperation. Its basic principles allocate all the obligatory ties for mutual understanding; it includes self-governing, equality, regional integrity, political liberation, non-interference in domestic affairs of other member states and mutual benefits. (Siddiqi, 2006)

2.5 Significance of SAARC

The countries which constitute the SAARC are lying in the South of the Himalaya and Hindukush mountains and bounded by the Indian Ocean on three sides. The geographic location of SAARC countries has made it strategically important in international politics.

Each SAARC country has its own geo-strategic importance. Pakistan dominates the other South Asian States in this context t as it locates between the South Western States and the Central Asian States and it is also important because it is a first Muslim country who has a nuclear power. The strategic importance of Pakistan is more increased after ‘one built one road’ policy of China (in result Pakistan China economic corridor is in process). Bangladesh’s political strategic location is very important to China, to approach Bay of Bengal. While Bhutan and Nepal are rich in terms of energy resources and very important to India. India, itself is dominating and has central location within the region, and important in terms of stable economy and nuclear power. It is estimated and predicted by the international studies on economy that “the 21st century belongs to Asia and, in the next two decades, South Asia and China can together reshape history with half world’s population residing here” (Alam, 2006). Big powers’ interests towards south

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Asian region have made the region more prominent especially during the Cold War, War on Terror and to encounter China as the emerging economic giant. (Javaid, 2013).

SAARC countries’ geographic locations is also important for international trade that is why other regional economic blocs and individual countries have applied for its membership. Including China, European Union, Iran, Japan, South Korea and even U.S.A. have observer status at SAARC. According to Qadri(2008), “Seven countries of South Asia and recently added Afghanistan has before it the proposal to include the People Republic of China, sit at the crossroads of the concentration of Northeast Asia’s industrial, technological and military power, the Indian sub-continent, its population region, and the Middle East, Australia and Southeast Pacific’s oil reserves. The strategic location of these countries, termed South Asia, sees a high percentage of the commerce and oil shipments representing Japan, Korea, Taiwan and Australia traverse the sea-lanes and straits of this region. In addition, this locale represents an important strategic location for United States in moving its forces to Indian Ocean and Pakistan Gulf form the Western Pacific”. (Qadri, 2008).

Moreover, South Asia is more important in terms of global security. Internal and external issues of South Asia have the Potential to threaten the security of total region. According to international political and security observers, after nuclear test conducted by two rival countries India and Pakistan, South Asia has become an international security risk due to expected fear of nuclear war. In these circumstances it is vital for these interrelated states to work organized to improve the risk to regional stability and order. Hence, the basic objective of SAARC at the time of its establishment was to accelerate the development of social and cultural and economic among the South Asian states through co-operative achievement in positive approved zones. The

69 existence of SAARC represent the consent of South Asian people for building peace through co-operation in the areas of vital interest.

Initially, the SAARC member countries agreed on the following areas for cooperation to accelerate the economic growth: farming, rural improvement, telecommunication, meteorology, population and health, postal services, transport, science, technology and sports, arts and culture. Later, more things were incorporated as women development and control of drug trafficking, they also discussed various perspectives as visa-relaxation, open skies agreement, regional food, security reserve, regional development fund, anti- terrorism measures, open economic interaction and regional university. The prospects of SAARC can only be proven if the organization works after resolving their inter-state political conflicts, and forward for mutual economic cooperation under their defined goals and principles. This will increase the possibility of the following,  Competitiveness through optimum utilization of resources.  Maximization of welfare.  Efficient resource allocation process.  A comparative advantage and better terms of trade in regional joint ventures.  Unified monetary and fiscal system.  Promotion of common regional interests.  Harmonization, secure and peace oriented region.  A collective security arrangement.

SAARC’s strategic need and its importance are undeniable but it appeared to be only a table talk among the member countries rather than an implanting authority. It had discussed various wide-ranging issues but couldn’t implement its expectations under a pragmatic approach. Its accomplishments are based only on the actual understanding among the mind-states, resolving their perceptual illusions, incorporating political spheres, and inculcating their national interest under the regional integration phenomena. (Saha, 2005)

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Although the slow co-operation process of SARRC is not appritiatable, but cooperation may be eager or reluctant, extensive or limited, it is something better than to be remained indifferent and do nothing for the betterment of the region. Co-operation cannot as acting together, in agreement, for the sake of common ends (Mansingh, 1997). However, co-operation is a first step towards end of conflict. “There are sufficient examples of regional organizations that have transformed their conventional outlook and aspirations into more open, dynamic and wider systems and practices of peaceful coexistence collective responsibility and regional development” (Rizal, 2012).

2.6 Organizational structure of SAARC

Similar to other regional organizations of the world, SAARC has also settled an “institutional framework” contained by different levels of summits take place at systematic intermissions to discuss the modalities and possibility of cooperation among the members. Over a dozen of summits have been held so far and adhering strictly to its fundamental objectives it has promoted regional cooperation through mutual assistance and association in the field of social, economic, and cultural, and scientific (Singh, 2016).

Articles 3-9 of the charter of SAARC deal with the institutional structure of this intergovernmental regional organization. Basically, SAARC comprises five layers of organizational structure:

2.6.1 Summit

Summit is the top policy making body of SAARC which is represented by the heads of the government of the member countries. According to SAARC charter, heads of state or governments are bound to meet once a year at least (Article3). They can meet more than one time in a year if they consider it necessary. Although, there was a proposal to hold the summit once in two

71 years in the Foreign Ministers’ Meeting in Thimpu in May 1985 (Saxena, 1985) but it was finally approved that the charter of SAARC would be followed in this regard. The summit meetings are significant to reinforce the sentiments of mutual co-operation among member states as they provide a chance for informal discussions on the crucial matters to head of the governments of the member states which may help to resolve the policy problems positively.

On the contrary to SAARC charter (Article 3), total nineteen SAARC summits have been held in more than thirty years which is the negation of charter. The reason behind was the postponement of summits due to the political and security related regional tensions (see the table). Table: 2.3 The Reasons of Postponement of scheduled SAARC Summits Postponement of Scheduled Reason of postponement Summits according to SAARC calendar The scheduled summit of Terrorist coup in Maldives and the 1989 , Colombo deployment of Indian peace keeping Force in Sri Lanka (it created tension between Colombo and New Delhi when president of Sri Lanka, Ranasinghe Premadasa Demanded the immediate withdrawal of IPKF ) (Dash,2008). The scheduled summit of India’s strained relations with Bangladesh 1992, Dhaka caused by the eruption of communal violence over the demolition of the historic Babri Mosque in India by extremist Hindus on December 06, 1992 (Sridharan, 2012) This was the first occasion when India refused to attend a Summit in Bangladesh which severely damaged the SAARC process. The scheduled summit This Summit became the hostage of poor 1994, New Delhi Indo-Pakistan relations due to the political and diplomatic ‘freeze’ between the two countries on Kashmir Issue (Obino, 2009).

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The scheduled summit of The peace process which began in 1996, December 1990 was suspended from 1994 till 1997(Jabeen, Mazhar and Goraya, 2010). This deadlock obviously led to undermine SAARC Summit. The scheduled summit of The between India and 1999, Kathmandu Pakistan in 1999. India, in reaction refused to attend the Summit. The scheduled summit of Military coup of Musharaf in Pakistan led 2000, Kathmandu to the postponement of SAARC Summits in 2000. Although it was a domestic matter of Pakistan but India refused to attend the Summit to make it an excuse. She Gave the reason that her participation in the moot would ‘legitimize’ the Military government in Pakistan ( according to India Musharraf was the Mastermind of ‘Kargil operation’ ) ( Sridharan, 2012) The scheduled summit of The Failure of between India 2001, Kathmandu and Pakistan on 14th of July, 2001 and terror attack on the India Parliament on 13th December 2001 further postponed the summit (Mujtaba, 2005) The scheduled summit of With the longest gap of 42 months (1999- 2003, Islamabad 2002), the Kathmandu Summit was finally held in December 2002 and accepted the Pakistan’s offer to host next Summit in early 2003. But Pakistan had to postpone the event due to continuous delaying tactics adopted by India to avoid its participation in the Summit. When the Summit postponed, India alleged Islamabad to ‘sabotaging’ the event (Daily times, Dec 10, 2010) The scheduled summit of Twice in a year 2005, The Summit 2005, Dhaka postponed due to India. She officially refused to attend the Summit due to the political development in Nepal (King Gyanendra declared emergency and sacked the government in 2005) and security reasons in Bangladesh (a bomb had exploded on Awami league earlier to scheduled Summit (Subramanian, 2011).

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After the delay of nine months, finally, the Dhaka Summit held on November 12-13, 2005 but India excused to attend it. The scheduled summit of No Summit was scheduled in 2006. 2006, The scheduled summit of Maldives refused to host due to ongoing 2009, Maldives Economic recession and tourist season in the country. The scheduled summit of The Summit was to be held in Nepal by the 2012, Nepal end of 2012 but it could not take place until 2014. The scheduled summit of The major reason behind this delay was 2013, domestic political instability in Nepal. The scheduled summit of The Summit did not take place due to 2015, amendment in SAARC Charter on eighteenth summit, 2014. According to amended charter, Summits shall be held once after two years, Council of Ministers and standing committee shall meet once a year, while programing committee at least twice a year. It was decided to convert the programing committee into the SAARC charter body (SAARC secretariat, 2014). The scheduled summit of India again deliberately refused to attend 2016, Islamabad the nineteenth SAARC Summit in Islamabad due to Pakistan’s eternal domestic political unrest led by Panama Issue and she also alleged Pakistan for 18th September attack on a military base in Indian- administered Kashmir. Bangladesh, Afghanistan and Bhutan followed the India and joined the withdrawal (BBC, September 28, 2016). Source: Author’s Compilation

2.6.2 Council of Ministers

The second top level body of SAARC is the Council of Ministers (CoMs). Its main function is to assist the Council. It is represented by the foreign ministers of the member countries. Article – 4 of SAARC charter throws light on the basic functions of CoMs  Formulation of the politics of the Associations  Review of the progress of cooperation under the association

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 Decision on a new areas of cooperation  Establishment of additions mechanism under the Association as deemed necessary  Decision on other matter of general interest to the Association

After the amendment in the SAARC Charter on 18th SAARC Summit in 2014, CoMs are bound to meet once a year. Previously they were bound to meet twice a year.

2.6.3 Standing Committee (Article – 5)

It is based on the foreign secretaries they shall have the flowing functions  Overall monitoring and coordination of programmer of cooperation  Approval of projects and programs, and the modalities of their fencing  Determination of inter-sectorial priories  Mobilization of regional and external resource  Identification of new areas of cooperation based on appropriate studies “The Standing Committee, which consists of the foreign secretaries of the member states, meets as often as deemed necessary, but at least once a year, and submits periodic reports to the Council of Ministers. It is entrusted with the responsibility to monitor and coordinate programs of cooperation, approve projects and modalities of their financing, mobilize regional and external resources, and identify new areas of cooperation based on appropriate studies”. (Dash, 2008)

2.6.4 Programming Committee

The standing committees is assisted by a programing committee. It is an adhoc body comprising of the senior official to scrutinize secretariat’s budget, to finalize the calendar 60 years activities and take cup any other

75 matter assign to it by the standing committee. The programming committee has been entrusted to consider the report of the technical committee and the SAARC region centers and submit its comments to the standing committee (Sing, 2012). The list of Technical committees are given below

2.6.5 Technical Committee

Technical committee is headed by the representative of member states and are responsible for the implementation, coordination and monitoring of the program in their respective areas of cooperation. The Chairmanship of the technical committees normally rotates amount member states in alphabetical order after every two years. The technical committee may, inter-alia, use the following mechanism and modalities, if and when considered necessary (Article – 6)  Meeting of head of national technical agencies  Meetings of experts in specific fields  Contact amongst recognized centres of excellence in the region There are twelve technical committees existing in SAARC to date: a) Agriculture b) Communications c) Education, Culture & Sports d) Environment e) Health and Population Actives f) Meteorology g) Prevention of Drug Trafficking and Drug Abuse h) Rural Development i) Science and Technology j) Tourism k) Transport l) Women in Development

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2.6.6 Action Committee (Article – 7)

According to SAARC Charter, the standing committee has mandate to setup action committee which comprise members of concern states to implement the projects in which more than two but not all SAARC members states are involved

2.6.7 SAARC Secretariat (Article – 8)

The Secretariat of SAARC was established at Kathmandu on 16th January, 1987 and was inaugurated by Late King Birendra Bir Bikram Shah of Nepal. It is headed by Secretary General appointed by the Council of Ministers from Member countries in alphabetical order for a three years term. The is assisted by the professional and the General Service Staff, and also an appropriate number of functional units called Division assigned to Directors on deputation from Members states. The secretariat coordinates and monitors implementation of activities, prepares for a service meeting and serves as channel of communication between the Association and its member states as well as other regional organization. The memorandum of Understanding on the establishment of the Secretariat which was signed by foreign ministers of member countries on 17 November, 1986 at Banglaore, India, contains various clauses concerning the role structure and administration of the SAARC Secretariat as well the powers of the secretary-General (SAARC, 1987). In several recent meetings the heads of states or government of member states of SAARC have taken some important decision and bold initiatives to strengthen the organization and to widen and deepen regional cooperation. The SAARC Secretariat and Member states observe 8 December as the SAARC charter Day (Sing, 2012)

Secretary General is the Chief administrative officer of the Secretariat. He is responsible for coordination and implementation of SAARC activities, including arrangements for SAARC meetings. He also works as a source of communication between SAARC and other international organizations. He is

77 appointed by the Council of Ministers from amongst the member states in alphabetical order. Initially he was appointed by the Council of Ministers upon the nomination by a member-state on the basis of two years. The 9th SAARC Summit at Male, 1997 decided that, henceforth the tenure of the Secretary – General should be of non-renewable term of three years (Declaration of Male Summit, 1997). He holds the rank and status of an ambassador (Sing, 2012).

The first Secretary General Abul Ahsan took charge on 16 January 1987, when the Secretariat was inaugurated. The Secretary General is assisted by Directors of different Divisions assigned to them by the Secretary General, nominated by each country. They have the rank of a Councilor and hold office for a term of three years, which may be extended to one full term by the Secretary General in consultation with the particular country. (SAARC Secretariat, 1988) The following have so far served as SAARC Secretary Generals Table 2.4 A list of the Secretary Generals of SAARC Name of the sec. General Country Tenure Abul Ahsan Bangladesh Jan 16,1987 – Oct, 15,1989

K.K.Bhargava India Oct.17, 1989 – Dec.31,1991

Ibrahim Husain Zaki Maldives Jan.1,1992 – Dec. 31,1993

Yadav Kant Silwal Nepal Jan 11994 – Dec. 31, 1995

Naeem U. Khan Pakistan Jan.1,1996 – Dec.31, 1998

Nihal Roderigo Sri Lanka Jan.1,1999 – Jan. 10, 2002

Q.A.M.A.Rahim Bangladesh Jan.11,2002 –Feb.28, 2005

Chenkyab Dorji Bhutan March 1, 2005 – Feb. 29, 2008

Sheel Kant Sharma India March 1, 2008-Feb 28, 2011

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Fathimath Dhiyana Saeed Maldives March 1, 2011-FEB28, 2014

Arjun Bahadur Thapa Nepal March 1,2014-Feb 28,2017

Amjad Hussain B. Sail Pakistan March 1, 2017 to date

Source: Author’s compilation 2.6.8 Financial Arrangements (Article – 9)

Finances for the programmes of cooperation raised through voluntary contributions. The Technical Committees have power to make recommendations for the apportionment of the cost for the implementation of the proposed programmes. However, while making recommendations the Technical Committees were expected to keep the following points in mind  Each Technical Committee shall make recommendation for the appointment of costs of implementing the programmes proposed by it.  In case sufficient financial resource cannot be mobilized within the region for funding activities of the association external Financial from appropriate sources my be mobilized with the approval of or by the standing Committee

2.6.9 General Provisions (Article – 10)

According to the Charter Decision at the all levels shall be taken on the basis of unanimity. It further elaborates that Bilateral and contentious issues shall be exclude form the deliberations

2.6.10 SAARC Regional Centers

The SAARC Secretariat has establishes 13 region centers in members states. The 13th being SAARC Arbitration Council establishes at Islamabad in 2010. (SAARC Secretariat, 2010). Each regional center is manages by governing board (GB). The GB comprises of representative of each of the member state and SAARC Secretariat “Regional Centers covering Agriculture,

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Tuberculosis, Documentation, Meteorological Research, and Human Resource Development have been established in different SAARC capitals some are given below:  SAARC Agricultural Information Centre (SAIC), (Dhaka, 1998)  SAARC Tuberculosis Centre (STC), (Katmandu, 1992)  SAARC Documentation Centre (SDC), (New Delhi, 1994)  SAARC Meteorological Research Centre (SMRC), (Dhaka, 1995)  SAARC Human Resource Development Centre (SHRDC), (Islamabad, 1999)  SAARC Cultural Centre (SCC), (Kandy, 2004)  SAARC Coastal Zone Management Centre (SCZMC) (Malé, 2004)  SAARC Information Centre (SIC) (Katmandu, 2004). In addition, three new regional centers covering Culture, Coastal Zones Management, and Information are being established”. (Iqbal, 2006)

2.6.11 SAARC Regional Apex Bodies

SAARC Council of Ministers at its 11th meeting (8-9 July) in Colombo 1992, approved Guidelines and Procedures for granting Recognition by SAARC to Recognized Regional Apex Bodies. According to guidelines, any non- political and secular organization that shall be concerned with matters relevant to the process of promoting social, cultural, and economic development of the region as envisaged in the SAARC Charter and has an established headquarter with an elective officer and a constitution (or similar constituent instrument) can see recognition by SAARC (SAARC,1992).In addition, the organization seeking recognition should consist of exclusively of nationals of member countries an should be based in the region. It should be a regional apex body with a minimum of four unites at the national level. These unites should be of recognized national standing and be endorsed by the Ministers of Foreign Affairs of the governments of their respective countries.

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Once the recognitions is accorded to the organization, it would be authorized to use the SAARC nomenclature and the logo, recognition would be accorded to only one apex organization, in respect of each profession or activity. SAARC has six apex bodies. Their names are given below: 1. SAARC Chamber of Commerce and Industry (SCCI) 2. South Asian Association for Regional Cooperation and Law (SAARCLAW) 3. South Asian Federation of Accountants (SAFA) 4. South Asian Foundation (SAF) 5. Foundation of SAARC Writers and Literature (FOSWAL) 6. South Asian Initiative to End Violence Against Children (SAIEVAC)

2.6.12 Other Recognized Bodies of SAARC

Likewise apex bodies, there are other recognized bodies of SAARC which are the subject matter of rules of ‘Guidance and Procedures’. The names of some bodies are given below: 1. SAARC Federation of University Women (SAARCFUW) 2. Association of Management and Development Institution South Asia ( AMDISA) 3. South Asian Free Media Association (SAFMA) 4. South Asian Federation of Exchanges (SAFE) 5. South Asian Network of Economic Research Institute (SANEI)

2.6.13 Areas of Cooperation in SAARC

 Agriculture and Rural Development  Investment and Commercial Disputes  Biotechnology  Culture  Economic and Trade ( trade agreements ,harmonization of standards and custom laws to avoid double taxation)

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 Education  Energy  Environment  Finance  Food Security and SAARC Food Bank  Funding Mechanism  Information and Communication Technology  Poverty Alleviation  Science and Technology  Social Development (gender, population, youth, children and health related issues)  Tourism  Security Aspects (focused areas I this regard are; drug and drug related crimes, terrorism)

2.6.14 Cooperation of SAARC with International and Regional Organizations

SAARC had signed Memorandum of Understanding with several international and regional political, social and economic organizations . A brief overlook is given in table below. Table: 2.5 SAARC Cooperation with other International and Regional Organization Name of organization Date of signing Focused Area MOU UNCTAD 1993 Trade Analysis and Information System (TRAINS) UNICEF 1993 All children related issues including the Annual Review of the Situation of Children in SAARC Countries; and implementation of the decisions taken at COMs

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held at the various SAARC capitals

APT 1994 Promotion of and growth of telecommunications in order to accelerate economic and social development in the region ESCAP 1994 The Agreement provides cooperation on dev elopment issues through joint studies, workshops and seminars, exchange of information and documents in poverty alleviation, human resource development, trade promotion, foreign direct investment and infrastructure development etc. UNDP 1995 The MOU embodies a general agreement for broad based collaboration with the aim of promoting sustainable human development, protection of environment and women empowerment. UNDPC 1995 The MOU was signed to coordinate in combating drug trafficking and drug abuse in the region.

EC 1996 The MOU mainly focused on exchange of information, institutional support and training, and technical assistance.

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ITU 1997 The areas covered by MOU include development of telecommunication and telematics services as well as improvement of the quality of voice and non-voice telecommunication services in the region CIDA 1997 The MOU was signed for cooperation in sustainable economic and human development, poverty alleviation and cooperation in trade related matters. WIPO 2014 MOU between SAARC and WIPO, after a series of negotiations, has been finalized Source: Author’ Compilation

2.7 A Brief over view on SAARC Achievements in Regional Cooperation

2.7.1 First Summit Meeting

The 1st SAARC summit was held in Dhaka in December 1985. In that meeting, South Asian countries outlined the central issues on which regional cooperation in South Asia was considered absolutely desirable. The important thing was that first time, post-colonial period, heads of State or Government of all South Asian countries gathered at one platform and acknowledged the importance of regional cooperation. “Probably, the greatest success of the first Summit was the opportunity for the leaders to meet on the sideline of the SAARC forum to discuss their bilateral problems and reach some kind of unofficial agreement” (Dash, 2008).

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2.7.2 Second Summit Meeting

The 2nd SAARC Summit meeting held at Bangalore (1986). The member countries agreed on a formula according to which each member country was required to contribute a minimum of 3 percent toward the annual budget expenditure of the Secretariat. The minimum 3 percent payment indicates equality among the seven member states. Besides, 3 percent payment, each country makes an additional contribution assessed on the basis of its per capita income and the economic capability. The third level of financial arrangements relates to the expenses of regional institutions. The host country was required to bear 40 percent of the cost of regional institutions. The remaining 60 percent was distributed among all seven countries on the basis of the same formula applied to the budget expenditures of the SAARC Secretariat.

The second Summit meeting of SAARC, the Idea of economic cooperation was on agenda. India supported the idea but its stance was that economic cooperation should confined to economic, scientific, technical and cultural fields only, avoiding all the political spheres. As the Prime Minister Rajiv Gandhi said in his speech at the Second Summit in Bangalore, “Regional cooperation cannot merely emerge from the fiats of leaders. It has grown from contacts between professionals at all levels. It is also through building a network of contacts at all levels among professionals among many disciplines, that we can start giving real content to regional cooperation” (Sharma, 2001).

2.7.3 Third Summit Meeting

The 3rd Summit meeting of South Asian Heads of States or Government was held at Kathmandu during November 2–4, 1987. There were two main agendas discussed in that Summit, (a) the private agenda which dealt with such hard issues as security of South Asian countries, border issues,

85 membership of Afghanistan in SAARC, South Asia as a nuclear-free zone, and bilateral problems between the South Asian countries and (b) the official agenda, which discussed the soft, apparently non-controversial, issues that resulted in a common declaration. (The Hindustan Times November 4, 1987).

2.7.4 Fourth Summit Meeting

The 4th scheduled Summit of SAARC held at Islamabad in 1988 in a changed regional environment. In 1988, President Ziaul Haq died in a plane crash. After 11 years of military rule under Zia, Pakistan had a democratic election in 1988, and Benazir Bhutto, winning the election with a comfortable margin, became the new prime minister. Indian Prime Minister Rajiv Gandhi’s visit to Islamabad to attend the SAARC Summit meeting was considered significant success of SAARC, as he was the first Indian prime minister of India who officially visited to Pakistan after the partition (1947).

2.7.5 Fifth Summit Meeting

SAARC movement suffered a setback when Colombo refused to host the scheduled Summit (1989), due to its political tension with India. Sri Lanka demanded the withdrawal of Indian Peace Keeping Force from the north eastern part of Sri Lanka. However the Summit meeting held later in 1990, when the last batch of IPKF left the territory of Sri Lanka. The However, Maldives was given the special honor of hosting the 5th Summit in 1990; to celebrate its twenty-fifth anniversary of independence from Britain. A diplomatic confrontation ensued between Maldives and Sri Lanka. The successful completion of Male Summit did not mark the end of SAARC Summit crisis.

2.7.6 Sixth Submit Meeting

An informal meeting and discussion between the prime ministers of India (Narasimha Rao) and Pakistan () at Davos (Switzerland) in 1992, the Pakistani government took action to prevent the move of the

86 and Kashmir Liberation Front (JKLF) to cross the Cease Fire Line (CFL) in Kashmir later that year. The Davos meeting was possible because of an earlier informal agreement between the two leaders at the sixth SAARC Summit meeting at Colombo in December 1991. In this way, 6th Summit meeting played an effective role in peace dialogue between Pakistan and India.

2.7.7 Seventh Summit Meeting

7th Summit meeting of SAARC held in April, 1993. The member countries signed the South Asian Preferential Agreement by consensus on the basis of product to product approach (positive list approach) towards intraregional trade. It was the first and foremost success of SAARC in the field of economic cooperation. However, SAPTA could be implement later in eighth Summit Meeting in 1995.

2.7.8 Summit Meetings of 9th and 10th

These two summit meetings at Male (1997) and Colombo (1998), where very important in the context of Pakistan-India peace relations. Indian and Pakistani prime ministers showed considerable warmth toward each other and promised to resolve the interstate political problems through peace and trade. Holding informal discussions on the sidelines of the SAARC Summit meeting at Male in 1997, Indian Prime Minister I.K. Gujral and Pakistani Prime Minister Nawaz Sharif agreed to follow up the Shimla Agreement principles to resolve their outstanding issues. This initiative was significant because the two countries came together for the first time to work toward mutually acceptable solutions in the spirit of Shimla Agreement principles nearly two decades after signing the Agreement.

The informal personal meeting at Colombo seemed to have broken the ice between the two leaders and started a process that culminated in the Lahore bus journey in 1999 to renew the peace efforts between India and Pakistan. However, this optimism of a greater momentum for SAARC plummeted after

87 the Kargil war in 1999 and the military coup in Pakistan in the same year. From 1999 to 2002, no SAARC annual summits were held because of India’s refusal to attend the summit meetings.

2.7.9 Eleventh Summit Meeting

Eleventh SAARC meeting held in 2002 at Kathmandu. India refused to attend SAARC Summit meeting due to military rule in Pakistan but later it agreed to attend the meeting – where the “famous handshake” between President Musharraf and Prime Minister Vajpayee was widely perceived as a peace overture between the two leaders.

2.7.10 Twelfth and Thirteenth Summit Meetings

Islamabad summit in 2004, was brought a valuable change in South Asian economy as South Asian Free Trade Area was established in that Summit meeting. The SAFTA framework was an improvement over the existing SAPTA, which was signed on April 11, 1993, and came into force in December 1995. Although SAPTA has run into troubles because of Indo- Pakistani disagreements over the lists of tradable items with reduced tariffs, it is fair to say that there have been some advances in the process of trade negotiation under SAPTA to further trade liberalization in the region. The other important agreement signed at this summit was an Additional Protocol to SAARC Convention on Suppression of Terrorism, outlining various measures to combat terrorism in South Asia. At this summit, India also agreed with other leaders to grant observer status to China along with Japan. While Pakistan and Bangladesh supported China’s candidature to join SAARC in the past, India was more reluctant about the prospect of Chinese membership. Indian willingness to accept China’s observer status at SAARC reflects the growing positive relationship between the two giants in Asia. Further, Head of the states of SAARC member countries decided to establish Poverty Alleviation Fund.

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2.7.11 Thirteenth Summit of SAAR

In the 13th Dhaka Summit (2005), the Heads of State or Government of SAARC countries agreed for regular finance ministers meeting immediately after every summit to explore and strengthen avenues of financial cooperation in South Asia (Dhaka Declaration November 13, 2005).

2.7.12 Fourteenth Summit Meeting

14th Summit was held in New Delhi, India on 3rd-4 April 2007, Afghanistan joined as the eighth member at the Association. For the region, coming out of the shadow of a long colonial period and subsequent regional turmoil, the formation of the SAARC marked a watershed event for regional cooperation in the Indian subcontinent. As such, the SAARC’s establishment was viewed as a historic event, reflecting the first institutionalized effort by South Asian countries to overcome differences and forge multilateral cooperation.

2.7.13 Sixteenth Summit Meeting

The 16th summit was held in Bhutan on April 2010, Bhutan hosted the SAARC summit for the first time. This was marked the silver jubilee celebration of SAARC that was formed in Bangladesh in December 1985.

2.7.14 Seventeenth Summit of SAARC

SAARC 17th summit held in Maldives, where four countries, Bangladesh, Bhutan, India and Nepal (BBIN) signed the Motor Vehicle Agreement (BBIN-MVA) for the Regulation of Passenger, Personal and Cargo Vehicular Traffic on June 15, 2015. India has already developed its bilateral ties with these three countries on rail, road, power and transit. ADB has pushed to develop the South Asia Sub-regional Economic Cooperation (SASEC) program in 1996 and was further endorsed from the1997 SAARC Summit in Malé. Sri Lanka and Maldives also moved forward to join this cooperation, which could at least convince donors to invest in the region. SASEC has

89 invested US$63.74 million in the sub-region in transport, trade facilitation, energy, and ICT.

2.7.15 Eighteenth Summit Meeting

18th SAARC Summit that was held in Kathmandu, Nepal, in November 2014. In the inaugural session of the Summit, Indian Prime Minister emphasized the urgent need for collective efforts and reconciliation in South Asia”. (Kathmandu, 2014)

2.7.16 Nineteenth summit Meeting

19th summit of SAARC was scheduled in Islamabad, Pakistan on 15 to 16 November 2016. India Bhutan, Bangladesh, Sri Lanka and Maldives including Afghanistan, did not attend SAARC summit due to 2016 Uri attack. Pakistan postponed the SAARC summit and announced that new dates would be released soon, but it did not happen (SAARC, 2016).

2.8 Struggle for Trade Liberalization and regional Integration in SAARC

Initially, the SAARC activities were confide to specific sectors like population, health care, climatology, culture, telecommunication and sports, etc. A significant development towards trade liberalization process was seen at its Islamabad summit which held in December, 1988. It highlighted the basic need for actual and “result-based activities” within the charter of SAARC to embrace trade industry. Further at its sixth summit which was held in Colombo, in December, 1991. Heads of the State declared their consent to liberalize trade/business in region through a “step-by-step approach” in such a method that states in the region share profits of trade development fairly (Hassan, 2001).

Although the charter of SAARC, Initially confined to Regional Cooperation instead of Regional integration but in the declaration of 1st Summit held on

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1985 in Dhaka. The head of the states acknowledged that the countries of South Asia, who constituted one-fifth of humanity, were facing the formidable challenges posed by poverty, underdevelopment, low levels of productions, un-employment and pressure of population compounded by exploitation of the past and other adverse legacies. (Dhaka Summit, 1985). So they reaffirmed that their fundamental goal was to accelerate the process of economics and social development in their respective country through the optimum utilization of their human and material resources. So, they were conscious that they should maintain peace and security in the region to promote welfare and prosperity of their peoples and to improve their quality of life.

Regional Cooperation Agreements in other parts of the World identified the economic cooperation mutually beneficial for the regional countries. However, within the SAARC region, a fundamental asymmetry among the member States, their varied level of development, including administrative procedures and rules, suggested that economic cooperation (while important) was likely to be a complex and gradual process (Kher, 2012). This does not imply that SAARC had decided to leave out economic cooperation. Virtually, the declaration of Ministerial Meeting held on 31 March to 3 April, 1986, categorically identified the need of intensified economic cooperation among SAARC countries (Banglore Summit, 1986). At the end of the meeting, SAARC members were agreed upon that they should coordinate their positions at the various headquarters of regional and international organizations, as well as in relevant international conferences to promote the common objectives of member countries.

2.8.1 The Meeting of National Planning Organizations of SAARC

The representatives of the National Planning Organizations of SAARC member countries met in Islamabad in October, 1987 and concluded that to

91 cope with the adverse international economic situation facing the South Asia region, there was an urgent need to pool resources for long term regional cooperation (Kher, 2012). The meeting realized the asymmetries at the development level and consequently the relatively small share in World Trade compare to other regions. Under the recommendations of that meeting, a consultant was commissioned to carry out a study on Trade, Manufacturers and Services (TMS) in the South Asian region. It was also decided that the National Planning Organizations of member countries would continue series of combined meetings to intensify the regional economic cooperation.

2.8.2 Committee on Economic Cooperation

The Council of Ministers at their Ninth Session, in May, 1991 at Male, endorsed the study of TMS (which was completed in early1991) and established a Committee on Economic Cooperation (CEC) (SAARC, 1991). The Committee was represented by the Commerce and Trade Secretaries of the SAARC Member States. The CEC was mandated to articulate and supervise the implementations of specific economic and trade related measures, policies and programmes within SAARC framework. So, the establishment of CEC was a first formal achievement of SAARC to institutionalize the regional cooperation.

Through its series of meetings, CEC have provided a valuable guidance in identifying new areas for cooperation on economic and trade related matters yet. Virtually, it is mandated to oversee all economic and trade related matters including the monitoring of preferential trading agreements. Harmonization of customs, procedures, intra-regional investments, taxation and rule of origin are also the subject matter of CEC. Furthermore, it has obligation to set up a SAARC Arbitration Council; to share information on economic and trade related matter and to keep an eye on special circumstances of least developed countries of the region. Finally, the formation of joint strategies for multinational trade negotiation fora is also included in the duties of CEC.

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The CEC submits its recommendations to the Standing Committee of the SAARC and through it to higher bodies, namely the Council of Ministers and the Summits.

2.9 The Agreement of SAPTA: A step towards Liberal economic Order (Free Trade)

One of the important reasons for the formation of SAARC was to increase regional trade cooperation among South Asian countries because it was considered that regional integration might work well in the realm of low politics (Hoffmann, 1966). The SAARC members were also agreed to adopt “policies of economic liberalization” in order to handle their economic crises as they were inspired by the experiences of regional cooperation efforts in Latin America (MERCOSUR) and Southeast Asia (ASEAN) which suggested that economic liberalization could provide a good foundation for the growth of regional Integration. According to the market gains logic, countries pursuing economic liberalization policies were required access to regional markets, which was made possible by cooperation commitments among participating member countries. Besides becoming a driving force for accelerating intraregional trade and investment and maintaining the region’s economic dynamism, regional cooperation could also help substantially in enhancing technology transfer, improving infrastructure, developing natural and human resources, and protecting the environment. Such outcomes were, indeed, some of the most important objectives of economic liberalization policies. (Devi, 2015).

Hence, under the guidance of Committee on Economic Cooperation, at the sixth Summit held in Colombo, in December 1991, SAARC approved the establishment of an Inter-Governmental Group (IGG) to formulate an agreement to establish a SAARC Preferential Trading Agreement (SAPTA) by 1997 (kher, 2012). Head of the States of SAARC countries declared their commitment for the liberalization of trade in the region through adopting the 93

Step by Step approach in such a manner that all member States could share the benefits of trade expansion equitably. So, the Sixth Summit of SAARC paved the way for free trade/ Market economy in South Asian region. The Summit gave SAARC a mandate to formulate and seek agreement on an institutional framework under which specific measures for trade liberalization among member countries could be furthered and to examine the Sri Lankan proposal to establish the SAPTA by 1997 (see Annexure).

On the basis of IGG recommendations, the Council of Ministers signed an agreement to form SAPTA in April 1993, which became operational in December 1995. The Agreement reflected the desire of the SAARC counties to promote and sustain mutual trade and economic cooperation within the SAARC region (see Annexure). After launching of SAPTA in 1995, three rounds of “preferential tariff reductions” have been exchanged i.e. SAPTA- First in 1995, SAPTA-second in 1997, and SAPTA-third in 1998. In SAPTA- 1, trade concessions were offered to 226 commodities by all the countries. In second round, the number increased to 1868 commodities while at the end of third round of Trade Negotiations under SAPTA, trade concessions were increased to 3456 commodities (kher, 2012).

2.9.1 The Salient Features of SAPTA

SAPTA was the first step towards higher level of trade and economic cooperation in the region. The defined aim behind its establishment was to promote mutual trade cooperation among SAARC States (see SAPTA preamble in Annexure). Its salient features were: 1. SAPTA was based on the principle of overall reciprocity and mutuality of advantages in such a way as to benefit equitably all contracting States; 2. Trade Negotiations under SAPTA were conducted on the basis of Step-by-Step and Product-by-Product Approach;

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3. Preferential Measures were taken in the favour of least developed members of the SAARC; 4. All products, manufacturers and commodities in their raw, semi- processed and processed form were the subject matter of SAPTA (Article3, SAPTA); 5. The main components of SAPTA were tariff, para-tariff, non-tariff measures and direct trade measures. In addition, it was decided that trade facilitation and other measures would be adopted to support and complement SAPTA to mutual benefits. The tariff, non-tariff and para-tariff concessions negotiated and exchanged amongst SAARC members, would be incorporated in the National Schedules of Concessions.

2.9.2 SAPTA and Least Developed Countries (LDCs) of SAARC

In SAARC Preferential Trade Agreement, a special and more favorable treatment was provided to the least developed Member States. For example: 1. Exclusive tariff concessions or deeper tariff preferences (duty free access) for the export products of LDCs; 2. The removal of tariff and para-tariff barriers (if appropriate); 3. To assist least developed SAARC members through long-term negotiations so that the LDCs could achieve reasonable level of sustainable exports of their products; 4. Safeguard measures, were decided to be applied benign to the exports from LDCs. 2.9.3 The Shortcomings of SAPTA

Despite the concessions to a seemingly large number of products, the progress of preferential trade under SAPTA remains modest. During first two Rounds, Trade Negotiations were conducted on product-by-product basis. Whereas in SAPTA-III, negotiations were conducted on Chapter-Wise. It was decided that next time the negotiations would be conducted on Chapter-

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Wise, Sectoral and Across-the-Board basis (as for as it would be possible). Although a fourth round of SAPTA negotiation (SAPTA-4) was initiated in 1999, it could not be ratified by member states because of the postponement of SAARC summit. Given the highly tedious nature of commodity-by- commodity negotiation under SAPTA rounds, the SAPTA-4 was eventually replaced by SAFTA agreement.

One of the most important limiting factors of SAPTA had been the actual preferential imports by member countries as compared to their total values of imports. Mukherji (2004) estimated that products imported under SAPTA concessions reached to only 15 percent of total imports among SAARC member countries. “A World Bank report on South Asian trade estimated that on average only 8.4 percent of tariff lines in the case of imports from non- LDCs and 6.2 percent in the case of imports from the LDCs were covered under SAPTA” (World Bank 2005). These estimates support the argument that SAPTA had little or no impact in changing the existing low trade patterns in South Asia. At least, three reasons account for the insignificant product coverage under SAPTA. First, negotiations under SAPTA have been conducted mainly on a product-by-product basis, which are extremely time- consuming. Second, proposed tariff cuts offered under SAPTA are not deep enough to have any significant impact on trade volume (Mukherji, 2004).

Actually, the framework of SAPTA was guided by the ‘positive list approach’ which has a little impact on trade liberalization. The process of tariff reduction adopted by SAPTA was slow and extremely time consuming. Furthermore, in the first two rounds of SAPTA, the removal of non-tariff barriers was not considered important with granting the tariff preferences. The tariff cuts were not deep enough and a wide range of goods was not subject to preferential tariff list even some most trade goods were not included to the list (Kelegama, 2006).

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Hence, after the four rounds of SAPTA, over 5,000 tariff line items could be the subject of preferential trading list (SAARC, 2002). Due to the slow progress of the regional initiative of promoting trade, a number of SAARC countries engaged in bilateral free trade agreements (BFTA). The Indo-Lanka BFTA was signed in 1998. While Indo-Nepal BFTA was signed in 1996 (RIS, 2004). In addition, several SAARC member countries joined wider regional grouping such as the Indian Ocean Rim Association for regional cooperation (IOR-ARC) and BIMSTEC (Bangladesh, India, , Sri Lanka, Thailand Economic Cooperation). Both regional grouping were initiated in 1996 in the hope of gaining more economic benefits, which the SAPTA process was not delivering.

2.10 From SAPTA to SAFTA: Entry of SAARC in Liberal Economic Regime

The Preferential Trade Agreement of SAARC was envisaged primarily as the first step towards the transition to a South Asia Free Trade Area (SAPTA). It was supposed that SAFTA would lead the South Asia, subsequently, towards a Custom Union, Common Market and Economic Union (Kher, 2012). The 16th session of the Council of Ministers held in New Delhi (1995), gave the consent to establish a free trade area. Hence, an Inter-Governmental Expert Group (IGEG) was set up to classify the necessary steps towards moving into a free trade area. However, the Idea of SAFTA was first mooted at the 8th SAARC Summit in Delhi (1995). It was then suggested that SAFTA would come into effect by 2005. But frustrated by the slow pace of progress of SAARC including SAPTA rounds of negotiations, and driven by the potential economic and political benefits of a free trade area agreement, the policymakers of South Asian countries took a decision at the 9th SAARC Summit at Male (1997) to advance the effective date of SAFTA from 2005 to 2001.

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The Male Summit also decided to set up a forum called Group of Eminent Persons (GEP) to look into various aspects of intraregional trade in South Asia and prepare a feasibility report on SAFTA. The GEP report entitled “SAARC Vision beyond the Year 2000” was presented at the 10th SAARC Summit in Colombo (1998). According to this report, the year 2008 was considered a realistic timetable for the launching of SAFTA (GEP Report, 1998).

On the basis of the recommendations of the GEP report, SAARC, at its 10th Summit in Colombo, 1998, took two important decision. Frist, to overcome the shortcomings of Preferential Trade Agreement in order to accelerate progress in the 4th round of trade negotiation under SAPTA. In this context, the issues of deeper tariff concessions on actively traded goods, non-tariff barriers (NTBs) and discriminatory practices and measures to remove structural impediments in order move speedily towards the goal of a South Asia Free Trade Area, were came under discussion (SAARC, 1998). Second, to complete a “Framework Treaty” for SAFTA by 2001. The summit also directed that the domestic content requirements under SAPTA rules of origins be reduced. The first meeting of SAARC Commerce Ministers held in New Delhi in January 1996, to recognize the importance of economic cooperation in South Asia. Since then, two more Ministerial Meetings have been held at Islamabad (April, 1998) and Dhaka (February, 1999) to emphasize on the importance of regional economic integration.

However, preparation of the Treaty by 2001 was not possible because of rapidly deteriorating political and security environment in South Asia triggered mainly by the following events – nuclear tests by Pakistan in 1998 ( Pakistan had to take this bold step to balance the power as India had already done nuclear test in 1974, Kargil conflict between India and Pakistan in 1999, military coup in Pakistan in 1999, and India’s refusal to recognize the new military regime of General Musharraf, political turmoil in Nepal, worsening

98 security environment in Afghanistan and the beginning of US military engagement in Afghanistan in 2001.

The preparation of the Framework Treaty for SAFTA was finally completed in January 2004, leading to a formal launching of the SAFTA at the 12th SAARC Summit at Islamabad in January 2004. The Islamabad Summit Declaration provided two different timetables for implementation of SAFTA agreements. It was decided that SAFTA would become fully effective for non-LDC members (India, Pakistan, and Sri Lanka) by 2013 and for LDC members (Bangladesh, Bhutan, the Maldives, and Nepal) by 2016. (Dash, 2008)

The SAFTA framework is an improvement over the existing SAPTA, which was signed on April 11, 1993, and came into force in December 1995. Although SAPTA has run into troubles because of Indo-Pakistani disagreements over the lists of tradable items with reduced tariffs, it is fair to say that there have been some advances in the process of trade negotiation under SAPTA to further trade liberalization in the region. The other important agreement signed at 12th summit was an Additional Protocol to SAARC Convention on Suppression of Terrorism, outlining various measures to combat terrorism in South Asia. The success of this protocol, however, depends upon finally, most of products, which received concessions, are not widely traded in the region and thus have limited trade value for SAARC member countries.

2.10.1 Salient Features of the Agreement of SAFTA

The Agreement on South Asian Free Trade Area is comprises of Forty one Articles and Four Annexures. In addition, two Annexes are attached with reference to SAFTA Rules of Origin. The salient features the agreement are given below:  The objectives of the SAFTA defined in the agreement are to promote mutual trade and enhance economic cooperation in the region through 99

eliminating the trade barriers and facilitating the cross-border movement of goods (Article-3)  SAFTA is based on the principle of overall reciprocity and mutuality of advantages in such a way as to benefit equitably all Contracting States  The Instruments through which SAFTA will be implemented are; trade liberalization programme (Article-7); Rules of Origin (Article 18 and two Annexes); Institutional Arrangements (Article- 10);Consultation and Dispute Settlement Procedures(Article-20); Safeguard Measures.  SAFTA follows the rule of National Treatment (NT) in accordance with the provision of Article III of GAT 1994.  The main components of SAFTA are, tariffs; para-tariff; non-tariff measures and direct trade measures.  India, Pakistan and Sri Lanka are categorized as Non-Least Developed Contracting States (NLDCS) and Bangladesh, Bhutan, Maldives and Nepal are categorized as Least Developed Contracting States (LDCS). However, Afghanistan which joined the SAARC in 2007, more than one year after the formal inauguration of SAFTA, became a part of the SAFTA Agreement as an LDC member.  Under the Tariff Liberalization Programme (TLP), NLDCS were bound to bring down tariff to 20%, while LDCS were bound to bring them down to 30%. According to Agreement, NLDCS were bound to further bring down the tariff from 20% to 0-5% in five years (Sri Lanka in 6 years), while LDCS would do so in eight year.  Under Article-11, the Non-LDCS were bound to reduce their tariff for LDCS’ products to 0-5% in three years. This TLP would cover all tariff lines except those kept in the sensitive list (negative list) by the member States (see the table).

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2.10.2 Rule of Origin under SAFTA

The defined rules of origin under SAFTA are:  The goods, traded under SAFTA Concessions on preferential basis, would have undergone substantial manufacturing process in the exporting countries.  The Substantial manufacturing process are defined in terms of twin criteria of Change of Tariff heading (CTH) at four-digit harmonized coding system (HS) and value content of 40% (30% for LDCS).  To safe the interests of LDCS, Product –Specific Rules (PSR) for 191 tariff line would be awarded to LDCS’ products.  The PSRs have provided clearly on technical grounds i.e. where, both inputs and outputs are the same four-digit HS level (see Annexure for details).

Thus, the establishment of SAFTA represented a major development in South Asia’s search for deeper economic integration in the region. With the signing of SAFTA in 2004, regional trade cooperation gained momentum and the once difficult-to-achieve objectives of a free trade area appeared increasingly achievable in South Asia. A slow and limited progress of SAFTA, since its implementation, have raised serious questions on its significance as a tool of “liberalizing regional trade”. There are two major viewpoints exist in the literature on the prospects of SAFTA. The supporters of SAFTA hold that South Asian economies, small economies in particular, would substantially gain if SAFTA comes into existence (Pigato et al. 1997). The other have view point that identical comparative advantages and restrictive trade policies due to interstate political dispute would make SAFTA less beneficial for the region.

Though, the Framework Agreement of SAFTA was signed in 2004 yet the Government of India, approved the SAFTA in December 2005 and paved

101 the way for its formal launching on 1 January 2006.than it was hoped that tariffs would be reduced within the stipulated timeframe of 2016 by all the participating countries. Especially openness to trade and investment would lead to the development and alleviate poverty and backwardness several empirical studies show that “despite the potential for trade diversion, SAFTA would bring significant benefits to small countries in the region and would facilitate unilateral trade liberalization in South Asia”. (Srinivasan and Canonero 1995; Srinivasan 1998). Using the framework of gravity model, a recent empirical study by New Delhi-based Research and Information Systems institute suggests that complete elimination of tariff under SAFTA is likely to increase intraregional trade by 1.6 times (Kemal, 2004). On contrary, the second views represented by SAFTA critics argue that SAFTA is hardly beneficiary for its members and will mostly lead to trade diversion and slow down unilateral trade liberalization in South Asia (Panagariya 1999).

2.10.3 Development of Infrastructure and Transit Facilities

The 11th session of COMs (1992) recognized the need to improve infrastructure and transit facilities in the South Asia region. A study was commissioned to assess the feasibility in this regard. The study was completed in 1994 and provided valuable recommendations. Under the light of such recommendations, the previously existed Technical Committee on Transport (established in 1983 by South Asian Countries) has been merged with Communications. Now a single Technical Committee on Transport and Communications has been effective from January, 2000. The committee covers three major segments of transport, i.e. land transport (railways and roadways); sea transport (waterways and shipping); and air transport.

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2.10.4 SAARC Trade Fairs

Under the SAARC Chamber of Commerce and Industry (SCCI), Trade Fairs have become a regular feature since 1996 (see the table below). The trade fairs have succeeded not only in projecting the potential of the region but also in promoting the wide variety of products the region produces which match international quality and standards. The SCCI has boosted the trade liberalization process in the region positively. The SCCI not only increases public awareness through workshops and publications of books and other material, but also fills the communication gap between government and private sector industry. In addition, it holds regular consultations with the SAARC Secretariat. Table: 2.6 List of SAARC Trade Fairs SAARC Trade Fairs Venue Date of Trade Fair 1st SAARC Trade Fair New Delhi Jan 9-14, 1996 2nd SAARC Trade Fair Colombo Sep 8-15, 1998 3rd SAARC Trade Fair Karachi April 21-26, 2001 4th SAARC Trade Fair Kathmandu Oct 25-29, 2002 5th SAARC Trade Fair Dhaka Dec 27-31, 2003 6th SAARC Trade Fair New Delhi Jan 6-10, 2005 7th SAARC Trade Fair Karachi Jun 16-18, 2006 8th SAARC Trade Fair Colombo Aug 28-31, 2008 9th SAARC Trade Fair Thimphu Sep 11-14, 2009 10th SAARC Trade Fair Kathmandu Dec 15-19, 2010 11th SAARC Trade Fair Dhaka 30th March to 1st April, 2012 12th SAARC Trade Fair Lahore Dec 4-6, 2015 13th SAARC Trade Fair Thimpu Sep 9-12, 2016 14th SAARC Trade Fair Colombo Sep 7-9, 2017 Source: Author’s Compilation (based on the information gathered from SCCI website)

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2.10.5 SAARC Business Leaders Conclave (SBLC)

SAARC contributes to promote regional integration, through providing a unique platform to discuss the trade matters among leading regional Businessmen, in the form of arranging the SAARC Business Leaders Conclave. The SBLCs are organized by SAARC Chamber of Commerce and Industry. The main objective of these conclaves are; to expedite the economic integration process of South Asian Association for Regional Cooperation; to develop new mindset and change attitudes in the SAARC region to ensure economic and social stability and prosperity; and to determine a persuasive action plan of the private sector of the region to foster the regional integration of South Asia (SCCI, 2018) Table: 2.7 The List of the Editions of SAARC Business Leaders Conclave (SBLC) Editions of Venue Date Theme of SBLC SBLC 1st SBLC New Delhi Nov 17-18, 2005 South Asia Regional Integration and Growth 2ed SBLC Mumbai Feb 17-18, 2007 Liberalization of South Asian Economies from Regulations and Restrictions 3rd SBLC Colombo Nov 22-23 Creation of Synergies for Regional Integration and Cooperation through effective networking for the business community within South Asia 4th SBLC Kathmandu Sep 20-22, 2011 Peace and Prosperity through Regional Connectivity 5th SBLC New Delhi Jan 16-17, 2014 South Asian Century: Progressing towards Regional Integration Source: Author’s Compilation (based on information collected through SCCI website)

2.11 The Establishment of South Asian Development Fund (SADF)

At the Sixth SAARC Summit (1991), the idea of SADF was mooted. After the merger of two earlier SAARC Funds, SAARC Fund for Regional Projects and SAARC Regional Fund, the SADF was formally established in 1996 (Kher, 2012). The Fund was formed to provide the finance to the

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SAARC member States for poverty alleviation, industrial development, balance of payment support and environmental protection.

2.12 SAARC-Japan Special Fund

SAARC has been established a SAARC-Japan Special Fund through signing the Memorandum of Understanding with the government of Japan on 27th of September, 1993 (SAARC-Sec, 1993). The Fund provides finance to support sustainable growth and infrastructure development of SAARC member Countries.

2.13 SAARC Agreement on Trade in Services (SATIS)

Soon after signing the SAFTA, SAARC kept the preparation of the framework Agreement of the SATIS, on its upmost agenda. However, the SAARC Agreement on Trade in Services, finally, signed at the Sixteenth Summit of SAARC in Bhutan in April, 2010 (Kelegama, 2015). The ratification of the Agreement, by the SAARC member States, took place nearly two years after the Agreement came into effect. However, the success of this agreement is associated with the success of SAFTA as Trade in Services required the institutional liberalization. Indeed, expediting the SATIS would make SAARC a more economically integrated region with higher growth.

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References

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Kemal, A. (2004). SAFTA and Economic Cooperation. South Asian Journal, 1-21. Mukherji, I. (2004). Towards a free Trade Area in SOuth Asia: Charting a Fesible Course for Trade Liberalization with Reference to India's Role. RIS Discussion Papers, 86/04. Obion, F. (2009). SAARC: The Political Challene for SOuth Asia and Beyond. Economic and Political Weekly, 118-125. Panagariya, A. (1999). Trade Policy in South Asia Recent Liberalization and Future Agenda. The world Economy, 353-377. Pattanaik, S. (2011). South Asia: Envisioning a Regional Future. New Delhi: Pantagon Security Interantion Press. Pigato, M. F., Itakura, K., Jun, K., Martin, W., Murrell, K., & Srinivasan, T. (1997). South Asia's Integration into the World Economy. Washington DC: World Bank. Qadri, H. M. (2008). SAARC and globalization: Issues, prospects & Policy Prescription. Lahore: Minhaj-ul-Quran Publucation. Raipuria, K. (2001). SAARC in the New Millennium: Need for Financial Vision South Asian Survey. Lahore: Minhaj-ul-Quran Publication. Rizal, D. (2012). South Asia and Beyond: Discoursed on Emerging Security Challenges and Concerns. Ned Delhi: Adroit Publishers. Rizvi, A. (2006). Problems of Regional Cooperation. South Asian Policy Analysis Network (SAFTMA), 131. Rynning, S. (2017). South Asia and the Great Powers: International Relation and Regional Security. London: I.B Tauris. Schiff, M., & Winters, L. (2003). Regional Integration and Development. Washington DC: World Bank. Sha, S. (2005). South Asian Association for Regional Coopeartion (SAARC) and Social Developemnt in South Asia: A Study of Some successful Experiences. Indian Journal of Assian Affairs, 1-44. Sharma, S. (2001). India and SAARC. New Delhi: Gyan Publishing House. Siddiqi, M. (2006). India and SAARC Nationa. New Delhi: Maxford Books.

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Singh, M. (1997). Encyclopedia of SAARC Nations. New Delhi: Deep & Deep Publishers. Singh, M. (1997). Regional Co-Operation in South Asia: Imperatives and Obstacles. New Delhi: Deep & Deep Publishers. Singh, R. (2016). Development is teh Spirit of SAARC. Retrieved from http://southasiajournal.net/development-is-the-spirit-of-saarc/: http://southasiajournal.net/development-is-the-spirit-of-saarc/ Sinha, R. (1985). New International Economic Order. New Delhi: Deep & Deep Publishers. Srinivasan, T. (1998). Developing Counties and the Multinational Trading System: From GATTA to the Urguay Round and the Future. New Delhi: Oxfored University Press. Syed, M. (2004). Pakistan-India Trade: Rationale and Reality. Pakistan Horizon, 1-21. Zaidi, S. (2005). Issues in Pakistan Economy. Karachi: Oxford University Press.

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Chapter 3

Pakistan-India Trade Relations under SAFTA Regime (1997-2015)

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This chapter describes the fluctuant history of Pakistan-India trade relations in detail. It highlights the positive impact of SAARC on trade relations of both economies. In addition, it focuses on the comparative analysis of Pakistan and Indian economy under SAARC Free Trade Area through applying quantitative methodology.

3.1 History of Trade Relations between India and Pakistan in Pre-SAARC period

Pakistan and India both have unique similarities with each other in various ways such as, both emerged as independent States on the map of globe, in the result of Partition of sub-continent in 1947. They are low income countries (in overall international trade perspective) and the part of Third World. Pakistan and India both are the early signatory of the GATT (the founding adhoc organization of multilateral trading system which was later replaced by the WTO). In addition, they are also nuclear powers and main players of SAARC (as they are relatively big countries as well as economies in compare to rest of the other SAARC members). In spite of all stated above similarities, both nations have hostile relations with each other due to some deep rooted socio-political issues, i.e., border issues and water issues etc., which emerged in the ashes of partition. Both have been fought three major wars with each other.

3.1.1 Key Economic Indicators of India and Pakistan

India is a bigger country than Pakistan in term of its size and population as well as economy. According to Global Competitive Index (2017-2018 edition), India has 1,309.3 million population and US $ 2,256.4 billion GDP. It is 40th largest economy out of 137 economies, with GDP per capita of US $1,723.3 and GDP in terms of purchasing power parity (% world GDP), 7.3. While Pakistan is 115th/137 economy, with GDP of US$ 284.2 billion. She has 193.6 million population and US$ 1,468.2 GDP per capita. Pakistan has GDP (PPP) % world 0.82 (see the table below).

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Table: 3.1 Comparison between the Key Economic Indicators of India and Pakistan in 2016 Population GDP per GDP US$ GDP

million capita US$ (PPP)% world GDP India 1,309.3 1,723.3 2,256.4 7.23 Pakistan 193.6 1468.2 284.2 0.82 Source: Author’s compilation (data is derived from World Economic Forum, 2017)

The large difference between economic indicators elaborate the fact that India is bigger economy than Pakistan, but as far as the business environment is concerned, both economies have almost same problematic factors. For example, corruption, high tax rates, government instability/coups, crime and theft, inefficient government bureaucracy, poor work ethics in national labor force, low access to financing, instability of public policy, poor public health, strict tax regulations, inadequate supply of infrastructure, insufficient capacity to innovate, foreign currency regulations, inflation and restrictive labor regulations are the most problematic factors for doing business in both countries (World economic forum, 2017).

3.1.2 Pakistan-India Trade Relations from 1947-1960s

Although, Pakistan and India share the 11th longest international border in the world but the trade between both countries remained extremely low till 1960s. Even bilateral trade halted completely for nine years, from 1965-1974 (Zaidi, 2006). Soon after independence, India was Pakistan’s most important trading partner. From 1947 to 1949 Pakistan’s exports to India were 56% of her total exports and her imports from India were 32% of its total imports (Tabish and Khan, 2010).

Actually Trade between Pakistan and India drastically declined when Pakistan refused to devalue its Rupee with respect to sterling in 1949. On the issue of devaluation, the Commonwealth, including India, imposed a trade

111 embargo on Pakistan (Khan, 2013). Consequently, bilateral trade between Pakistan and India fell dramatically. From 1948 to 1960 both states signed eleven Indo-Pak trade and payment agreements, but these agreements could not boost up the volume of official bilateral trade, as it declined from 184.06 crore of Indian rupees in 1948-49 to Rs.13.63 crore in 1958 (PHD-CCI, 2013).

Trade relations between Pakistan and India went almost negligible for nine years (1965-1974) due to two major wars which were fought in 1965 and 1971 respectively. Bilateral trade volume of the two nations was estimated at its lowest level Rs.10.53 crore in 1965-66 (PHD-CCI, 2013). There was a trade embargo between the Pakistan and India after the war of 1965 which continued till 1974.

3.1.3 The establishment of Trade protocol

After the secession of East Pakistan, both countries tried to normalize their political relations through resuming bilateral trade ties. They signed a trade protocol, in the pursuance of Shimla Accord (peace treaty) in 1972, for the restoration of commercial relations on a government to government basis on November 30, 1974 (Dixit, 2003 and PHD-CCI, 2013). In addition, government of Pakistan allowed its private sector to trade with India with effect from December 7, 1976. However, the trade protocol could not create the expected impact factor in improving India Pakistan Trade relations. India’s nuclear test in Pokhran, in the same year(1974) sabotaged the trade normalization process, as Bhutto government in Pakistan decided to launch nuclear programme on emergency basis to maintain the balance of power with India (Dixit, 2003).

3.1.4 Delhi International Trade Fair

However, the process of trade normalization started again in Zia regime. Pakistan joined the Delhi International Trade Fair in 1981, and as a result

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India also sent her trade delegation to Pakistan. In June 1983, a joint Business Commission was constituted, with aim to articulate suggestion to open up bilateral trade and assist respective governments to accelerate the process of decision making in this regard. Meanwhile, the South Asian countries took the bold step of establishing the SAARC, to promote trade and economic cooperation among member states (besides other goals). The more than usual meetings among the officials of South Asian States during the series of conferences held for preparation and drafting of framework agreement of SAARC (1981-84), created a healthy impact on trade relations as well as political relations of India and Pakistan. In July 1982, Pakistan declared a list of 40 items in which private sectors of the two countries could trade (Ali, 1996).

3.1.5 The policy of Industrialization and Self-Sufficiency

Indeed, Pakistan and India, like other South Asian economies remained protectionists for a long period. In the result of 1948 war (which was fought between Pakistan and India on the issue of Kashmir) and Pakistan’ political decision to refuse to devalue its Rupee, India halted all type of trade with its neighbor. Hence, Pakistan, which was starved of most manufactured goods of daily consumption, encouraged the private sector to be self-sufficient in consumer goods. In this perspective, Pakistan launched a program of industrialization to achieve a measure of self-sufficiency (Burki, 2006 & Zaidi, 2007). While in the case of India, Jawaharlal Nehru, India’s first prime minister, declared India a socialist economic republic. Virtually, when Nehru took over the government, economy of British India was already under the control of highly developed bureaucratic system. Especially during Second World War, when British government was busy into warfare, In British India, public sector was responsible to produce goods for fighting men. So, Nehru decided to continue the British legacy as well. Hence the Indian economy remained closed for more than four decades.

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3.1.6 Import Substitution Approach

The reason behind trade decline was not only the political in its very nature but it had also economic dimensions. Pakistan and India, like other South Asian countries, followed import substitution approach towards economic development for nearly forty years (from late 1940s to mid-1980s). As a result, the intraregional trade of both countries declined drastically in those decades but it started increasing soon after the both nations abounded the import substitution policy in the favor of general trade liberalization (see the table). Table: 3.2 Intraregional Trade (Official) of India and Pakistan in relatively Liberal Regime.

Intraregional Intraregional Exports Total Intraregional Imports 1981 1990 1995 Trade 1981 1990 1995 1998 1981 1990 1995 1998 1998 India 1.3 0.4 0.6 2.9 2.7 5.1 5.6 1.8 1.4 2.7 3.2 1.1 Pakistan 1.9 1.6 1.5 5.5 4.0 3.2 4.9 3.1 2.7 2.2 3.6 2.4 Source: Author’s Compilation (estimated from World Bank Report# 29949, Trade Policies in South Asia: An Overview, 2004).

3.2 SAARC and Trade Openness

Pakistan and India both became the signatories of SAARC in 1986, which committed itself to promote the welfare of the people of South Asia. SAARC declaration identified the various areas for cooperation, including, human resource development, poverty alleviation, energy, development of science and technology, people to people contact, security, economy, finance and trade. The agreement of SAARC, overall, emphasizes on the socio-economic issues of the region and seeks their solutions through regional cooperation.

The mutual trade between the two nations significantly increased after the establishment of SAARC. Since 1989, Pakistan expanded the list of approved

114 imports from India to 571 items. Indo-Pak trade boosted up in 1991, as the estimated figure was Rs. 168.09 crore. While it reached to Rs. 522.59 crore in 1992-93 (PHD-CCI, 2013). India granted the MFN status to Pakistan in 1996 and opened its borders for Pakistani commodities. Trade between the two countries, further enhanced after the establishment of SAPTA.

The SAARC Preferential Trade Agreement (1995) introduced an integrative arrangement in the region. At the end of three rounds of negotiations under SAPTA, a total of 5550 lines had been included for tariff concessions (PHD- CCI, 2013). Pakistan enhanced the import list to 600 items in July 2000, and 1075 items in November 2006 (Ghuman and Madaan, 2006). The flow of bilateral trade negatively affected once again from 1999-2001 due to Kargil War (as both nations abandoned mutual diplomatic relations and India refused to attend SAARC Summit in Islamabad). Later SAARC played a leading role to normalize the political relations between the two.

3.2.1 Structural Adjustment Plans of IMF and WB

Along with SAARC, some other factors also mobilized bilateral trade of India and Pakistan. Most of the South Asian economies undertook reforms to achieve trade openness from the mid-1980s to mid-1990s. One of the aim of SAARC was to collaborate with international political and economic organizations to cope with the changing global politico-economic scenario. On the directions of Washington Consensus, IMF and WB both introduced Structural Adjustment plans in third world countries as a strategy for economic development and poverty alleviation. The main pillars of Washington consensus were, trade liberalization; liberalizations of inward foreign direct investment; privatization of state enterprises; deregulation (abolition of regulations that restrict market access or competition); and legal security for property rights (Pettinger, 2017). Especially, IMF bailouts tended to involve free market reforms as a condition of receiving money.

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So, under the extreme pressure of IMF, Pakistan and India abandoned trade protectionism in favor of openness as the strategy for development and poverty alleviation in early 1990s. India resisted the trade liberalizing policy after 2000 and remained its economy closed to free trade. While Pakistan followed the route of liberalization since 1996/97 (including its agriculture trade policies). Consequently, Pakistan was least protected market in the South Asian region in about 2004 while India was the highly protected economy of the region (see the table below). Table: 3.3 Summery of Tariff Structure in South Asia

India Pakistan Bangladesh Sri Lanka Nepal Marc 2002/03 2004/05 Feb 04 Aug 03 h04 Top MFN custom duty rate 30 25 25.0 27.5 25 Other general protective taxes 0 - 4.0 3.75 4.5 General maximum (custom duty+ 30 25 29.0 31.25 29.5 other) Average MFN custom duty rate 22.2 17.3 16.3 11.3 13.7 Average of other general 0 1.5 3.9 2.1 4.3 productive taxes

Average of other selective 0 0 6.3 0 productive taxes

Sum (average custom duty+ other 22.2 18.8 26.5 13.4 18.0 productive taxes)

% of products with total production 2.8 1.1 15.8 0.9 5.8 rate>general maximum protection rate Number of MFN customs duty 7 4 4 6 5 bands Number of customs duty 17 10 2 3 bands>MFN average Range of custom duty bands>MFN 40- 40-250% 75&100% 40,80, average duty rate 210% 130%

% of ad valorem tariff lines>MFN 2 0.1 0.2 5.2 average duty rate

% of tariff lines with specific duties 5.3 0.9 1.2 0.6

Source: Reproduced from World Bank #29949, Trade Politics in South Asia: An overview, 2004.

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Globalization and fast moving free market economic trends in world trade forced both countries to revolutionize their trade related macroeconomic policies to meet the challenges of international competition.

3.2.2 The Effect of WTO on Pakistan-India Economy

World Trade Organization had been established in 1995 which was the successor of the GATT. It was a permanent trade organization to have an aim, amongst other things, to make possible the flow of trade through eliminating the trade barrios among nations. In this regard, WTO suggested a substantial and acceptable reduction of tariff and non-tariff barriers to its member countries. In addition, WTO introduced two key principles, MFN and NT to facilitate the international trade. India and Pakistan both, as the member of WTO, were bound to grant MFN status to each other. MFN status guarantees that trade among the WTO members is conducted on the basis of non- discrimination. All trading partners are to be treated equally with similar tariff rates and terms of trade (PBC, 2017). However, India had already grated the MFN status to Pakistan in 1996, but Pakistan was still reluctant to grant MFN status to India due to domestic politics and effective lobbying of auto-mobile and textile sector.

3.2.3 The Establishment of SAFTA

Despite of such circumstances, at the initiative of SAARC, along with other member countries, Pakistan and India also concluded a landmark treaty of SAFTA on January 6, 2004, with a commitment to facilitate free trade among member countries by eliminating trade barriers and scale down their tariffs in two phases to 0-5 percent from January 1, 2016 (SAFTA, 1994). “The treaty allows free cross-border movement of goods within the region, with the provision for a list of sensitive items (which may require some protection) for member countries to safeguard national interests” (Tabish and Khan, 2012).

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3.2.4 The Composite Trade Dialogue between India and Pakistan

Meanwhile, Pakistan initiated trade talks with India, in 2004, under the ’s government to improve the bilateral trade ties. Prime Minister Manmohan Singh welcomed that initiative. Four rounds of trade dialogue held till 2007, in result, three major steps were taken to enhance mutual economic cooperation, (a) Pakistan expanded its positive list towards India; (b) both countries opened road routes to facilitate trade; (c) and restrictive maritime protocol was amended to open sea routs for bilateral trade (Taneja et al, 2013). Despite of the terrorist attack on Samjhota express (a twice-weekly train service which was started between Delhi and Lahore as the part of confidence building measure) in India, the two governments allowed trade and travel across the along Jammu and Kashmir in 2008 (PBC, 2017).

Virtually, the volume of bilateral Trade between these countries visibly increased since 2006, after the formal launching of SAFTA. Exports from India to Pakistan increased more than the Pakistan’s export to India (Trade Map, 2010). A study conducted by ICRIER (using the gravity model) quantified the trade potential $ 6.5 billion in 2004. The State Bank of Pakistan estimated the figure over USD $ 5billion (on the extent of trade complementary between the two economies). But, the official bilateral trade between India and Pakistan stood at USD $2.6 billion in 2010 (Trade Map, 2011).

3.2.5 Mumbai Terrorists Attack

However, the composite trade dialogue halted due to Mumbai attacks (the terrorist attack on India’s parliament) in November 2008, and both the states could not continue the dialogue due to domestic resistance, security concerns and political uncertainties (PBC, 2017). India Blamed Pakistan for the

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Mumbai attacks and suspend Trade Talks and froze its diplomatic relations with Pakistan. Trade relation remained frozen till 2010.

3.2.6 Resumption of Trade Normalization Process

Trade normalization process resumed in 2011, on secretary level, which helped improving trade relations between Pakistan and India Resultantly. In result, Pakistan took two valuable decisions to facilitate mutual trade in 2011, as the government officially announced that she would grant long awaited MFN status to India and replace its positive list with negative list by the end of 2012 ( USAID, 2012). Indeed, the issue of MFN was related to global trade integration process while the issue of negative list was directly related to regional trade integration process in South Asia under the umbrella of SAARC.

3.2.7 Issue of Positive list and sensitive list

At the time of the establishment of SAFTA (Islamabad, 2004), it was agreed that all countries would follow a sensitive list (selective items on which trade is allowed but on normal tariff lines without any preferential concession which are granted under SAPTA or SAFTA), to safeguard their domestic industry. But those lists were supposed to decrease gradually over the years. India had reduced its sensitive list for LDCs by 95% whereas for NLDCs by 29.3% (PBC, 2017). While, Pakistan had reduced its sensitive list just by 20%. In case of India, Pakistan was followed positive list (trade on all products are restricted except the listed ones) approach under SAPTA period. Whereas, SAFTA trade liberalization programme demanded a shift from positive list approach (which is limited in its scope) to negative list approach (all products are importable from India except negative list’s items, in this way negative list approach is more liberal than positive list approach).

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3.2.8 The Adoption of Negative list Approach

After the revival of trade talks in 2011, Pakistan, finally adopted the negative list approach towards India. Initially, the negative list of Pakistan was comprised of 1,209 items. Additional 137 products were also restricted by the government of Pakistan that could be traded across the Wagah border (PBC, 2017). Furthermore, to facilitate the free trade under SAFTA, Pakistan and India signed three bilateral agreement on custom cooperation, redress of trade grievances and mutual recognition in 2012 (MOC, 2013).

3.2.9 Pakistan-India Cooperation in Investment Sector

The breakthrough on liberalizing trade between Pakistan and India paved the way for economic cooperation in further areas such as investment. The permitted foreign direct investment from Pakistan into India which had been banned formerly. In addition both countries also agreed upon to a more liberalized visa regime of granting multiple-entry visa valid for a year, for Indian and Pakistani businessmen (MoC, 2013).

3.2.10 The Decision of Granting MFN to India

Thus, the decision of granting MFN status to India remained inconclusive due to multiple reasons. The literal meanings of Most Favored Nation spread the misconception in politico-religious groups which affected the public opinion negatively, toward the decision of granting MFN to India. On other hand, Private business community especially, highly influential industrial groups (including Automobile sector and textile sector) had serious apprehensions in this regard and they were not in the support of that decision (the primary data also confirms this analysis in 5th chapter of this study). Hence, The Pakistan People Party (which was in power that time) decided to postpone the decision regarding granting of MFN status till the election, 2013.

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3.2.11 The impact of Trade Liberalization between Pakistan and India

The newly elected government of Pakistan Muslim League (N), in 2013, again withheld the granting MFN status to India and pending it till India’s election, 2014 (PBC, 2017). Meanwhile, the government commissioned a series of studies to analyze the impact of trade liberalization between Pakistan and India. The studies were conducted by the Institute of Public Policy and Pakistan Trade Project on the request of Ministry of Commerce (MoC), Pakistan (MoC, 2013). The studies include:  A Primer: Trade Relation between Pakistan and India (1947-2012);  Pakistan-India Trade Relation: A sectoral Analysis,  Pakistan-India Trade Relation: The Impact of Non-Tariff Barriers,  Macroeconomic impact on Pakistan of the Newly l liberalized Pakistan-India Trade,  Policy Options for Managing the Impact of Trade Normalization with India.

The Institute of Public Policy and Pakistan Trade Project both, along with these studies, conducted two further studies;  Analysis of The Investment policies and Practices between Pakistan and India;  Assessment of Potential of Intra Industry Trade between Pakistan and India.

In the light of these studies, on February 2015, the commerce minister of Pakistan announced that Pakistan might grant Non-Discriminatory Market Access (NDMA) to India (PBC, 2017). Virtually, to avoid the expected intense public reaction, the term NDMA was used for MFN status by the government of Pakistan. India welcomed this act, as later in the year, Indian foreign minister visited Pakistan and made commitment for further trade liberalization.

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3.2.12 Suspension of Trade Normalization Process

Thus, bilateral trade relations once again affected in 2016, when India blamed Pakistan for terrorist attack on India’s Pathankot Air Base. Situation became worse after Uri attack (militants’ attack on base in disputed Jammu and Kashmir) in September 2016. India blamed Pakistan to support Jaish-e-Muhammed (a militant organization belongs to Deobandi sect in Pakistan, which was alleged in Uri attack), and in reaction, India refused to attend the 19th SAARC conference in Islamabad (PBC, 2017). Many politicians, in India demanded that India should withdraw the MFN status which she had granted to Pakistan years ago, but the government of India did not do so due to the pressure of its exporters which could lost their immediate market due to expected trade embargo from Pakistan’ side, in the reaction of Indian act (Express Tribune, 2016).

3.3 A Comparative Analysis of the Economies of Pakistan and India

A comparative analysis of the both economies helps out to understand the importance of trade liberalization process (under SAFTA) in the growth of bilateral trade between Pakistan and India. Both economies have varied growth rate record (see the table below). From 1960s to 1980s, the GDP growth rate of Pakistan was higher than India, but it gradually declined during 1990s and 2000s, and now India has gone ahead. In last decade, average annual growth rate of India reached near to 8% while, growth rate of Pakistan remained below 5% despite an intervening period of high growth from 2002- 2007.

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Table: 3.4 Variant Growth Rates of the Economies of Pakistan and India India Pakistan

GDP Growth Rate Growth Growth GDP Growth Rate Growth Growth

Decades Growth of Rate of Rate of Growth of Rate of Rate of

Rate% Agriculture% Industry% Services% Rate% Agriculture% Industry% Services%

1960s 6.5 4.1 8.8 7.0 7.2 5.1 11.0 6.8

1970s 3.1 1.8 4.0 4.4 4.7 2.4 6.1 4.8

1980s 5.6 3.5 6.2 6.6 6.3 4.1 7.8 6.5

1990s 5.5 2.8 5.6 7.3 4.6 4.4 4.8 4.6

2000s 7.7 3.1 7.9 9.3 4.6 2.7 6.2 5.1

Source: USAID Trade Project, 2012

The figures show that India’s annual growth rate is higher in service sector than its industrial sector. While in case of Pakistan, industrial sector is the leading sector. As far as the international trade is concerned, Pakistan’s economy is more open than that of India’s. This is measured as the sum of exports and imports as a proportion of the GDP. Historically, Pakistan is more inclined to trade than India (see the table below).It is a fact that, India remained close economy for a long period of time. Both economies, following the trade liberalization process under the umbrella of SAARC since 1990s, have become much more open than before.

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Table: 3.5 Comparative Trade openness of Economies of Pakistan and India Pakistan Share Share Share of Share of Share of Share of Decades of of Manufactured Manufactured Exports to Imports Exports Imports Exports in Imports in Developing from in GDP in GDP Total Exports Total Imports Countries Developing Countries

1970 4.5 7.7 57.2 66.1 29.8 9.4 1980 11.1 22.6 48.2 54.0 37.5 16.2 1990 14.0 18.5 78.7 54.1 16.4 18.0 2000 12.2 14.7 84.7 46.8 18.8 25.0 2010 12.1 22.1 74.1 48.5 40.1 41.7 India 1970 3.3 3.5 51.7 49.4 19.5 18.7 1980 4.7 8.1 58.6 38.7 17.5 28.2 1990 5.7 7.4 70.7 51.2 9.8 14.4 2000 9.2 11.2 77.8 46.7 23.1 20.9 2010 12.7 18.9 63.8 51.8 35.4 40.4 Source: USAID Trade project, 2012 Pakistan and India both have to carry large trade deficits often due to high trade gap. Since 1957 to 2016 Balance of trade in India averaged -2414.55 USD Million while -36727.56 PKR Million (Tradingeconomics, 2017). But the current account deficit is much better due to home remittances in the case of Pakistan and the export of services in the case of India. However, India’s position on the foreign exchange reserve is substantially better than Pakistan (see the table below). Table: 3.6 Comparative Balance of trade and Foreign Exchange Reserves (as % of GDP) Years Balance of Trade Current Account Deficit Foreign Exchange Reserves as % of imports Pakistan India Pakistan India Pakistan India 1970 -3.3 -0.2 - - 17.6 35.9 1980 -11.5 -3.4 -3.7 -1.0 9.3 46.7 1990 -4.5 -1.8 -4.2 -2.2 4.0 6.5 2000 -2.5 -2.0 -0.1 -1.0 13.9 73.6 2010 -10.0 -6.2 -0.8 -3.0 36.7 84.1 Source: Author’s Compilation (data is derived from WDI)

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Thus, as for as the trade direction of both countries is concerned, both are inclined to trade with developed world instead of developing countries. The top 5 import and export of Partners of Pakistan are USA, UAE, UK, Germany and China, while the largest destination of the Indian export and imports are UAE, USA, China and Hong Kong (WDI, 2016). Table: 3.7 Trade Direction of Pakistan and India

Export Export Export to Import Import Import Years within outside Developed Total within Outside To Total South South Economie South South Develo Asia Asia DCs* s Asia Asia ped DCs* Econo mies Pakistan 1960 9.0 21.1 69.9 100.0 5.5 10.6 83.9 100.0

1970 2.6 27.3 70.1 100.0 2.7 12.1 85.2 100.0

1980 7.2 30.3 62.5 100.0 3.2 15.3 81.5 100.0

1990 4.0 12.4 83.6 100.0 1.7 18.4 79.9 100.0 2000 4.6 14.3 81.1 100.0 2.7 22.3 75.0 100.0 2010 12.3 27.8 59.9 100.0 6.4 35.3 59.3 100.0

India 1960 5.5 21.5 73.0 100.0 2.2 14.2 83.6 100.0

1970 4.6 32.3 63.1 100.0 1.4 27.3 71.3 100.0 1980 3.9 32.0 64.1 100.0 1.0 36.8 62.2 100.0 1990 3.1 23.7 73.2 100.0 3.1 20.6 78.9 100.0 2000 4.3 18.8 76.9 100.0 0.9 20.0 79.1 100.0 2010 5.0 30.4 61.0 100.0 0.6 38.9 60.5 100.0

Source: Author’s Compilation (Data is gathered from WDI) *Developing Countries The overall comparison of the trade directions of both economies shows that over the last fifty years, the direction of both economies have primarily been with developed countries e.g. USA and Europe in both imports and exports. However, the relative increase in trade volume is seen after 1991, toward developing countries outside the South Asian region. Trade with other economies in South Asia remained restricted, with some indications of an increase in 2010. As far as the trade within regional developing countries is concerned, in last four decades, India has constantly low volume of trade as compare to Pakistan.

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3.4 Trade Policy of Pakistan with India under SAFTA

Trade policy of Pakistan with India is being pursued on the basis of the opportunities and threats expected to emerge by trade liberalization between the two countries. With keeping in mind the domestic industrial base, Pakistan has adopted a conscious strategy to gradually open up trade with India, particularly in the sectors in which her domestic industry is not in position to compete with foreign products. Pakistan and India formed a joint commission in 1983, which formally ratified an agreement to foster greater bilateral cooperation in the economic, industrial and commercial fields. In result, Pakistan allowed private sector to import 40 items from India. The officially allowed number of import items were later increased to 584 items. Whereas, Pakistan allowed all kinds of exports to India, and maintained a positive list of 687 items in 2004-05, which were officially importable from India. In pursuance of SAPTA negotiations, the positive list of importable items was expanded by 81 items to a total of 768 items (USAID, 2012). These items correspond to around 1650 items at 8-digit level and further to 773 items (TDAP, 2010). Most of the new items included in the positive list were in the nature of raw material and chemical items required by the local industry. Items which were not included in the positive list, were not permissible to import from India.

3.5 India’s Trade Policy towards Pakistan

Contrary to Pakistan, India did not impose equivalent formal restrictions on exports to or imports from Pakistan, but she apply non-tariff barriers which are generally believed to have a similar effect, especially on the imports. In order to protect domestic industries in India, the Indian Ministry of Commerce maintained a list of sensitive consumer goods, imports of which was regularly monitored with a view to take mediate action to seize or reduce disruption of local production by competing imports. Products were

126 periodically removed from or added to the list. In February 2004, the sensitive consumer goods of India was consisted of 240 HS products. Domestic production of many of these products were protected by special measures, including high tariffs and also by the use of various non-tariff techniques.

Since the establishment of the South Asian Preferential Trade Arrangement (SAPTA), Pakistan and India have moved gradually towards liberalizing trade with each other. Both the countries have provided significant relief to each other in terms of tariff concessions during the fourth bilateral meeting held on December 3, 2003 under the purview of SAPTA. Pakistan extended concessions to India on 223 items, up to 10percent on the tariff rates for 2003- 04, except for seven items where the depth of concession is 20 percent. The existing tariff on most of these items ranges between a low of 5-20 percent (except 25 percent on four and 30 percent on two items). The total number of items on which Pakistan has so far given concession to India has been extended to around 463 items.15 India gave Pakistan concessions in the range of 10 percent to 25 percent on tariff rates on 262 items.

The existing tariff on almost all these items ranges between 20-30 percent (except 10 percent on only four items), which are substantially higher than the tariff rates offered by Pakistan. Trade between Pakistan and India was supposed to be further liberalized after the implementation of SAFTA on January 1, 2006. Under the agreed trade liberalization program, Pakistan and India were bound to scale down their tariff rates from 25 percent to 20 percent within a time frame of two years, i.e. January 2006 (see chapter 2, for detail). After 2012, Pakistan has replaced its positive list with negative list.

3.6 Trade Facilitation Policies Acquired by Pakistan and India under SAFTA

Under the article eight of the SAFTA, contracting states showed their consent towards the adoption of trade facilitation and other measures to support trade liberalization process. Trade facilitation, along with harmonization of custom

127 clearance procedure and standards, reciprocal recognition of quality tests and agreement (See Annexure3). Though, the sea route was operational since beginning, yet it went unnoticed because of the restrictive maritime protocol that did allow only Indian and Pakistani flagships to carry cargo (between India and Pakistan). Consequently, in the absence of competition from foreign vessels, Indian and Pakistani vessels were used to charged high sea freight rates.

3.6.1 Amendment in the Maritime Protocol

In the pursuance of SAFTA agreement, the maritime protocol was amended in 2005 which brought sea trade between the two countries under global maritime arrangements. Now, Sea route was opened for foreign competition, and therefore, it took a considerable reduction in commercial freight rates between Mumbai and Karachi and. So, in 1995-96 when the road route was closed, trade by sea only accounted for 33 percent of the total trade between India and Pakistan due to high freight rates on commercial vessels), while by rail accounted for 63 percent (see the table below). Since 2011-12, due to the opening of the road route and the liberalization of the sea trade, the share of different modes in total trade between the two countries changed substantially (see the table). Further, it is noticeable that for both exports and imports, apart from a few merchandise, most of the top merchandise are traded via a single mode of transport, either road, rail, sea or air. Table 3.8 Trade with India through different modes Year Road Rail Air Sea

1995 – 96 0% 63% 4% 33%

2011 – 2012 17% 15% 8% 60%

Source: Auther’s Compilation from different sources

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3.6.2 Opening of Road Route

The movement was historical when after more than half a century (after partition), Pakistan and India agreed to open road routs for trade. The importance of this move can be better considered when compared it with cross-border transport protocols that India has with Nepal. Indeed, India and Nepal have the most liberal transport protocol that permits the trucks from the both nations to move into each other’s territories. Thus, in practice, the access to these trucks are confide to border areas only. Goods from the trucks of one state are loaded and offloaded on the other country’s trucks at the relative border (this is because when trucks move from one country to the other, the local mafia extorts money from the foreign trucks). However, transshipment is allowed because these informal payments are higher than the cost of transshipment. On the other hand, the opening up of the road route between Pakistan and India was well celebrated by general public at both sides of the border. However, lobbyists and interest groups, were anxious about this change. Because, this change had raised enormous hopes for the implementation of further trade-facilitating measures, successfully, at the land border between Pakistan and India.

Lahore (the capital city of Punjab province in Pakistan) is separated by Amritsar (one of the major cities of Indian Panjab) with a distance of only 54 kilometers. So, the costs of transport (for goods moved via land route between northern India and northern Pakistan) could be substantially lower than the sea route. Due to recognition of the importance of land route (for trade), India opened an Integrated Check Post (ICP) at Atari in April 2012. The check post was equipped with new facilities including a trade gate to facilitate all trade activities under one unit (including warehousing and other facilities). Trade timings were also increased from seven hours per day to 12 hours per day (for all days of the week). Meanwhile the two countries signed the agreement to make easy and efficient the lengthy process of custom documentation

129 through introducing the Electronic Data Interchange (EDI) facility and installation of truck scanners.

3.6.3 The Proposal for increasing the number of Trade Routes

However, to increase further bilateral trade, different options are under discussion on private and official level. The two governments are also considering opening up of new road routes including the option of opening the Munabao-Khokhrapar road route (the rail route is already operational at this point under the agreement of people to people contact, which was signed by the Pakistan and India in 2006) and Sindh-Rajasthan route. Development of land linkages between two neighbors are the most desirable act which would boost up bilateral trade volume ( as cost of doing trade will be less), reduce poverty and generate other welfare gains. In addition, trade would increase further if the two governments give access to each other’s containers/ trucks to move in each other’s territory, as it this measure would also reduce the transaction costs.

3.7 An Overview of Bilateral trade between Pakistan and India

The data from various sources (Pakistan economic survey, ICRIER, WITS) indicates that from 2003-2015 (during trade liberalization period) volume of bilateral trade increased but trade balance was in the favour of India. Pakistan faced, constantly, trade deficit with India which increased from (2010-2015). In 2003, the exports of Pakistan to India were worth of $ 84 million, while the volume of export expanding to $ 312 million in 2015. On other hand, imports from India to Pakistan increased by 639 percent (from $ 226 million in 2003 to $ 1,669 million in 2015). The trade deficit improved, slightly in 2015 when it was $ 1.36 billion down from $ 1.71 billion in 2014. However, the major reason behind this was the decline in imports from India (from $

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2.10 billion in 2014 to $ 1.67 billion in 2015). In result, Pakistan’s exports also declined, in 2015, from $ 80 million over the 2014. Table: 3.9 Pakistan Trade with India Year Pakistan’s Export to Pakistan’s Import from Trade Balance India(in millions) India(in millions) 2003 84 226 -143 2004 158 454 -296 2005 337 577 -239 2006 327 1,115 -788 2007 292 1,266 -975 2008 355 1,691 -1,337 2009 235 1,080 -845 2010 275 1,560 -1285 2011 273 1,607 -1,334 2012 348 1,573 -1,225 2013 403 1,874 -1,471 2014 392 2,105 -1,713 2015 312 1,669 -1,357 Source: Author’s compilation However, there are discrepancies in trade data pointed out during analyzing the trade figures which were officially reported by Pakistan and India. For example, India reported higher imports from Pakistan from 2010 to 2015 (with exception of 2013). While in comparison, Pakistan reported less exports to India during the same years. Even in 2012 and 2015, the trade data discrepancy was reached to the tune of $ 152.3 million and $ 144 million respectively with regards to India’s reported imports from Pakistan.

Table: 3.10 Trade Data Discrepancies between Pakistan and India Years Pakistan Trade Deficit with India’s Trade Surplus India with Pakistan 2010 1,285 1,915 2011 1,334 1,326 2012 1,225 1,133 2013 1,471 1,797 2014 1,713 1,640 2015 1,640 1,507 (Source: Author’s compilation from various sources)

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The above table shows the difference in the trade deficits reported by Pakistan and the trade surplus reported by India. India accounted for a trade surplus greater than what was recorded by Pakistan in the same calendar years of 2010, 2013 and 2015. While Pakistan overstated the bilateral trade deficit in 2011, 2012 and 2014.

There are also inconsistencies found in the reported data by Pakistan for its imports from India and India’s exports to it. These are larger than the discrepancies which were reported in the data for Pakistan’s exports to India. For instance, India reported exports to Pakistan of $ 2.23 billion in 2010, whereas Pakistan reported imports from India of $ 1.56 billion in the same calendar year. So, a difference of $ 675 million was found in the same year. However, discrepancy in recording trade data declined and the difference of $ 294 million in reported data was found in 2015. 3.7.1 Trends toward Bilateral Trade

The table below shows that Pakistan’s imports from India are consistent with the flow of global exports to India. Between 2014 and 2015, India’s exports to the world declined, and so did Pakistan’s imports from India. Table 3.11 Pakistan’s Imports from India Vs India’s Export to World Year Pakistan’s Import from India’s Export to the India (%) World (%) (US $ Million) (US $ Billion) 2005 0.5 1.0 2006 1.1 1.2 2007 1.2 1.5 2008 1.7 1.9 2009 1.1 1.8 2010 1.6 2.1 2011 1.6 3.0 2012 1.5 2.9 132

2013 1.8 3.3 2014 2.1 3.1 2015 1.6 2.8 (Source: Author’s complication from various sources)

The percentage of Pakistan’s exports to India were a higher proportion than the percentage of India’s imports from the world during 2005 and 2008. However, Pakistan’s share started shrinking after 2008. Pakistan is not a major source of India’s imports, as her import from Pakistan was only US $ 312 million in 2015. Table 3.12 Pakistan’s Export to India vs India’s imports from the world Year Pakistan Export to India India Import to the World (%) (US$ Million) (%) (US $ billion) 2005 3.2 1.5 2006 3.1 1.9 2007 2.9 2.0 2008 3.5 3.1 2009 2.2 2.8 2010 2.8 3.5 2011 2.8 4.8 2012 3.5 5.0 2013 4.0 4.8 2014 3.9 4.7 2015 3.0 4.0 (Source: Author’s complication from various sources)

The compiled data in the table below reveals that the percentage of bilateral trade in compare to both countries’ global trade is remained low from several years. India’s share in in Pakistan’s total global trade was recorded greater than Pakistan’s share in India’s global trade from 2010 to 2015. The table below indicates that share of India in Pakistan’s global trade fluctuated from minimum 2.73% to maximum 3.46% from 2010-2015. While Pakistan’s share in India’s global trade remained less than 1% in the same colander years.

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Table: 3.13 Share of Bilateral Trade in Country’s Global Trade Years Share of Pakistan in Share of India in India’s Trade Pakistan’s Trade 2010 0.45% 3.1% 2011 0.27% 2.73% 2012 0.27% 2.81% 2013 0.32% 3.30% 2014 0.35% 3.46% 2015 0.37% 3.00% (Source: Author’s complication from various sources) 3.7.2 Top Ten Exports of Pakistan to India at HS-02 Level

The table below show that top ten Pakistan’s exports to India, at HS-02 level, consist of Agriculture products (it includes cotton, salt, edible fruit and nuts), untanned leather, Iron and Steel, medical or surgical instruments and apparatus. Exports of all mentioned below products (except copper and inorganic chemicals) have increased since 2011. Table 3.14 Pakistan’s Top 10 Export to India at HS – 02 Level

(All values in USD Million) Code Product Label 2011 2012 2013 2014 2015 All Products 27.86 347.99 402374 392.21 312.28 08 Edible fruit and nuts; peel of 47.86 67.18 73.97 64.34 68.39 citrus fruit or melons 25 Salt; Sulphur; earths and 48.00 52.79 45.06 53.95 56.28 stone; plastering materials, limes and cements 52 Cotton 30.51 81.66 42.38 60.15 48.58 41 Raw hides and skin (other 12.98 9.83 20.64 36.20 34.33 than fur skins and leather 90 Optical, photographic, 6.72 8.30 7.60 9.89 14.06 cinematographic, measuring, checking, precision, medical or surgical instruments and apparatus; parts and accessories thereof 28 Inorganic chemicals; 14.81 14.75 13.24 11.99 11.40 organic or inorganic compounds of precious metals, of rare-earth metals, of radioactive elements or of isotopes

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74 Copper and articles thereof 11.32 21.37 34.52 33.56 11.07 39 Plastics and articles thereof 8.93 10.71 5.09 16.90 1087 72 Iron and steel 6.53 11.55 11.72 14.30 7.22 51 Wool, fine or coarse animal 6.17 8.34 13.17 10.85 7.01 hair; horsehair yarn and woven fabric Source: Author’ Compilation from various sources 3.7.2 Top Ten Imports of Pakistan from India (HS-02)

Table below shows Pakistan’s top ten imports from India at HS-02 level. These are includes edible vegetables, plastics, tanning or dyeing extracts and cotton. Pakistan imported cotton worth of $ 305 million, in 2011, from India. The figure reached to $ 341 million in 2015. However, Imports of edible vegetables, and residues and waste from food industries and organic chemicals are declining since 2011. Table 3.15 Table Pakistan’s Top 10 Imports from India at HS – 02 Level (All values in USD Million) Code Product Label 2011 2012 2013 2014 2015 All Products 1607 1572 1874 2104 1669 52 Cotton 305.50 190.56 408.86 381.17 340.99 29 Organic Chemicals 373.34 308.24 259.12 237.77 187.19 07 Edible vegetables and 141.09 201.49 230.66 251.96 125.87 certain roots and tubers 39 Plastic and articles thereof 67.50 85.81 149.53 157.07 120.86 32 Tanning or dyeing extracts; 41.19 45.48 57.14 89.40 92.14 tannins and their derivatives; dyes, pigments and other coloring 12 Oil seeds and oleaginous 39.51 48.89 47.52 65.28 78.80 fruits; miscellaneous grains, seeds and fruit 23 Residues and waste from 186.31 268.33 297.35 209.92 68.75 the food industries; prepared animal fodder 55 Man-made staple fibers 22.94 42.43 42.81 56.71 61.63 38 Miscellaneous chemical 49.20 53.14 44.36 64.77 57.79 products 84 Machinery Mechanical 24.70 23.23 30.23 58.90 57.74 appliances, nuclear reactors, boilers; parts thereof Source: (Author’s complication from various sources)

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3.7.4 Top Ten Exports of Pakistan to India (HS-06):

The data given below shows that Pakistan’s exports to India (at HS-06 level) increased from 2011till 2013, as it was $ 272 million in 2011 and $ 402 million in 2013. But the figures show the decline in export in 2014 and 2015. However, the major share of exports at HS-06 level products were fresh and dried dates (its share was highest) and Portland cement (its share was second largest) during these calendar years. It is notable that the export of medical and surgical instruments (and appliances) was low at $ 5.66 million in 2011but it jumped to $1096million (which proves its high demand in India). Table 3.16 Pakistan’s Top 10 Exports to India at HS – 06 Level (All values in USD Million) Code Product Label 2011 2012 2013 2014 2015 All Products 272.86 347.99 402.74 392.21 312.28 080410 Fresh or dried dates 47.18 67.13 73.41 63.64 67.93 252329 Portland cements 36.65 32.81 24.60 35.91 36.91 (excluding white whether or not artificially colored) 520100 Cotton, neither 2.05 63.71 20.10 36.81 25.86 carded nor combed 410712 Grains splits leather 6.02 4.88 10.81 14.13 19.46 “incl. parchment- dressed leathers, of the whole hides and skins of bovine 520942 Demine, 2.82 4.66 7.51 10.84 14.14 Containing>= 85% cotton by weight and weighing? 200gm2, made of yarn 252010 Gypsum; anhydrite 6.34 15.78 14.85 13.72 12.30 901890 Instruments and 5.66 7.46 5.87 7.45 1096 appliances used in medical, surgical or veterinary sciences, n.e.s

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740400 Waste and scrap, of 8.81 18.63 28.82 27.55 9.22 copper (excluding ingots or other similar unwrought shapes 283620 Disodium 9.16 5.91 7.23 8.99 8.70 carbonate 390410 Polyvinyl 5.29 4.66 4.12 12.37 8.69 Chloride:, in primary forms, not mixed with any other substances (Source: Author’s complication from various sources)

3.7.5 Top Ten Imports of Pakistan from India (HS-06):

Pakistan’s top imports from India also follow a similar trend as flow of exports from Pakistan to India: with imports increasing from 2011 to 2014, and then declining. In 2015, imports from India to Pakistan amounted to $ 1.67 billion. Top three products were cotton, neither carded nor combed, polypropylene and tomatoes, fresh or chilled. Table 3.17 Pakistan’s Top 10 Imports from India at HS – 06 Level (All values in USD Million) Code Product Label 2011 2012 2013 2014 2015 All Products 1607 1572 1874 2104 1669 520100 Cotton, neither carded nor 291.93 161.72 294.98 282.02 273.47 combed 390210 Polypropylene, in primary 41.19 45.37 90.72 114.18 84.63 forms 070200 Tomatoes, fresh or chilled 76.18 112.64 128.17 119.66 69.21 230400 Oilcake and other solid 186.31 263.20 291.43 193.65 68.70 residues, whether or not ground or in the form of pellets, resulting from the extraction of soya-bean oil 320416 Synthetic organic reactive 17.90 21.30 29.65 44.37 49.10 dyes; preparations based on synthetic organic reactive dyes of a kind used to dyed fabrics or produce colorant preparation

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71310 Dried shelled peas “Pisum, 0.04 6.31 37.30 41.37 47.31 sativum” whether or not skinned or split 540752 Woven fabrics of yarn 0.00 0.37 17.35 31.15 46.10 containing >=85% by weight of textured polyester filaments, Inc. monofilament of >=67 decitex and maximum diameter of <=1 mm, dyed 890800 Vessels and other floating 4.12 18.36 14.36 62.65 39.36 structures for breaking up 550410 Staple Fibers of viscose 21.81 32.83 24.39 35.93 31.85 rayon, not carded, combed or otherwise processed for spinning 290243 P-Xylene 210.58 165.47 123.72 82.79 27.50 (Source: Author’s complication from various sources)

3.8 Trade Potential between Pakistan and India under SAFTA

This section of the chapter analyzes the trade potential between Pakistan and India through static measure.The potential that exists for a particular good (keeping the other factors constant) is called the trade potential. An analysis of import and export patterns of Pakistan and India indicates that at what extent the trade can take place between them. For this purpose data is taken from World development Indicators (WDI) and World Integrated Trade solution (WITS). Both are world recognized databases. To calculate export potential of Pakistan to India, the formula is used here:

EP = Min (Pakistan’s export to the world of X, India’s imports from the world for X) – Pakistan current exports to India of X

Explanation

Here, EP is abbreviated for Export Potential and Min for Minimum. Export potential of Pakistan is calculated by subtracting the exports of Pakistan to the world or the imports of India from the world (whichever value is lower) 138 by the current export of Pakistan to India current in selected commodity. However, this method does not pay attention to the possible differences in the components of trade creation through the opening up new markets. At best it presumes trade diversion.

3.8.1 Pakistan’s Top High Potential Export Sectors to India

Pakistan exported $ 312 million to India in 2015. It has the potential to export products (excluding petroleum products) worth $ 3.3 billion more according to data for 2015. Pakistan has the most potential to export products in the areas of textile and clothing. However, the product with the highest potential is “Instruments and appliances used in medical, surgical or veterinary sciences, n.e.s.” Table 3.18 Pakistan’s Top High Potential Export Sector to India All values in USD Million Sr. No Sector Pakistan’s Pakistan’s Indicative Export to export Potential in 2015 India in 2015 1. Textiles and Clothing 61.10 844.37 2. Miscellaneous 15.33 471.32 3. Metals 20.38 291.13 4. Plastic or Rubber 13.49 275.92 5. Chemicals 14.58 266.32 6. Mach and Elect 0.97 248.62 7. Food Products 3.44 223.45 8. Vegetable 77.53 166.97 9. Minerals 59.43 130.64 10. Hides and Skins 35.23 123.37 11. Footwear 0.29 81.57 12. Wood 0.68 72.66 13. Transportation 0.07 69.86 14 Stone and Glass 60.8 45.43 15 Animal 0.67 32.86 (Source: Author’s complication from various sources) 3.8.2 Pakistan’s Top High Potential Import Sectors from India

Pakistan’s imports from India in 2015 amounted to $ 1.67 billion. The table below shows the top high potential import sectors from India. 139

Pakistan’s top import sectors from India consist of Machinery and Electrical/Electronic Equipment ($ 4.18 billion), Chemicals ($ 2.60 billion) and Transportation ($ 1.81 billion). Table 3.19 Pakistan’s Top High Potential Import Sector from India Al values in USD Million Sr. No Sector Pakistan’s Imports Pakistan’s From India in 2015 Indicative Import Potential in 2015 1. Machines and 47.51 4182.73 Elec 2. Chemicals 310.82 2607.81 3. Transpiration 0.18 1823.07 4. Metals 11.41 1757.81 5. Textiles and 386.04 1319.74 Clothing 6. Plastic or 165.47 1232.34 Rubber 7. Miscellaneous 16.35 813.85 8. Vegetables 61.24 798.91 9. Food 78.98 539.59 Products 10. Stone and 9.82 238.6 Glass 11. Wood 5.45 203.51 12. Footwear 0.15 58.25 13. Minerals 0.04 42.3 14 Animal 15.66 33.26 15 Hides and 1.47 25.28 Skins (Source: Author’s complication from various sources)

3.8.3 Pakistan’s Top 20 High Potential Exports to India

The table shows that Pakistan had total export potential of US$ 21776 million in the year 2015. While, it’s total export to India were only US$ 312 million. The top 20 high potential HS-6 level products which were exported to India in 2015 were count for 53.532 US million dollar. Pakistan exported the same 20 products to the world for 3816.02US million. The table shows that in these products Pakistan has great potential to enhance its export to India and try to find out that what kind of hindrance are there in increasing the export volume

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to India in these products. The table shows that out of these 20 top potential export items 7 are included in the sensitive list of India. The items which are included to sensitive list are: Cotton, neither carded nor combed, marble nor travertine, merely out, by swing or otherwise, and into blocks or slabs of square; Women’s or Girls trousers, bib and brace overalls; breeches and shorts of cotton. Fresh or chilled onions and shallots. Sesames sees, whether or not broker. Men’s or Boys trousers, bib and brace overalls, breeches and shorts of cotton. India applies high tariffs on these items.

Table 3.20 Pakistan Top 20 High Potential Exports to India

Is this HS-6 Product are any of its sub- Pakistan’s Tariff Pakistan’s India’s Pakistan’s categories Product exports applied by Product Label experts to imports from exports to on India’s Code Potential in India on India 2015 world 2015 world 2015 NLDC 2015 Pakistan Sensitive List Y = Yes, N = No All values in USD Millions All products 312 390,744 22,089 21,776 Instruments and appliances used in 901890 medical, surgical or veterinary 10.96 529.26 332.64 321.68 6 N sciences, n.e.s. Polyethylene terephthalate in 390760 primary forms 0.295 128.17 117.09 116.09 5 N Medicaments consisting of mixed or unmixed products for 300490 therapeutic or Prophylactic purpose 0.023 517.71 80.67 80.65 10 N

520100 Cotton, neither carded nor combed 25.859 386.49 105.59 79.73 0 Y Denatured ethlyl alcohol and other 220720 spirits of any strength 1.58 147.63 76.67 75.09 7.5 N Tubes, Pipes and hollow profiles 740400 e.g, open seam, riveted or similarly 9.22 779.78 72.45 63.23 10 N closed Men’s or Boys trousers, bib and 620342 brace overalls, breeches and shorts 0.19 60.72 762.15 60.53 32.9 Y of cotton Articles and equipment for sports 950699 and outdoor games n.e.s swimming 0.45 83.18 44.80 44.34 10 N and paddings pools Footwear with outer soles of 640399 rubber, plastics or composition 0.19 430.2 74.026 42.83 10 Y leather Marble and travertine, merely out, 251512 by swing or otherwise, into blocks 0.12 294.62 39.37 39.25 10 Y or slabs of square 261000 Chromium ores and concentrates 1.32 38.38 70.93 37.05 2 N Paper and paperboard, surface- 481159 coloured, surface decorated or 0.28 36.38 40.17 36.1 10 N printed coated unrebated Leather “Incl. parchment-dressed 410719 leather” of the whole hides and 2.41 70.45 38.39 35.98 7 N skins of bovine Medicaments containing hormones 300439 or steroids used as hormone but not 0 80.98 33.63 33.63 10 N antibiotics

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Fresh or chilled onions and shallots 70310 0.045 31.35 38.98 31.30 12.5 N Sesamum sees, whether or not 120740 broker 0.58 29.68 40.50 29.11 30 Y Blankets and travelling rugs of 630140 Synthetic fibers (excluding electric, 0 46.19 28.37 28.37 10 N table covers, bedspreads) Table, Floor, Wall, Window, 841451 Celling or roof fans, with a self- 0.003 71.32 28.17 28.17 9 Y Contained electric mother Women’s or Girls trousers, bib and 620462 brace overalls, breeches and shorts 0.007 27.18 528.52 27.10 35.4 Y of cotton Made-up articles of textile 630790 materials, inc. dress paterms, n.es 0 26.35 38.50 26.35 10 N Total 53.532 3816.02 2591.616 1236.58 Source: derived 3.8.4 Pakistan’s Top 20 High Potential Import from India

Table below shows that Pakistan imported mentioned below 20 products on HS-6 from India worth US$ 568.12million in 2015, whereas Pakistan imported the same items in same year from the world worth of US$ 6196 million. Out of these products, 8 products are included in the negative list of the Pakistan. These products includes: Motor cars and other motor vehicles

principally designs of the transport of persons; Medicaments consisting of

mixed or unmixed products for therapeutic or prophylactic purpose; Staple fibers of polyesters, not carded, curbed or otherwise processed for spinning. On Motor cars, cycles and other vehicles, Pakistan charged 92 % tariff. Table shows that Pakistan has great potential to import these items from India instead of from the world.

Table 3.21 Pakistan Top 20 High Potential Import from India

Is this HS- 6 Product Equivalen are any of t ad its sub- Pakistan’s Pakistan’s India’s valorem categories Product imports Potential Product Label Imports export to tariff on Code from in 2015 from India world applied by Pakistan world faced to Negative Pakistan list Y = Yes, N = No Black Fermented tea and partly 23.85 600.13 449.11 425.27 10 N 90240 fermented tea, whether or not flovered, in immediate packing’s

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Motor Cars and other motor 0.00 1225.85 345.87 345.87 53 Y 870321 vehicles principally designed for the transport of persons Oilcake and other solid residues, 68.70 436.59 396.94 328.24 5 N 230400 whether or not ground or in form of pellets 390210 Polypropylene, in primary forms 84.63 739.18 412.10 327.47 5 N Motor cars and other motor 0.00 2953.33 293.16 293.16 60 Y 870322 vehicles principally designs of the transport of persons Medicaments consisting of 10.50 9330.57 283.57 273.16 14 Y mixed or unmixed products for 300490 therapeutic or prophylactic purpose Cotton, neither carded nor 273.47 1860.98 543.75 270.28 2 N 520100 combed 290243 P-Xylene 27.50 551.68 265.85 238.34 5 N 300220 Vaccines for Human medicine 8.66 632.55 226.24 217.58 5 N Aero planes and other powered 0.00 1900.48 213.08 213.08 5 N 880240 aircraft of an of an un laden weight 15000 kg New Pneumatic tyres of rubber, 21.79 434.58 230.89 209.09 10 N 401120 of a kind used for buses and lorries Textured filament yarn of 0.00 742.75 203.49 203.49 5 Y 540233 polyester (excluding that put up for retail sale Motor cars and other motor 0.00 762.94 188.31 188.31 92 Y 870323 vehicles principally designed for the transport of persons Chemical product and 16.90 194.65 211.97 177.75 5 N 382490 preparations of the chemical or allied industries Flat-rolled products of iron or 0.00 624.41 177.31 177.31 5 Y no-alloy steel of a width of >= 721049 600 mm, hot-rolled or cold- rolled Machines for the reception, 0.00 168.85 240.89 168.85 5 N 851762 conversion and transmission or regeneration of voice, images Telephones for cellular network 0.00 166.75 749.99 166.75 12 Y 851712 “mobile telephone” or for other wireless networks Staple fibers of viscose rayon, 31.85 268.27 179.91 148.06 5 N 550410 not carded combed or otherwise processed for spinning Photosensitive semiconductor 0.22 146.35 445.39 146.13 5 N 854140 devices, inc. photovoltaic cells Staple fibers of polyesters, not 0.05 200.92 138.18 138.13 5 Y 550320 carded, curbed or otherwise processed for spinning 568.12 23941.81 6196 4656.32 313 Source: derive

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3.9 Chart wise description of Bilateral Trade Relations between Pakistan and India

Pakistan Trade with India (US $ Million) 3000

2500

2000

1500

1000

500

0 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Pak Export to India Pak Import from India Trade Balance

Source: Made by Author with reference to table # 3.9

Bilateral Trade as a Percentage of Country’s Global Trade (US $ Million)

Share of Indi in Pakistan’s Trade

Share of Pakistan in India’s Trade

0.00% 0.50% 1.00% 1.50% 2.00% 2.50% 3.00% 3.50% 4.00%

2015 2014 2013 2012 2011 2010

Source: Made by Author with reference to table # 3.13

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Pakistan – India Trade Data Discreptncies (US $ Million) 4,000

3,000 1,640 1,915 1,797 1,507 2,000 1,326 1,133

1,000 1,713 1,640 1,285 1,334 1,225 1,471 0 2010 2011 2012 2013 2014 2015

Pakistan Trade Deficit with India India’s Trade Surplus with Pakistan

Source: Made by Author with reference to table # 3.10

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Pakistan’s Export to India’s vs India’s imports from the world

10

9

8

7

6

5

4

3

2

1

0 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 Pakistan Export from India (%) India Import to the World (%)

Source: Made by Author with reference to table # 3.12

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Pakistan’s Imports from India Vs India’s Export to World 6

5

4

3

2

1

0 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Pakistan Import from India (%) India Export to the World (%)

Source: Made by Author with reference to table # 3.11

Pakistan's High Potential Export and Import (US $ Million)

Chemicals

Plastic Or Ruber

Metals

Miscellaneous

Textile and Clothing

0 500 1000 1500 2000 2500 3000 3500 4000 4500

Value in US$ Million Imports Value in US$ Million

Source: Made by Author with reference to table # 3.12

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Pakistan’s Top High Potential Export Sectors to India

Textiles and Clothing Miscellaneous 0% 17% 17% Metals 0% 4% Plastic or Rubber 10% 6% Chemicals 4% 4% Mach and Elect 16% 1%0% 21% Food Products Vegetable Minerals

Source: Made by Author with reference to table # 3.16

Pakistan’s Imports From India in 2015

Machines and Elec Chemicals 7%1%1%0%1%0%4% Transpiration 6% Metals 1% 28% Textiles and Clothing 15% Plastic or Rubber 1%0% Miscellaneous

35% Vegetables Food Products Stone and Glass

Source: Made by Author with reference to table # 3.17

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References

Ali, M. (1996). Foreign Trade Pattern of Pakistan. Chamber of Commerce and Industry. New Delhi: PHD House, 4/2 Siri Institutional Area, August Kranti Marg, New Delhi 110016.

Battista, A. (2016, September 28). What makes South Asia the fastest growing region in the world? Retrieved from https://www.weforum.org/agenda/2016/09/what-makes-south-asia-the- fastest-growing-region-in-the-world/: https://www.weforum.org/agenda/2016/09/what-makes-south-asia-the- fastest-growing-region-in-the-world/

Bureau, P. (2013). India-Pakistan Bilateral Trade: Past, Present & Future. PHD Chamber of Commerce and Industry, 3-8.

Burki, S. (2006). South Ssia and the Multilateral Tading System. Lahore: South Asian Policy Analysis Network (SAPANA).

Dixit, J. (2003). India and Regional Development Through the Prism of Indo-Pak Relations. New Delhi: Gayan Book Publishers, Pvt Ltd.

Khan, M. (2013). India-Pakistan: Trade Relations. new america foundation , 2-15.

Kugelman , M., & Hathaway, R. (2013). Pakistan-India Trade: What Needs to Be Done? What Does It Matter? Washington DC: Wilson Center\.

Pasha, H., Burki, S., & Imran, M. (2012). A Primer: Trade Relation between Pakistan & India (1947-2012). US AID Trade Project.

Pettinger, T. (2017, April 25). Washington Consensus-definition and criticism. Retrieved from https://www.economicshelp.org/blog/7387/economics/washington- consensus-definition-and-criticism/: https://www.economicshelp.org

Schwab, K. (2017). The Global Competitiveness Report 2016-17. Retrieved from http://www3.weforum.org/docs/GCR2016- 2017/05FullReport/TheGlobalCompetitivenessReport2016-

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2017_FINAL.pdf: http://www3.weforum.org/docs/GCR2016- 2017/05FullReport/TheGlobalCompetitivenessReport2016-2017_FINAL.pdf

Tabish, M., & Khan, M. (2011). Harnessing India Pakistan Trade Potencial. Indo- Pakistan Economic Cooperation.

Taha, M. (2012). Pakistan-India Trade Policy Under WTO. Pakistan Horizon, 114- 138.

Taneja, N., Mehra, M., Mukherjee, P., Bimal, S., & Dayal, I. (2014). http://www.indiapakistantrade.org/pdf/India-Pakistan-Summary.pdf. Retrieved from http://www.indiapakistantrade.org: Summary of Research Studies

Taneja, N., Mehra, M., Mukherjee, P., Bimal, S., & Dayal, I. (2013). Normalizing India Pakistan Trade. Indian Council For Research on Interanation Economic Relations.

Trade Map, 2010, International Trade Center (ITC)

Trade Map, 2011, International Trade Center (ITC)

Zaidi, S. (2006). Issues in Pakistan's Economy: A Political Economy Perspective. Karachi: Oxford University Press.

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Chapter 4

The Non-Tariff barriers to bilateral Trade under SAFTA

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This chapter highlights the barriers and hurdles which slowdowns the smooth sailing of bilateral trade liberalization process between Pakistan and India. It mainly focuses on the non-tariff barriers (barriers to trade other than tariffs) to trade which are imposed by Pakistan and India on each other’s export which alters the spirit of free trade in the purview of SAFTA. It also indicates the Interstate political conflicts and domestic politico-economic dimensions and external elements which affect the trade liberalization process negatively from both sides.

4.1 What are Non-Tariff Barriers (NTBs)

Usually, states applies direct taxes to foreign products for two reasons; (a) to collect the revenue and (b) to protect domestic producers from foreign competition. These taxes are called tariffs, but the theory of free trade demands zero tariff on reciprocal basis. However, to protect their domestic industry (where states have entered into one or more than one free trade agreements), states apply non-tariff barriers to restrict specific imports (that may cause severe damage to their domestic industry) in some cases. These practices are allowed in limited areas under anti-dumping laws of WTO, but if it exceeds its limits, it violate the spirit of free trade.

In the case of SAFTA, India and Pakistan both are in agreement (like other SAARC members) to gradually adopt the zero tariff policy (see chapter two for details) towards each other’s exports, but practically, both have not been achieved the target yet. While, both governments impose non-tariff barriers to bilateral trade which increase the cost of doing business and condemn the fruit of free trade in the region.

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Defining NTBs is not an easy job, because countries do not impose any restriction to import on the name of “non-tariff restriction to trade”. However NTBs refer to all government imposed and government sponsored measures that are used to protect domestic industry. WTO provides legitimacy to some NTBs, which include measures to protect national security, sanitary and phytosanitary measures, the environment and technical barriers to trade (WTO, 2011).

4.2 A Comparative Analysis of NTBs in India and Pakistan

The comparative study of NTBs in India and Pakistan will help to identify the non-tariff barriers which are in practice at both sides. Further, it high-lights that which country use excessive NTBs towards each other.

4.2.1 A Brief Preview of Non-Tariff Restrictions on Imports in India

Though India has started follows the trade policies since late 1990, yet its trade policy is relatively restrictive in compare to other SAARC member states. India had soften its replace its tariff regime with non – tariff trade embargo. According to information collected from UNCTAD & WTO Tariff analysis data base, India discourage imports in different technical basis, for example, to discourage import in food items India, impose SPS Measures and other WTO’s approved international standards. The agenda behind is that India want to be develop Self – sufficient in food sector but it relax this policy in the day of inflation or food shortage  On One hand India had organized its customs procedures in the light of SAFTA’s trade liberation program to facilitate

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intraregional trade but on other hand it uses anti-dumping laws of WTO excessively  The Trade Policy, to limit the quantity of the merchandise, is considered the core NTB to Imports. While India is the frequent user of this policy. It uses several quantitative measures including safe measures to limit the imports in certain selected goods  India does not provide level playing’s field for foreign producer in selective sectors as it subsidies them from direct or indirect way (example is agriculture sector) Petroleum, Oil and Lubricants (Pol) Products  Certain goods are subject to pre-shipment inspection the goods include in this category are scrap metallic waste and textile etc.  India impose quota and tariff rate quotas on certain food products and raw material. In addition, it charge additional customs duty (in lieu of union taxes), a special additional duty (in lieu of state taxes), the union education cess and some sub- national taxes (like octroi)  Another core NTB reference prices are applied in accordance with global market prices, these prices are revised after every two weeks. In the same manner, for selected items, minimum import prices are also determined. Imports of various goods are only allowed on selected ports only. This practice increase the cost of transportation and actually discourage imports  Reference prices have been established for some products, which are revised every two weeks to align with international market prices. In addition, minimum import prices have been set for a number of items.

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Some goods can only be imported through specified ports. This tends to raise transport costs to particular locations and is, therefore, a NTB.

India maintains state trading for certain agricultural goods (especially cereals) which are imported by specified state agencies. This is characterized as a monopolistic price and, therefore, a NTB. Public procurement operates under a set of reservations and price preferences. Only domestic firms can supply particular goods and are given a price advantage in other goods. Improvements have been made in intellectual property enforcement in recent years. This is classified as a NTB according to UNCTAD, as it involves a process to determine if there have been no patent violations.

4.2.2 Goods Covered Under Different NTBs

The NTBs adopted by India vary in their application. Below are 14 main NTBs applied by India and the respective categories of goods subject to each type of these NTBs? Table: 4.1 Goods Covered Under Different NTBs Pre-shipment Unshielded and shredded metallic waste and Inspection: scrap, some textiles and clothing articles Para- tariffs: On all goods, an additional duty equivalent to central excise duty (generally 10%), special additional customs duty at 4% in lieu of state taxes, 3% education cess, octroi in some ports, fuel cess on HSD and petrol, national calamity contingent duty (NCCD) on pan masala, cigarettes and tobacco products:, clean energy cess on coal, lignite and peat. Import Prohibitions On 51 items (at 8 digit HS level) including a range of livestock products, ivory and ivory powder, mobile handsets (without IMEI number) Reference Prices: For calculation of customs duty payable on palm oil, Palmolive oil (crude and RBD), crude soya bean oil, poppy seeds and brass scrap.

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Import licensing: 442 tariff lines (at 8 digit HS level), primarily on live animals and products (19%), vegetable products (9%), mineral products (12%) pulp, etc. (8%); arms and ammunition (80%), works of art (12%) Minimum Import Price 24 tariff lines, including betel nuts, retreaded tires; used pneumatic tires, marble tiles and products, cement bricks and other building blocks and bricks, other articles of cement, concrete boulders Transportation Motor vehicles and second-hand cars (less than Restrictions: three years old), animal products and fish products through specified ports. Also, on tea and garments from Sri Lanka. State Trading: 33 tariff lines including wheat, rye; oats; rice, grain sorghum; millet; jawar, bajra; copra; crude coconut oil; some chemicals like special boiling point spirits; aviation fuel; high speed diesel oil; kerosene oil; urea Anti- dumping 207 anti-dumping measures in force. Applied on Measures: China (32%), Republic of Korea (9%) Thailand (7%); EU (6%); Japan (4%); US (4%). By product; Machinery and mechanical/ electrical appliances (21%); chemicals and products (37%); plastics and rubber articles (13%); base metals and products thereof (17%) Import Quotas: On marble and similar products. Monitoring of 415 sensitive items including milk and milk products; fruits and vegetables; pulses; poultry; tea and coffee; food grains; edible oils, cotton and silk. 18623 Indian standards and 84% harmonized with international standards. BIS sets standards for 14 sectors including production and general engineering, civil engineering; chemicals; electro-technical; food and agriculture; electronics and information technology; mechanical engineering; management and systems; metallurgical engineering; textiles; water resources; medical equipment and hospital planning Packaging and Special requirements for all food items, products Labeling: containing natural flavoring substance, medicines, source of gelatin. Ingredient declaration required for food. Specific labeling

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requirements for infant milk substitutes, infant foods, bottled mineral water and milk products. Sanitary and 71 notifications including measures on food Phytosanitary items including processed food, pet food Measures: products of animal origin; plants and plant materials; food packaging materials; horns/hooves of animals; meat and meat products; milk and milk products; food additives; maximum residue limits (MRLs) of different pesticides in carbonated water; MRLs of pesticides on different food commodities; pre- packaged food; and food safety and standards rules. Special Quarantine Animals and animals products some Requirements: plants/planting materials Source:(A study on Trade Normalization process, Ministry of Commerce Pakistan, 2012)

The level of Para-tariffs imposed by India is high, in some cases exceeding 30% (Kayani & Shah, 2014). Import restrictions apply primarily on livestock products, while reference prices are used for edible oil imports. Import licensing is generally used for regulating food imports. Minimum import prices are applied in the case of items which are vulnerable to under invoicing. Some products such as used vehicles can only be imported through specified ports (presumably because of complexities in customs valuation).

India also maintain State monopoly in number of food items, especially cereals and POL products, can only be made by specified state trading agencies (especially to enable provision of subsidies). India has started applying some anti-dumping measures, especially for items imported from China and apply largely on manufactured goods. India monitors imports of 415 ‘sensitive’ items, mostly related to food.

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A large number of standards, which are in tune with international standards, are being applied by India. Packaging and labeling requirements are specified mostly for food items and medicines while there are as many as 71 notifications on SPS measures.

Agricultural products and textiles are of special interest to actual and potential Pakistani exporters to India. The former face the largest number of NTBs on imports from all sources, including import licensing, quota or prohibition, transportation restrictions, import only by state trading agencies, application of SPS and TBT measures and quarantine requirements.

Textile exports to India also face a number of NTBs including pre- shipment inspection, high para-tariffs, and SPS measures along with relatively high tariffs. These are, of course, standard procedures applied by most countries on import of textiles.

4.3 The Law/Regulations and Relevant Agencies on NTBs in India

All non-tariff custom procedures, Laws, regulations and implementing agencies are listed below in the table 4.2. The key agencies are Bureau of Indian Standards (BIS); the Directorate General of Foreign Trade (DGFT); Directorate General of Safeguards; Customs and Directorate General of Anti-Dumping and Allied Duties (DGAD).

Table 4.2: NTM Laws/Regulations & Implementing Agencies in India NTM/Procedures Laws/Regulations Agency Customs Procedures

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Registration Foreign Trade Directorate General (Development and of Foreign Trade Regulation ) Act, 1992 and (DGFT) 2010 Pre-shipment Handbook of Procedures Accredited certifying Inspection 2009-2014, Deptt. of Agencies Commerce Customs Valuation Customs Act 1962; Customs department Customs Valuation Rules, 1988 (a) References Prices Customs Notification Customs department No. 36/2001 Import Prohibition / Import Policy Ministry of Customs department Restrictions Commerce; Foreign Trade Policy 2009-14 Import Licensing Foreign Trade DGFT (Development and Regulation Act, 1992 and 2010 Import Quotas DGFT Notifications DGFT Anti-Dumping and Customs Tariff Act, 1975 Directorate General Countervailing and 1995, and Rules of Anti – Dumping Measures and Allied Duties (DGAD) Safeguards Customs Tariff Act, 1975, Directorate General with rules (Safeguards) in Dept of Revenue Standards Technical Bureau of Indian Standards Bureau of Indian Regulations and Act 1986 and rules Standards, (BIS)* Certification

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Accreditation of National Laboratories Accreditation Board for Testing and Calibration Laboratories (NABL), Ministry of Science & Technology Labeling Legal Metrology Act 2009 Ministry of Health with rules and Family Welfare Source: (data is compiled from ICRIER and World Bank documents, Indian chapter)

Table 4.3: Sanitary & Phtyosanitary Legislation Legislation Description Implementing Institutions Prevention of Food Aims to protect consumers Central Committee for Adulteration Act against the supply of Food Standards under 1954 Adulterated food. It the Directorate General specifies minimum quality of Health Services level standard for various (Ministry of Health and food products. The Act is Family Welfare) mandatory: infringement may lead to fines and imprisonment Essential Regulates the Central and state Commodities Act manufacture, commerce, government agencies 1954 and distribution of essential commodities, including food. A number of control orders have been formulated under the provisions of this Act Fruit Products Regulates the manufacture Ministry for food Order 1955 and distribution of all fruit processing Industries and vegetable products, sweetened aerated water, and vinegar and synthetic syrups. The manufacture

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or re-labeling of products require a license from the Ministry for food Processing Industries, which is granted when the quality of products, sanitation, personnel, machinery, and equipment and work area standards are satisfactory Solvent Extracted These orders control the D rectorate of Oils, De-Oiled production and Vanaspati, Vegetable Meal, and Edible distribution of solvent Oils, and Fats under the Four Control Order extracted oils; de oiled Department of food 1964;Vegetable meal, edible flours, and and Public Distribution Products Control hydrogenated vegetable (Ministry of Consumer Order 1976 oils (banaspati). Affairs, Food, and Production and Public Distribution) distribution of the above- mentioned products require a license, which is granted when products conform to the specifications laid down in the schedules. The Directorate also regulates the price of Vanaspati Meat Products Regulates the Department of Control Order 1993 manufacture, quality. And Marketing and sales of all meat products Inspection Under the Department of Agriculture and Cooperation (Ministry of Agriculture) Milk and Milk Provides for setting up an Department of Animal Product Order 1992 advisory board to advise Husbandry, Dairying, the Government on the and Fisheries ( products, sale, purchase, Ministry of and distribution of milk Agriculture) powder. Units with installed capacity for handing milk of over 10,000 liters tones per year, are required to register with the

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Department of Animal Husbandry and Dairying Livestock Allows the Central Department of animal Importation Act Government to regulate, Husbandry, Dairying, 1898 (amended in restricts, or prohibits and Fisheries ( 2001) Import of animal and Ministry of animal products into India Agriculture) Destructive Insects Regulates import of plants Directorate of plant and pests Act 1914 to prevent introduction Protection, Quarantine into and the transport from and Storage (Ministry one State to another in of Agriculture) India of any insects, fungus or other pest that is or may be destructive to crop Plant Quarantine It regulates the import of Plant Quarantine (Regulation of plants and plant materials Division in the import into India) Ministry of Agriculture Order 2003 Standards on They lay down certain Directorate of Weights Weights and obligatory condition for and Measures under Measures all commodities in packed Department of (Packaged from, with respect to Consumer Affairs Commodities) declarations on quantities (Ministry of Consumer Rules 1977 contained Affairs , Food, and Public Distribution

Source: Data is collected from:  SAARC NTM Bulletin, 2017;  SAARC Chamber of Commerce;  And ICRIER

4.4 Pakistan Specific NTBs of India

We now consider the NTBs and procedural obstacles in exports to India which may be categorized as solely Pakistan-specific. These obstacles are identified through primary data collection (open ended interviews) and from the available literature [based on surveys conducting by ministry of commerce Pakistan and Indian council for Research on international economic Relations (ICRIER)]. Which focuses on the following: 162

 Trade facilitation and Customs Procedures  SPS and TBT measures  Financial Measures  Para-tariff Measures  Visas (Taneja ,2007, Taneja et al, 2014)

4.4.1 Trade Facilitation and Customs Procedures

The most feasible route is the land route. The only operational rail route is through Wagha border. India permits (as per Customs Act) import through Amritsar Railway station, Attari road, Attari Railway station, Khalra, Assara Naka, Khavda Naka, Lakhpat, Santal pur Naka, Suigam Naka, Dekhi Railway station, Hussainwala, Bamer railway and Munabao railway station Goods from Kolkata are being shipped to Karachi via Singapore.  India does not permit Pakistan the transit facilities through its territory to Bangladesh and Nepal  Customs clearance of India through e-filing is not available on the land route  The customs authorities in India create special issues in the valuation of import of new items from Pakistan. Whereas, there is evidence of under-invoicing of traditional items like dates.  Sometimes, in the name of security, excessive checks are carried out on consignments from Pakistan. As a result, goods are held up for long periods at customs before they are cleared, especially at Mumbai port.

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4.4.2 The SPS &TBT Measures

India has established 24 standard setting agencies both at the national and provincial level, as compared to a single authority in Pakistan, the Pakistan Standards and Quality Control Authority (PSQCA). Due to this reason there is a Given that there is multiplicity in standards, which make problem more acute for Pakistani exporters to India, Moreover information in this regard are scarce. Further, the enforcement of standards is strict in India as compared to Pakistan.

As Pakistan has a tremendous export potential particularly in scare agriculture items and textiles, Pakistan exporters feel that these are precisely where SPS and TBT measures are most rigorously applied by India. Pakistani exporters would be immensely facilitated if there is an agreement with India with the effect that certification by Pakistani agencies will be accepted, as long as it adheres to international standards. A recent agreement has, in fact, been reached at in this regard. Leather items from Pakistan: traders complain that the samples of consignments are sent to specially those testing laboratories which are located far away from the port of entry in India.

Textiles: Pakistani exporters in Pakistan who export fabric to India complain that they are required to obtain a pre-shipment certificate from an accredited laboratory on the use of hazardous dyes. Generally it takes a long time. Over and above India requires the label to include Pakistani exporters’ manufacturer, description and sorted number of cloth and other details, including composition of cloth and printing or damaged pieces. This is, of course, the normal practice in most countries

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Agricultural items: obtaining the SPS certificate and testing requirements take a long time. Moreover, plant quarantine facilities are not available at Amritsar railway station. Testing requirements are available only in New Delhi and Mumbai.  Processed foods: products must have 60% of the shelf life at the time of import. This shelf life is often determined arbitrarily and without transparency.  Pre-packaged products: traders are required to give information on the retail sales prices (including cost breakup) in India. This requires time and increases transaction costs.

4.4.3 Financial Measures

At Amritsar and Lahore several firms trade without letters of credit (L/Cs). According to Pakistani exporters, some Indian banks do not recognize L/Cs from Pakistan banks (Kayani & Shah, 2014) which certainly causes significant delays. There are too no formal mechanisms for the settlement of trade disputes.

The Asian clearing union (ACU) mechanism is meant to insure payments in US dollars. However, traders complain about the inefficiency of the ACU mechanism, particularly with regards to the amount of time taken to settle transactions. There is also no other mechanism available. Pakistani banks are so far not allowed to operate in India. This is a significant impediment to bilateral trade.

4.4.4 Para-Tariffs

India imposes a countervailing duty of 10% on most items, a special countervailing duty of 4% and education cess of 3%. Exporters from

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Pakistan have to mention the minimum retail price (MRP) on packaged foods, without proper knowledge of distribution costs in India. Moreover, interstate taxes on the movement of goods in India are excessive and increase to the cost of imported goods.

4.4.5 Visas

India grants business visas to Pakistani traders. Bona fide businessmen are granted visas on the basis of an invitation from a recognized Chamber / Federation / Association. The problems are that visas are issued for a period of 15 days. This greatly restricts market development activity. Further, police reporting is required on their arrival and departure. The South Asian Association for Regional Cooperation (SAARC) business visas are available on a selective basis. Recently the period of validity was curtailed from one year to three months

Overall, Pakistan exporters face special restrictions in trade with India including problems in transportation, financial transactions and stringent visa requirements. Also there are also apprehensions that India applies NTBs more strictly on Pakistani imports, motivated partly by security considerations. Such apprehensions are difficult to validate. They reflect a trust deficit that needs to be overcome if the trade liberalization process is to proceed effectively. Hence, greater transparency in the application of NTBs and in the trade facilitation measures along with more direct interaction between Pakistani businessmen and their counterparts in India may alleviate many of the aforementioned issues and concerns over time.

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4.4.6 Indian Subsidies to Agriculture

India subsidizes inputs into agricultural production. It includes irrigation, electricity, and fertilizers (among others). According to the WTO (2011) the total subsidies in 2008-09 aggregated to USD $53 billion, representing over 5% of the GDP (as shown in Table 4.4). The subsidy per hectare was at approximately USD $300. The comparable figures for Pakistan for 2010-11 display agricultural subsidies of around USD $2.7 billion, equivalent to 1.2% of the GDP and per hectare of USD $118. Therefore, agricultural subsidies are almost three times higher in India than Pakistan. This artificially raises the competitiveness of India’s agricultural products. The Indian subsidies on agriculture are WTO compliant but they do represent a NTB and substantially limit the prospects of Pakistani exports of agricultural products to India (as was the case at the time of Partition). The level of subsidies as a percentage of the value of agricultural production is 15 percent. This can be treated as the ad valorem equivalent (AVE) of the subsidies Table 4.4: Subsidies to Agricultural Inputs in India (billion USD $) 2006-07 2008-09 Growth rate (%) Fertilizer 16.0 35.0 54.1 Electricity 4.7 6.0 18.1 Irrigation 4.0 5.2 18.0 Other (a) 1.1 7.2 162.9 Total Subsides 25.8 53.4 253.1 Memo Items Agricultural Value Added 196.3 232.1 Agricultural Production 294.5 348.2 GDP* (at current prices) 927.6 1018.9 Cropped Area (Million Hectares 178.4 179.3

Subsidies as % of value Added in 13 23 Agriculture Subsidies as % of GNP 2.8 5.2 Subsidy per hectare (USD $) 145 297 Subsidy as % of Value of Production 8.8% 15.3% *GNP at current prices Source: WTO Trade Policy Review, India Economic Survey, MOF India.

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4.5 The Application of Non-Tariff Barriers in Pakistan

The main policy instrument of Pakistan is the tariff regime. Industrial policy is influenced by a large number of Statutory Rules and Orders (SROs), indicates specify concessions and exemptions in tariffs by end use and product. However, the tariff schedule does not indicate the preferential tariffs on each product.

4.5.1 An Overview of the Non-Tariff Trade restricted laws in Pakistan

Pakistan largely applies transaction values and WTO’s customs valuation rules. Special valuation procedures apply to motor vehicles, both new and old, cosmetics and toiletries, motorcycles, and polyester yarn, among others. However, minimum import values apply only to motor cycle parts. Pre-shipment inspection is required for a range of used machinery and equipment.

Import prohibitions and licensing are applied for health, safety, security, religious and environmental reasons and include items like retreaded tires, alcohol, and some goods in transit to Afghanistan.

The quotas for imports apply to certain chemicals. Some imports under SROs require approval by relevant ministries or agencies, like the Engineering Development Board (EDB) for the import of components and parts for the automotive sector, finished pharmaceuticals by the Ministry of Health and Ministry of Food and Agriculture for import of wheat flour. Some Major NTBs are given below:

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 Beyond the customs duty, importers pay the general sales tax (GST) of 16%, a presumptive income tax at 5% on commercial importers and 3% on industrial importers.  Agriculture is subsidized through underpricing of inputs like fertilizer, electricity and irrigation water. Gas consumption is also subsidized  Involvement in trading remains substantial. The TCP imports (and exports) major agricultural commodities like wheat, sugar and urea, mainly to provide subsidies.  Price preferences (of up to 25%) remain on government procurement  Standards increasingly follow international requirements, largely applied uniformly on imports and domestic goods  Pakistan has strengthened protection of intellectual property rights (IPR) by adopting the 2004 Paris Convention and setting up the Intellectual Property Organization (IPO).  Preferential rules of origin exist under bilateral/regional trade agreements, incorporating various value addition requirements  Certain imports are restricted unless they meet specific conditions, such as prior approval or clearance, passing certain testing requirements or satisfying procedural requirements. This includes approval of finished and raw material imports of pharmaceuticals by the federal Ministry of Health (which has been devolved to the provincial governments) and licensing of concessional imports of materials, components and auto parts for the automotive sector by the Engineering Development Board (EDB).  Some State-Owned Enterprises (SOEs) enjoy preferential treatment. For example, Pakistan Steel Mills Corporation

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(PASMIC) may import iron ores and concentrates non- agglomerated duty free, while the statutory rate of customs duty on these items is 5%.  The National Tariff Commission (NTC) conducts anti-dumping, countervailing and safeguards investigations. The organization has imposed 19 measures, including on ceramic tiles from China, polyesters staple fiber from Indonesia, Korea and Thailand, and India for Phthalic Anhydride, among others.  Pakistan has 27,000 national standards that mainly cover agriculture, food items, chemicals, civil and mechanical engineering and textiles. About 15,000 are International Organization for Standardization (ISO) standards and 7,000 are International Electronic Commission (IEC) / International Organization of Legal Metrology (OIML) standards. However, enforcement remains poor (PSQCA, 2014)  There are 25 notifications that cover sampling and testing procedures as well as labeling, package, storage and transport of food products and pharmaceuticals, among others.  The Ministry of Food, Agriculture and Livestock (now the Ministry of Food Security and Research) is responsible for the formulation and implementation of animal/plant quarantine and regulating pesticides.  Pakistan’s SPS-related legislation is relatively outdated

Table:4.5 The Goods Which Are Covered by NTBs in Pakistan

Rules of Origin Included in FTAs/PTAs. For SAFTA, minimum value addition is 40% of f.o.b. price (30% for LDCs) and minimum aggregate originating content of 50% f.o.b. Customs Valuation Transaction values on 90-95% of goods, special valuation procedures for some food and 170

consumer goods. This includes cosmetics and toiletries, floor covering and sheets, motor, cycle auto-parts, soap, polyester yarn; fabric: air conditioners, soda ash and motor vehicles. The Customs Act includes a ‘take over’ provision. Pre-shipment On a wide range of allowable imports of second Inspection hand goods (e.g. plant, machinery, equipment and apparatus) by an authorized agency. Import Licensing New or used aircraft: acetone, sulphoric acid and hydrochloric acid (after obtaining NOC from Ministry of Narcotics Control), pharmaceutical raw materials (subject to conformity with Drugs Imports and Export Rules, 1976); palm stearing (subject to some technical standards), various chemicals; food colors; dyes (by suppliers), insecticides, rodenticides, fungicides; TV transmission equipment (by PEMRA). Imports of certain goods eligible for tariff exemptions/concessions require ministerial or other approval. The Ministry of Health approves specified finished pharmaceuticals, and packing and raw materials for in-house manufacture; Ministry of food, Agriculture and Livestock must certify duty free imports of wheat flour. Import Prohibition Alcoholic beverages; re-treaded and used pneumatic tyres; wide range of plant and equipment; construction, mining oil, gas and petroleum industries can import second hard machinery and equipment (or reconditioned) provided construction companies are registered with the Pakistan Engineering Council. A negative list prevents certain imports like auto parts and cigarettes of Afghanistan from transiting through Pakistan, so as to discourage smuggling of these goods back into Pakistan Quantitative Certain chemicals are subject to quantitative Restrictions limits; ozone depleting substances State Trading TCP is the main importer of wheat, sugar, pulses and urea. PASMIC, a public sector company, can import iron ores free(others at 5 percent); POL products(only by refineries or OMCs) Government Price preferences of up to 25% on all government Procurement purchases depending upon domestic value added content Indigenization Pakistan has moved out of TRIMS, but indigenization is still promoted by the Ministry of

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Industries and EDB. Concessionary tariff arrangements have been made available for import of raw materials, components, assemblies that are not produced locally in automobiles, air conditioners, are fumigators and coolers. Anti-Dumping By NTC, items that have been subject to anti- Countervailing dumping actions include ceramic tiles; polyester stable fiber, phtalicanhydride, PVC resin polyester filament yarn, electrolytic tin plate, acetic acid. Safeguards Polyester filament yarn electrolytic tin plate, acetic acid Standard and Quality Pakistan Standards and Quality Control Certification Authority (PSQCA) is the national standardization body. Coverage includes mainly agriculture, foodstuffs, chemicals and pharmaceuticals, civil and mechanical engineering and textiles. Standards for 47 products (e.g. edible oil, biscuits and bottled water) are mandatory for human safety and public health reasons. The Pakistan National Accreditation Council (PNAC) is the accreditation body for testing laboratories. 24 such laboratories cover pharmaceuticals, textiles, chemicals, engineering and food items Sanitary and The Ministry of Food Security and Research is Phytosanitary expected to plant/animal quarantine and regulates regulation pesticides. Other Ministries involved are Commerce, Science and Technology and Health. MRL levels are tested for imported foodstuff, which must have at least 50% of the shelf life at the time of importation. Marking, Labeling and Specified food colors; pharmaceuticals; cigarette; Packaging foodstuffs; refined vegetable oil (only in bulk) Quarantine Live animals, fish and fishery Products, rice Requirements seeds Finance Measures Importers of gold and silver subject to arrangements of own foreign exchange Source: (data is compiled from PSQCA, NTC websites)

4.5.2 Focus on Manufactured Goods

NTBs in Pakistan tend to be somewhat more focused on manufactured goods, especially with regards to customs valuation, pre-shipment inspection, import

172 licensing by a number of Ministries/Agencies, quantitative restrictions, indigenization, anti-dumping and quality certification. There are issues of institutional capacity in agencies like NTC, PSQCA and PNAC. Also, some ministries like Health; Food, Agriculture and Livestock have been devolved to the Provincial governments after the 18th Amendment. It is not clear how the regulatory functions related to NTBs are currently being performed there. The automobile sector is one sector which is likely to be opened for trade with India following the granting of MFN status. Potential imports from India in this sector will face a number of NTBs including issues of customs valuation, pre-shipment and indigenization. In addition, Pakistan has high import tariffs on vehicles.

4.5.3 Regulations/Laws and Implementing Agencies for NTBs in Pakistan

The relevant laws/regulations which govern the application of NTBs and the implementing agencies thereof are presented in this Table Table 4.6 Laws/Regulations & Implementation Agencies for NTBs NTBs Law/Regulations Agency Customs Valuation Customs Act, 1969? As Customs amended, with rules Pre-shipment Import Policy Order, Accredited certifying inspection 2009 as amended agencies by PNAC Import Prohibitions / Import Policy Order, TCP, Various entities Restrictions 2009 as amended both in the public and private sectors Imports Quotas Trade Policy Customs and concerned Ministry Procurement PPRA Ordinance PPRA Anti-Dumping, Anti-Dumping National Tariff Countervailing Duties, Ordinance, 2001, with Commission (NTC) Safeguards rules; countervailing MOC Duties Ordinance 2001 rules; Safeguard Measures 2003 Ordinance with rules Standards and Quality Import Policy Order PSQCA Certification 2009 as amended

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Making, Labeling and Import Policy Order Customs Packaging 2009 as amended Source: (Data is compiled through the websites of NTC, MOC and PSQCA)

In Pakistan, the agencies which play a key role in the administration of NTBs in Pakistan include Customs, Trading Corporation of Pakistan (TCP), Public Procurement Regulatory Authority (PPRA), NTC and PSQCA.

4.6 NTBs of Pakistan which affect Indian Imports

According to SAARC NTM Bulletin (2016 and 2017) and A survey of Indian exporters to Pakistan conducted by Taneja et al (2007) with the collaboration of ICRIER, identified the given below non- tariff trade restrictions which Indian exporters face from Pakistani side.

4.6.1 Restrictions on Imports

 The most signification apparent barrier is restrictions on import of certain goods. Over the years, the list has gradually extended. This has now been converted into a Negative List.  Import embargo resulted in a well-documented problem, whereby several goods not on the positive list have been exported to Pakistan through Dubai or by way of smuggling in to Pakistan. Transport costs on the Mumbai-Dubai-Karachi route are 1.4 to 1.7 times more than on the direct Mumbai-Karachi route. This problem is likely to persist with items in the Negative List until December 2012.  A number of problems have arisen with respect to the positive list/negative list including, a mismatch of codes between the Indian

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and Pakistani 8-digit Harmonization System (HS) classifications. This has created unnecessary harassment to trader

4.6.2 Inadequate Land Transport Routes

The most viable and cost-effective way of moving goods between the two countries is through the land route. The two devastating wars between India and Pakistan were fought in 1965 and 1971(on the Issue of Kashmir) which destroyed the all connecting land areas of Pakistan and India. Both countries intentionally neglected the infrastructure development in these border areas and stop the official trade with each other for years. However, being the signatory of SAFTA, Pakistan and India revived their trade relations. To facilitate bilateral trade, infrastructure development is the essential component. Though both countries have started to work on infrastructure development but only limited number of land routes could have been restored yet.

Pakistan permits trade from India only through Attari by rail and through Wagha by road. Goods from Kolkata are shipped to Karachi via Singapore. Pakistan allows the import of only 137 tariff lines from India through the road route (Wagha Attari) since July 2005. Items permitted include: garlic, tomato, potato, onion and livestock.

There are certain obstacles when comes trading via the rail route. Pakistan does not allow the import of cotton by the rail through Attari as per Pakistan’s 1967 Plant Quarantine Rules (which allows cotton to be imported only through Karachi port). A large number of textile mills are located in proximity to Lahore but some cotton has to be imported through a circuitous route whereby goods are first transported to

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Mumbai, from where these are moved to Karachi by sea and further to Lahore by road.

Another issue that hampers trade is that the two countries do not permit transit facilities to each other. Pakistan allows goods from Afghanistan to be transported to India through the land border but does not accept the access to transit facilities for Indian goods.

4.6.3 Infrastructure Constraints and Related Bilateral Protocols

 There are several hindrances for transportation by the rail route. Currently goods move by rail by a goods or parcel wagons that are attached to the , the passenger train. Goods that are transported by Samjhauta Express by parcel wagons move at fixed timings on a fortnightly basis. The same number of parcel wagons (10) move on every trip, whether loaded or unloaded. There is no fixed timing for a goods train but the trains do not move across the border after 5:00 p.m. for security reasons. The number of rakes/wagons that can play from Attari to Amritsar are usually determined on a monthly basis. Under a reciprocal arrangement between the two countries, the wagon balance has to be cleared every 10 days between the two countries. The Indian Railways crew and engine is allowed to carry the wagons up to the Attari/Wagah border (and vice-versa) from which point the wagons are transported by Pakistani rail engine head. The following problems were highlighted in the course of the survey: o Demand for wagons exceeds the supply of Pakistan Railways.

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o The security of wagons leads to high transaction cost and bribes. o Several exporters in Kolkata are interested in exporting through the land route to be able to access the steel manufacturing units near Lahore but are not able to book rail wagons. Exporters are compelled to send their shipments from Kolkata to Karachi through trans- shipment at Singapore. From Karachi the goods are transported by the land route to Lahore. This circuitous route raises transport and other costs considerably. o There is limited handling capacity at Lahore. Currently the Lahore railway station is not able to handle more than 20 rakes. Initially, Indian and Pakistan were not allowed to cargo trucks to cross the border of their respective countries. Pakistani trucks were parked 200 meters away from the zero line. Goods were unloaded from the trucks and transported on head-loads by coolies up to the zero line where the goods were handed over to coolies on the other side of the border. Trucks had to wait an average of three to four days. In a day only 10-12 trucks could cross the border. In a recent amendment of the road protocol, Indian and Pakistani trucks are now allowed to cross over to the border and unload. This protocol is similar to the road protocol between India and Bangladesh.

4.6.4 Customs Procedures and Administration

A hindrance facing Indian traders is that the facility of Electronic Data Interchange (EDI) that allows the goods declaration to be filed electronically is not available at the land-border trading points of Pakistan. Land borders are limited and more of the trade take place

177 through Karachi sea port via Singapore which affect the cost of fright and make the business costly.

4.6.5 Sanitary and Phytosanitary Measures (SPS) and Technical Barriers to Trade (TBT)

In Pakistan the only standard setting body is the Pakistan Standards and Quality Control Authority (PSQCA) as compared to 24 standard setting bodies, both at the center and state level in India. Currently PSQCA imposes compulsory standards for 46 products. There is no evidence on NTBs related to the strict application of SPS and TBT measures in Pakistan on imports from India.

4.6.6 Financial Measures

Currently Indian banks are not allowed to establish branches in Pakistan. Investment in Pakistan from India is allowed through government route instead of automotive route (India also follow this practice however).It is identified as a NTB for bilateral trade between the two countries.

4.6.7 Para-tariff measures

Increase the cost of imports in a manner similar to tariff measures by a fixed percentage or amount. Pakistan imposes a sales tax of 16% and a withholding tax of up to 5%. Until recently selected products faced a federal excise duty in addition to a sales tax.

4.6.8 Visas

Visa applicants are required to provide invitations from sponsors in each city that is visited. This is an impediment for traders as they are

178 unable to visit cities where they can locate potential importers. Pakistan grants visas for a maximum of three cities per visit. In addition, visa is granted for limited period of stay, in most cases for 15 days. While Visiting Indians are required to report to the police on arrival and before departing from the country. Indians visitors have to enter into and depart from Pakistan from the same port.

Pakistani business men often requires technical services from India in the engineering and chemical sectors. However, Indians find it difficult to get visas for technical services. Traders have pointed out that almost every transaction will have to be accompanied with a flow of technical experts who would need to install machinery in Pakistan. To summarize, as a policy, India and Pakistan follow a restrictive visa regime. The Consulates in both countries exercise tremendous discretionary powers in granting visas and waiving visa requirements that include exemption from scrutiny by the Ministry of Home Affairs in India/Ministry of Interior in Pakistan, extending the length of stay, exemption from police reporting and number of cities to be visited.

4.6.9 Subsidies by Pakistan to Agriculture

Pakistan gives subsidies to domestic farmer in various categories which are listed below in the table. Table 4.7 Subsidies on Agricultural Inputs in Pakistan (Million USD $) Fertilizer Subsidy 1014 On imports 525 On domestic production 501 Power Subsidy 944 Irrigation Subsidy 711 Others (tractors, seeds, etc.) 7 Total Subsidy 2676 Memo Items Agricultural Value added 43088

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GNP (at current prices) 219732 Cropped Area (million 22.75 hectares) Subsides as % of Value added 6.2 Subsides as % of GNP 1.2 Subsidy per hectare (USD $) 118 Subsides as % of value of Production 4.9  Source: Federal and Provincial Budget Documents;  Agricultural Statistics Year Book;  Pakistan Economic Survey

The largest component is the fertilizer subsidy followed by the subsidy on electricity consumption (especially by tube wells) in agriculture. Subsidies to agriculture stand at 1.2% of the Gross National Product (GNP) and amount to USD $118 per hectare. The level of subsidy per hectare is almost three times higher in India than in Pakistan. The Agreement of SAFTA clearly envisages the elimination of the barriers to trade in the region. Further, it highlights the trade facilitation measures that the Contracting States have agreed to.

4.7 Issue of MFN/NDMA

Pakistan and India both are engaged in two free trade agreements with each other, (a) under WTO (multi-lateral agreement) and (b) under SAFTA (regional agreement). Under WTO agreement, both are bound to grant MFN status on mutual basis. India has granted Most Favored Nation status to Pakistan in 1996, while Pakistan did not reciprocate. Actually, bilateral trade between India and Pakistan was, previously, governed by an agreement between the two countries that was signed in 1948, and Pakistan used that agreement as a pretext for not granting MFN to India under the WTO.

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However, both countries went into regional free trade agreement in 2004 when SAFTA was signed between the South Asian countries. It was agreed that all countries will follow a Sensitive List approach. The Sensitive Lists were supposed to decrease gradually over the years. In case of India, Pakistan follows a Negative List (where it has apprehensions of potential damages of its local industry). In this situation, India demands the MFN status which means Pakistan would not maintain its negative list any more (because Pakistan will has to give the same concessions to India that it gives to other WTO member states).

Though, Pakistan’s reluctance to grant MFN status is severely exploited by India at international forums, yet practically Pakistan’s trade policy towards India is comparatively more liberal than that of India’s. Virtually, India imposes non-tariff restrictions towards overall imports (and especially to the imports from Pakistani side) while Pakistan’s main trade policy is based on tariff. Since 1996 (though had granted MFN), India is applying non-tariff barriers to Pakistan’s main exports textile and clothing. Even the sensitive list of India under SAFTA also includes a number of Pakistan’s potential export items (including textile and clothing).

4.8 Sub-Regional Free trade Agreements

South Asian Association for Regional Cooperation took a long time to adopt trade liberalization policy in the region, meanwhile SAARC member states had signed sub-regional and intraregional free trade agreements. SAARC itself allows its member countries to sign bilateral trade agreements. These bilateral agreements however offer at times more favorable concessions than those available under SAFTA thereby

181 undermining the viability of SAFTA. There is considerable evidence that India’s bilateral agreements with Sri Lanka and Bangladesh provide exporters from those countries terms which are much more favourable than would be available to them under SAFTA.

4.9 Rise of Informal Trade

Due to political and security apprehensions and uncertain economic relations between Pakistan and India, trade exchanges have been minimal. This has caused informal trade to surge. A number of studies that are conducted previously, have shown that informal trade is not only prevalent between the two countries, but goods on the Negative list of Pakistan also enter the country indirectly. A study conducted by the Indian Council for Research on International Economic Relations (ICRIER), estimated the size of informal trade at $ 4.7 billion in 2012- 2013. The existing Negative List, high duties, inadequate modes of payment and fear of harassment by the custom officials have allowed informal trade to grow exponentially. Textiles, spices, jewelry, cosmetics, pharmaceuticals and auto parts are the main commodities that are traded illegally.

Another study by Sustainable Development Policy Institute (SDPI), identified the markets in Pakistan that are host to informally exported products from India. The markets mentioned below are not necessarily dealing only with informally traded goods, and most likely have a proportion of formal stock as well. Most of this informal trade is re- routed to Pakistan through third countries especially via Dubai, Sri Lanka and Hong Kong.

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Table: 4.8 Flow of Informal Trade in Pakistan Sector Primary City Primary City Market Market Textile Bolten Market Karachi Eshr, Azam and Lahore Shahalam Market Tobacco Nankwar Karachi Panmandi Lahore (Anarkali) Livestock Yazman Rohri Bahawalpur Autoparts Ranchor Line Karachi Badamibagh Lahore Al-Noor Market Peerwadhi Rawalpindi Pharmaceutical Bara Peshawar Shalam Market Lahore Bohat Bazaar Rawalpindi Cosmetic Bolten Market Karachi Anarkali Lahore Kakhano Bazzar Peshawar

Spices and Herbs Bolten Market Karachi Anarkali Lahore Shahalam Lahore Market Source: Informal Flow of trade, SDPI, 2013 The first part of the table (4.7) shows the trade routes identified by ICRIER through which illegal goods from India enter into Pakistan. India-Dubai-Pakistan (Route I) is the route that is extensively used with the value of trade reaching $ 1,354 million in 2012-2013. Route VI, Route III and Route II are other corridors that are frequently used for smuggling goods into Pakistan. The second part of the same table (4.7) shows that Pakistan's exports to India enter informally only through three channels: Via Dubai, across the Line of Control routes and Lahore-Amritsar-Delhi route. It can be noticed that the volume of official exports from Pakistan to India is much smaller than the flow of illegal exports from India to Pakistan. Table: 4.9 Trade Routes for Informal Exports from India to Pakistan (2012 – 2013)

Trade Roots Value of Trade (in millions $) India – Dubai – Pakistan (Rout - 1) 1354

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India – Dubai – Iran (Bandar Abbas) – 399 Afghanistan – Pakistan (Rout – 2) India – Dubai – Karachi – Afghanistan 977 – Pakistan (Rout – 3) Delhi – Amritsar – Lahore (Rout – 4) 1022 India – Pakistan (Karachi) – 75 Afghanistan – Pakistan (Rout – 5) India – Afghanistan – Pakistan (Rout 85 – 6) Cross Line of Control Roust (Bus & 80 Rail) Export from Pakistan to India Informal Routs Cross Line of Control Roust (Uri – 175 Islamabad – – Rawalakot) Via Dubai 120 Lahore – Amritsar – Delhi 426 Source: Author’s compilation (Information is collected from ICRIER & SDPI) The table number 4.7 describe the items which are entered in Pakistani markets through informal channels. Most informally traded goods are fruit and vegetables, sari, fancy dresses, jewelry, pharmaceutical, herbal and species and cosmetics.

Table: 4.10 The Items which are informally traded from India to Pakistan Items Total USD million Fruited and Vegetables 5.40 Textile Sari 204.40 Fancy dress (incl. bridal wear) 1152.00 Pharmaceutical 59.40 Spices and Herbs Spices (Cardamom, Cinnamon, Jaiphal and 8.40 Javitri

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Tea 1.20 Tobacco items Gutak 4.80 Betel Leaves 39.60 Automobile sector Spare Parts 5.70 Tyres 170 Cosmetics Soap, Cream, Shampoo, hair oil etc. 48.0 Jewelry Items Bridal sets 27.38 Bangles 16.43 Lockets 32.85 Low grade artificial Jewelry Lockets 2.19 Bangles 9.13 Herbal Products Black Asphaltum 0.22 Ispghool 0.31 Chavanprashad 0.39 Feminine creams 0.19 Hair oils 0.16 Herbal beauty creams 0.19 Herbal Soaps 0.06 Other Paper 0.030 Crockery 0.020 Total 1788.89 Source: Informal Flow of trade, SDPI, 2013 The table 4.8 describe the duty structure on top informally traded items if they entered into Pakistan through formal channel. Due to informal trade government of Pakistan lost its revenue.

Table 4.11 Duty Structure on Key informally traded items if they were to be traded formally Items Duty Sales tax Withholding tax (%) (%) Fruited and Vegetables 0 – 30 16 5 Textile Sari 25 16 5 Fancy dress (incl. bridal wear) 25 16 5 Pharmaceutical 5 – 25 16 5 Spices and Herbs Spices 5 – 15 16 5

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Tea 10 16 5 Tobacco items Gutak Banned Banned Banned Betel Leaves 200/kg 16 5 Auto Parts Spare Parts (Gears, Windscreens, Banned Banned Banned Pumps) Tyres 5 – 25 16 5 Cosmetics Soap, Cream, Shampoo, hair oil etc 30 16 5 Jewelry Items Bridal sets 5 16 5 Bangles 5 16 5 Lockets 5 16 5 Low grade artificial Jewelery Lockets 10 16 5 Bangles 10 16 5 Herbal Products Ispghool 5 16 5 Chavanprashad 10 16 5 Feminine creams 30 16 5 Hair oils 30 16 5 Herbal beauty creams 10 16 5 Herbal Soaps 30 16 5 Other Paper 5 – 25 16 5 Crockery 30 16 5 Source: Federal Board of revenue, 2013

4.10 Sensitive and Negative list work as NTB to bilateral trade

At the time of the implementation of SAFTA, it was decided that each country would prepare a list of tariff lines in which she want to trade without granting any concession. Trade between India and Pakistan has also been undermined by the maintenance of sensitive lists and the negative list. However, Pakistan maintain a negative list parallel to sensitive list with India. The tariff lines which are included in the negative list are officially prohibited to import from India. The negative and sensitive lists operational in Pakistan applicable to India and the sensitive list maintained by India for Pakistan are indicative of the sectors in which the two countries want to offer protection to domestic

186 industries from each other’s imports (Taneja et al, 2013). The textile and clothing items make up for 5.7 percent of the items in Pakistan’s negative list. As opposed to that, T&C items make up for almost 25 percent of the sensitive lists of both countries. Out of 614 items, India has 176 T&C items in its sensitive list which accounts for the largest number of items of a particular sector in the list.

Most of the textile items in Pakistan’s negative list consist of man-made filaments and manmade fibres (across HS codes 54 and 55). The clothing items (across HS codes 61 and 62) consist of 9 items of apparel and clothing accessories—knitted and crocheted. India ranks second in the production of polyester textile yarn production in the world (Oerlikon Textile, 2010). The top ten synthetic fibers consuming countries in 2007 accounted for 76% of world synthetic fiber consumption, and included (in decreasing order) China, the United States, India, Japan, the Russian Federation, Germany, South Korea, the United Kingdom, , and Pakistan (FAO and ICAC, 2013). As per WTO law, subsidies for production fall in the “actionable” category where the affected importing country can impose countervailing duties to offset the disadvantage to its local manufacturers due to the cheaper imported item. However, their use is subject to challenge, either through multilateral dispute settlement or through countervailing action, in the event that they cause adverse effects to the interests of another Member. There are three types of adverse effects. First, there is injury to a domestic industry caused by subsidized imports in the territory of the complaining Member. This is the sole basis for countervailing action. Second, there is a serious prejudice. Serious prejudice usually arises as a result of adverse effects (e.g., export displacement) in the market of the subsidizing Member or in a third

187 country market. Thus, unlike injury, it can serve as the basis for a complaint related to harm to a Member's export interests. Finally, there is nullification or impairment of benefits accruing under the GATT 1994. In this perspective India is also trying to protect its textile industry by way of applying non-concessional tariffs on items in the sensitive list.

4.11 Interstate political Conflicts

Interstate political conflicts between Pakistan and India have also become the devastating non-tariff barrier to trade, because trade between two countries without the collaboration state machinery is not possible. India is a frequent user of this non-tariff barrier to trade. In case of Pakistan, its application is drastic. A number of time, India sabotage the SAARC’s trade cooperation process on political basis. The scheduled summit of 1989, Colombo was postponed due to the deployment of Indian peace keeping Force in Sri Lanka (it created tension between Colombo and New Delhi when president of Sri Lanka, Ranasinghe Premadasa Demanded the immediate withdrawal of IPKF )(Dash,2008). The scheduled summit of 1992, Dhaka was also postponed because of India’s strained relations with Bangladesh caused by the eruption of communal violence over the demolition of the historic Babri Mosque in India by extremist Hindus on December 06, 1992 (Sridharan, 2012).This was the first occasion when India refused to attend Summit in Bangladesh which severely damaged the SAARC process. The scheduled summit 1994, New Delhi was also became the hostage of poor Indo-Pakistan relations due to the political and diplomatic ‘freeze’ between the two countries on Kashmir Issue (Obino, 2009).

Though Pakistan and India started peace process which began in December 1990, yet it was suspended from 1994 till 1997(Jabeen, Mazhar and Goraya, 2010). This deadlock obviously led to undermine the scheduled summit of 1996. Once again, India refused to attend the scheduled summit of 1999,

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Kathmandu, due to Kargil war (1999) between India and Pakistan. India, again refused to attend the scheduled summit of 2000, Kathmandu due to military coup of Musharraf in Pakistan. Although it was a domestic matter of Pakistan but India used it as an excuse to attend the Summit meeting of SAARC. She Gave the reason that her participation in the moot would ‘legitimize’ the Military government in Pakistan (according to India Musharraf was the Mastermind of ‘Kargil operation’) (Sridharan, 2012). The Failure of Agra Summit between India and Pakistan on 14th of July, 2001 and terror attack on the India Parliament on 13th December 2001 further postponed the scheduled summit of 2001, Kathmandu (Mujtaba, 2005).

However, with the longest gap of 42 months (1999-2002), the Kathmandu Summit was finally held in December 2002 and accepted the Pakistan’s offer to host next Summit in early 2003. But Pakistan had to postpone the event due to continuous delaying tactics adopted by India to avoid its participation in the Summit. When the Summit postponed, India alleged Islamabad to ‘sabotaging’ the event (Daily times, Dec 10, 2010)

4.11.1 The scheduled summit of 2005, Dhaka

Twice in a year 2005, The Summit postponed due to India. She officially refused to attend the Summit due to the political development in Nepal (King Gyanendra declared emergency and sacked the government in 2005) and security reasons in Bangladesh (a bomb had exploded on Awami league earlier to scheduled Summit 12-13, 2005 but India excused to attend it (Subramanian, 2011).

4.11.2 The scheduled summit of 2016, Islamabad

India again deliberately refused to attend the nineteenth SAARC Summit in Islamabad due to Pakistan’s eternal domestic political unrest led by Panama Issue and she also alleged Pakistan for 18th September attack on a military base in Indian- administered Kashmir. Bangladesh, Afghanistan and Bhutan

189 followed India and refused to come in Pakistan. Finally Pakistan had to postpone the Summit.

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References

Business Line. (2012). https://www.thehindubusinessline.com/economy/remove-non-tariff- barriers-to-facilitate-indo-pak-trade-cuts/article20477068.ece1. Retrieved from Remove non-tariff barriers to facilitate Indo-Pak trade: CUTS: https://www.thehindubusinessline.com/economy/remove-non- tariff-barriers-to-facilitate-indo-pak-trade-cuts/article20477068.ece1

Chamber, S. (2016). NTM Bulletin October 2016 Issue 02. SAARC Chamber of Commerece and Industry.

Kayani, U., & Shah, S. (2014). Non-Tarif Barriers and Pakistan’s Regional Trade: A Legal and Economic Analysis of Non-Tarif Barriers in Pakistan, India, China and Sri Lanka. International Grow Centre.

Mahmood, A. (2002). WTO Agreement on Agriculture in Post Doha Scenario (SAARC). SAARC Chamber of Commerce & Industry.

Ministry of Commerece. (2011). Ministry of Comerece, India. Ministry of Commerece, New Delhi, India.

Pasha, H., & Pasha, A. (201). Non-Tariff Barriers of India and Pakistan and their Impact. Retrieved from http://www.sjbipp.org/publications/PR/projectreport/PR-25-16.pdf: http://www.sjbipp.org/publications/PR/projectreport/PR-25-16.pdf\

Phadnis, A., & Hussain, K. (2011, September 11). India-Pakistan trade: India tackles non-tariff barriers head-on. Karachi, Pakistan, Sindh.

Rawalpindi Chamber Of Commerce . (2011). Non Tariff Barriers (NTB’S) Between Pakistan & India . The Rawalpindi Chamber Of Commerce & Industry.

Roy, J., & Banerjee, P. (2007, January). http://siteresources.worldbank.org/SOUTHASIAEXT/Resources/2235

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46-1192413140459/4281804-1192413178157/4281806- 1265938468438/BeyondSAFTAFeb2010Chapter5.pdf. Retrieved from Connecting South Asia: The Centralilty of Trade Facilatiion for Regional Economic Integration: http://siteresources.worldbank.org/SOUTHASIAEXT/Resources/2235 46-1192413140459/4281804-1192413178157/4281806- 1265938468438/BeyondSAFTAFeb2010Chapter5.pdf

SAARC Chambers. (2017). NTM Bulletin. ntm bULLETIN eDITION - iii .

SAFTA. (2006). SAFTA: Opportunities & Challenges. SAARC Chamber of Commerece and Industry (SCCI).

UNCTAD. (2012). http://unctad.org/en/PublicationsLibrary/ditctab20122_en.pdf. Retrieved from http://unctad.org/en/PublicationsLibrary/ditctab20122_en.pdf: http://unctad.org/en/PublicationsLibrary/ditctab20122_en.pdf

WTO. (2011). https://www.wto.org/english/tratop_e/tpr_e/tp349_e.htm. Retrieved from https://www.wto.org: https://www.wto.org/english/tratop_e/tpr_e/tp349_e.htm

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Chapter 5

Primary Data Analysis

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This chapter is comprised of the analysis of the Primary data which was collected during the study to gather the view point of stakeholders regarding SAARC and its liberal trade policies. In this regard, over 30 interviews and a sample survey were conducted. The interviews included, officials of the Ministries of Commerce and Finance, National Tariff Commission of Pakistan, SAARC Chamber of Commerce and Industry, Chambers of Commerce and Industry of Lahore, Islamabad and Rawalpindi; Research based non-profit organizations that work to serve as the policy advisor to Government of Pakistan such as Sustainable Policy Institution, Islamabad Policy Research Institute and Institute of Strategic Studies Islamabad etc. While survey was conducted from consumers in Lahore to estimate the awareness level of Consumers about the Pakistan – India Trade Liberalization under SAFTA. The acceptability of free trade entire world is due to the idea of consumer welfare (as liberal theory proclaims). So, consumers are the main stakeholder in free trade agreements. The data of survey and interviews is analyzed separately.

5.1 Survey Methodology

A survey was conducted from the consumers, in Pakistan, to check their awareness level about Pakistan’s trade relation with India. The city of Lahore was selected to conduct that survey for multiple reasons. First and foremost reason was that Lahore is the second largest metropolitan city of Pakistan (First one is Karachi) and the capital of Punjab province. Wagah-Atari trade route between Pakistan and India is situated here. Bulk of Indian goods (through formally and informally trade) are available in local markets of Lahore. City is educational hub of Pakistan, literacy rate is relatively high from other cities of Pakistan and people are politically mobilized. Sample of the survey was consisted of one hundred consumers, randomly selected from seven most popular markets and shopping area. Consciously, the respondent were select educated persons from both genders so that they can understand 194 the content of the survey. One by one question was asked to the each respondent and clear the ambiguity if he/she felt to understand any question and gave them proper time to response with clarity of their thought and according to their will, researcher mark answers. Only willing persons were selected voluntarily gave their consent to ask the question. Detail of the survey respondents is given in the table. Total Thirteen questions were asked to the each respondent. Information about the Survey Sample Name of Markets Total Respondent Breakup covered Respondents by Gender Male Female Anarkali Bazar 15 8 7 Shahalmi Bazar 10 5 5 Ichra Bazar 10 5 5 Liberty Market 20 8 12 Moon Market 10 6 4 Fotress Squre 20 10 10 DHA Y Block 15 7 8 Total 100 49 51

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Question1: What does granting the most favored Nation Means? Answer: Only 28% respondent could give the right answer. 20% had no idea about it while 30% were known about the term but in literally meaning not in its actual sense. 22% had opt the first option.

What Does Granting of the Most Favored Nation (MFN) Status Means

30% 25% 20% 15% 10% 5% 0% No special Trade Declaration of Special Trade Not Sure advantage but Profound Advantages and equal treatment Friendship and terms and as given to other Future Favour to Conditions for trading partner the Country the country being countries, that being granted the granted the MFN Pakistan has not MFN Status Status had any preferential trade agreement with

Question2: When did India grant MFN to Pakistan? Answer: 30% were replied India never granted MFN status to Pakistan 20% were not sure. 15% replied that India granted MFN status to Pakistan. While 15% considered 1798 is the right answer. Only 20% respondent were aware about the right date.

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When did India Grant Pakistan the MFN Status 35% 30% 25% 20% 15% 10% 5% 0% 1947 1996 1978 Never Not Sure

Question3: Should the negative list of goods (which restricts some goods from being imported) be phased out to allow free trade between India and Pakistan on all goods? Answer: 30% responded that negative list should be phased out immediately, on contrary 20% were not in the favour of phasing out the negative list while 30% responded the 3rd option “should be phased out eventually” 20% were not sure.

Should the negative list of goods (whihc restricts some goods from being imported) be phased out Immediately?

Not sure

Should be phased out eventually

Should not be phased out

Should be phased out Immediately

0% 5% 10% 15% 20% 25% 30% 35%

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Question4: Should the government of Pakistan grant MFN status to India.

Answer: 30% were in the favour of granting the MFN status to India immediately, while 20% responded opted the second option. It should grant after a greater laps of time other 20% were against to grant MFN to Pakistan 18% were not aware about the “MFN Status” and 12% answer not sure about the government decision

Should the government of Pakistan grant MFN status to India. 35%

30% 30%

25%

20% 20% 20% 18% 15%

10% 12%

5%

0% Yes it should be It should grant it It should not Not aware of Not Sure granted after a greater grant the status what MFN Status Immediately Laps of time at all is

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Question5: Trade with India will impact on Pakistani Consumer? Answer: 40% People had of the opinion that trade with India would have significant positive impact while 20% responded that trade with India would have moderate positive impact bilateral trade on contrary 10% consumers responded that Pakistan trade with India would have moderate negative impact only 5% considered that trade with India would have significant negative impact. 25% of the respondents considered that trade with India would not have neutral impact on Pakistani consumers

TRADE WITH INDIA WILL IMPACT ON PAKISTANI CONSUMER?

40% 30% 20% 10% 0% Series1

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Question6: Do you think Good Trade relation between Pakistan and India will result in long term regional peace? Answer: 60% of the respondents considered that good trade relation with India would bring long term regional peace. While 40% people consider good trade relation with India would have neutral impact on region peace.

Do you think Good Trade relation between Pakistan and India will result in long term regional peace?

40% 35% 30% 25% 20% 15% 10% 5% Series1 0% Significant Moderate Neutral Moderate Significant Positive Positive Positive Negative Negative Impact Impact Impact Impact Impact

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Question7: In your opinion, to what extent is the general Public in Pakistan in favour of trade with India? Answer: overall 70% respondent considered that general Public is in favour of trade with India? However out of 70%, Thirty Percent considered the 40% considered it moderately positive 20% grade it neutral while only 10% people responded that according to their opinion general build is not favour of trade with India

In your opinion, to what extent is the general Public in Pakistan in favour of trade with India? 45%

40%

35%

30%

25%

20%

15%

10%

5%

0% Significant Moderate Positive Neutral Positive Moderate Significant Positive Impact Impact Impact Negative Impact Negative Impact

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Question8: What does the South Asian Free Trade Agreement mean in term of trade between India and Pakistan? Answer: 60% respondent were clear that SAFTA means eventual end of trade barriers among member countries. 24% people responded that free trade agreement SAFTA means increase in trade barriers. While 16% people replied that SAFTA does nothing in terms of trade barriers between member’s countries

What does the South Asian Free Trade Agreement mean in term of trade between India and Pakistan? 70%

60%

50%

40%

30%

20%

10%

0% 1

Eventual and of trade banners among members countries Increase in trade barriers SAFTA does nothing in terms of trade barriers between members counters

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Question9: Which Institution in Pakistan is responsible for Trade Policy making? Answer: 30% respondent had of the view that Ministry of Finance responsible for trade policy making while 22% people responded that trade policy is the Subject matter of Ministry of Foreign Affairs. 40% people replay Ministry of Commerce is direct linked with Trade Policy. Only 8% had of the opinion that Ministry of Commence with collaboration of the all these Departments made the Trade Policy of the Pakistan and it was the right answer.

Which Institution in Pakistan is responsible for Trade Policy making? 45%

40%

35%

30%

25%

20%

15%

10%

5%

0% 1

Ministry of Finance Ministry of Foreign Affairs Ministry of Commerce Ministry of commerce with the collaboration all the Departments

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Question10: Consumer are paying higher prices for the goods Imported from India due to trade restrictions Answer: 34% thought it is true, while 28% responded it is false. 38% replied that did not know.

Consumer are paying higher prices for the goods Imported from India due to trade restrictions

100%

80%

60%

40%

20%

0% TRUE FALSE Don’t Know

Question11: Are you familiar about the terms Non-Tariff Barriers (NTBs) Answer: Only 10% respondents were very familiar about the Non- Tariff Barriers. 30% were vaguely familiar. 20% respondents were those who just heard of them only. While 40% were those who never heard of them even.

ARE YOU FAMILIAR ABOUT THE TERMS NON-TARIFF BARRIERS (NTBS)

NEVER HEARD OF THEM 40%

HAVE HEARD OF THEM ONLY 20%

VAGUELY FAMILIAR 30%

VERY FAMILIAR 10%

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Question12: Are you familiar with the role of WTO in spreading free trade? Answer: Only 20% respondents were very familiar about the WTO’s role in spreading free trade entire globe. 20% were vaguely familiar. 30% respondents were those who just heard of the name of WTO only. While 30% were those who never heard of them even.

Are you familiar with the role of WTO in spreading free trade? 35%

30%

25%

20%

15%

10%

5%

0% Very Familiar Vaguely Familiar Have heard of the Never heard of the name of WTO only name of WTO

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Question13: Do you agree through Trade Liberalization, Regional Integration process in South Asia will be accelerated? Answer: Only 40% respondents were strongly agree. 20% were Agree. 30% respondents were those Neutral about the statement. While 10% were those who dis-agree with this statement.

Do you agree through Trade Liberalization Regional Integration process in South Asia will be accelerated?

40% 40%

35% 30% 30%

25% 20% 20%

15% 10% 10% 5% 0% Strongly Agree Agree Neutral Dis-agree

5.1.1 Observation of the Survey During survey, this fact came into knowledge that even educated consumers in Pakistan are not well aware about the technical knowledge about bilateral trade relations between India and Pakistan. However, generally they are in favour of bilateral trade because they consider that trade between the two countries would reduce the political tension and bring peace in the region.

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5.2 Analysis of Open-ended Interview Keeping in view the objectives of this study, the seven comprehensive questions were prepared by the researcher. The responses of the interviewees are given quote in quote.

Q1. Whether Regional Integration through Free Trade is a Viable Option in South Asia?

Majority interviewees had the opinion that without trade regional integration has no bright future at all. All South Asian countries have deep routed political issues with each other, ‘same political identity’ logic of regionalism theory cannot keep them aligned with each other because they are eager to maintain their political sovereignty at any cost. Only economic logic can motivate to them to cooperate with each other. That is why SAARC charter affirmed that this organization is established for the welfare of the people of south Asia.

For example, one of the interviewee answered that, “trade not only brought socio-economic improvement in south Asian society but it also brought peace in the region”. He further said, “Peace without cooperation is not possible and economic development in warlike situation is impossible, so, South Asian countries should coordinate with each other and develop that level of integration which they had in the colonial times. For this purpose, SAARC is a most appropriate forum if its agenda ‘secure peace through economic cooperation’ be followed by its member countries progressively” (Sulehri, SDPI)

Another interviewee said, “South Asian countries have joined WTO and they are bond to give MFN status to each other, so, I thinks South Asian countries have no choice except the option of free trade, in this regard SAARC is an appropriate platform to prepare themselves for the challenges of global trading system” (Saber, 2017). One of the ex-foreign minister responded that

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“the objectives of forming all free trade agreements are to adopt the global village approach in trade via availability of cheap products, best utilization of expertise transmit to other countries so that consumers get benefited. Because free trade makes possible the availability of quality product everywhere. So, I think free trade can help to poverty alleviation in Aouth Asia” (khar, 2017).

Q2. Pakistan- India liberal trade: opportunities and threats

The answers on this question were divided in two extremes, majority of the interviewees considered that free trade with India is beneficial for Pakistan. Protectionism is not a pragmatic approach, while government of Pakistan should strictly apply trade competitive policies and through advancement in technical knowledge, and research development support their domestic producer. Whereas the interviewees which had dissenting views were also had the firm stance that throughout the SAFTA period Pakistan beard the trade deficit with India and trade balanced remained in the favour of India. Hence, liberal trade regime with India may severely damaging for some main export potential sectors of domestic industry.

The former president federation of chamber of commerce Pakistan expressed his views in this regard, “I am the advocate of trade and investment between Pakistan and India. Though apparently, it seems impossible but I believe that bilateral economic terms of two neighbors should not be captive of contentious political issues. There are many examples exist where politically rival countries have maintained economic ties positively. One of the best example in this regard is China-India relations. China has also political unrest with India but its trade with India is increasing day by day, while Pakistan’s official trade with India is mere $ 3 billion yet.” (Aziz, 2017)

The ex-secretory general of SAARC chamber of commerce expressed his views that “Trade liberalization would enhance access of Pakistani producers

208 to Indian market and Indian producers to Pakistani Markets, this mutual interaction of business community would work as confidence building measure which would lead both countries to share economic goals which eventually leads to ever lasting peace.” (Tabish, 2017)

The founder president of the Women chamber of Commerce Islamabad, shared her views regarding the importance of trade with India. She said, “From the platform of Women Chamber of Commerce, we have been started trade with India from 2010. It is economical for Pakistani business women to do exhibition in India because trade trip in India is economical for them.” (Fazil, 2017). The vice president of the women chamber also responded that, “Trade policy in Pakistan is gender blind, though government of Pakistan has determined 20 billion in budget in its trade policy from 2015-18, to facilitate and create business for women but implementation is pending yet” She further said,“Instead of Pakistani government, Indian government is recognizing our efforts. For that purpose, Indian high commission have given a curtsy call to us on March 24, 2017 and ensured us that to facilitate business women, they will make possible the exemption of police report for Pakistani business women during their trade trip in India and 20 days visa processing” (Ansari, 2017)

However, one person from Academia expressed his views that, “SAFTA is less beneficial for Pakistan because Pakistani local industries are less competitive to Indian products which are quality wise better and Price wise adequate so free trade with India would bring trade surplus for India and trade deficit in the case of Pakistan”(Kamal, 2018).

Q3. Hurdles in Trade Liberalization between Pakistan and India?

Interviewees expressed mixed opinion on this questions, some considered, political tensions is the main hindrance in trade liberalization, while other

209 thought non-tariff barriers are the major hurdle. And some thought economic interest group are the real hurdle in the adoption of consumer welfare trade policy (free trade), as through lobbying they affect government decision of trade liberalization with India.

For example, one of the senior research fellow at institute of strategic studies Islamabad responded, “Powerful interest groups through direct and indirect way mount pressure on the government of Pakistan to affect the trade policy in their favor. For example, Toyota, Honda and Suzuki, for a long time, investing in Pakistan. So, whenever Pakistan try to open this sector for Indian Auto importer, these multinational affiliates strongly resist, eventually Pakistan is maintaining auto sector in negative list for years” (Mustafa, 2017). He further said “One of the best example of lobbying factor involvement in trade policy is that recently, Pakistan banned the release of Indian films in Pakistani cinemas, cinema associations, lobbied through T.V channels and pressurize the government to uplift the ban. The same thing happens in foreign trade matters, politically influential interest groups try to mold government’s decisions in their favour” (Mustafa, 2017). The answer of the one of the official of the ministry of Commerce strengthen this view point, as he responded during interview that, “ trade with India takes place between the private partners of both side. If our business community have apprehension and they show its resistance on any trading item or items, government recognizes their apprehensions and stop trading this item” (Touqeer,2017). However, many of the interviewees were considered that non-tariff barriers are the major hurdle between Pakistan-India trade relations. For example, a senior fellow at Islamabad Policy Research Institution expressed his views. “Non- tariff barriers applied by India to Pakistani export have discouraged the exporters. Business community of Pakistan has afraid of Indian market size. India is a big economy and it gives subsidies to its exporter, while Pakistani government is not providing proper

210 economic infrastructure to its producer and exporters which may provide them a level playing field to its business community” (Warsi, 2017). “India through applying non-tariff barriers is damaging the Intraregional trade Instead of positively resolving political issues with Pakistan it started to sign bilateral RTAs with other SAARC countries which may hurt Indo- Pak trade relations” (Ali, 2017)

Q 4. Why SAARC is considered the Fail Organization?

The responses on this question were various in nature, more than half of the respondent were expressed their opinion that SAARC member countries give more importance to political issues rather than socio-economic issues of the region. The power balance is in the favor of India and it want to play a role of hegemon in south Asia, So time to time it shows off its hard and soft power in the matters of SAARC. However, majority of the interviewees had of the opinion that India’s hegemonic role is SAARC has slowdown its progress. For example, the director of the IPRI, expressed his point of view that “India is the major country of SAARC but it not behave like the major countries of EU. In European Union major powers do not show hegemon behavior to rest of the EU member states because they have learnt the lesson from WW-II. While India’s behavior is hegemonic in SAARC. (Sardar, IPRI)

A former foreign minister expressed his views that “If India avoid to show its hard and soft power within SAARC, and treat Pakistan politely or in a good way then SAARC can work faster because India’s good relations with Pakistan can make the SAARC an active and progressive organization. For that purpose India should have to keep interstate political issues apart from the platform of SAARC” (Kasori, 2017).One of the interviewee gave his thought that, “Being hostile if both countries act in a same way then both are equally responsible for the failure of SAARC but if we look at Pakistan’s behavior at SAARC, it seems to be reconciliatory in its nature while India behaves otherwise. For example, Pakistan never resist to attend any SAARC

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Summit meeting in throughout the history of SAARC even it never hesitant to visit India though it has serious security concerns about the India involvement in the terrorism activities in Baluchistan. While India refuses to come Pakistan to attend SAARC conference” ( Lala, 2017)

Another Interviewee responded “Mistrust between Pakistan and India is the main reason behind the failure of SAARC we are not come of realistic mindset, we are not shifting our geo-politics in geo-economics. Foreign policy of any country comprises of domestic situation if domestic situation is weak one cannot show confidences in foreign policy making and resolving foreign conflicts” (Malik, 2017).

One of the person from acdamic Gave his thought that, “I think the security issue is one of the main cause behind trade dead lock. Terrorism is uprising in Kashmir and Baluchistan, the lack of trust has become the cause of economic damage in the region because economic relations only can be sustainable if countries have developed positively effective conflict resolving channels instead of using trade dead lock as an tool to get political objective” (jabeen,2017)

Another person from academia responded that, “Inter-state relation define politico-economic relations. Although India shows that it has resolved its conflicts with its neighboring countries but it is not true. SAARC objective was Socio-economic progress but if India through using hard and soft power would continue to effect SAARC, It may not be successful” (Bukhari, 2017). One of the interviewee expressed his views that, “India’s carrot and stick policy toward other SAARC members is the main hurdle in the progress of SAARC. India want to kick off Pakistan from the forum of SAARC. Even at the cost of SAARC, India approached other SAARC members to avoid Pakistan” (Salam, 2017)

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Q5. Importance of Bilateral Political Dialogues between Pakistan and India for Economic Relations.

All respondents were solemnly agreed on the importance of political dialogue for economic cooperation. For example on of the respondent expressed his views that “Result oriented and sustainable political dialogue between India and Pakistan will make trade relations good. Even, along with political dialogues trade dialogues also continue simultaneously. It is the idea existing on global level. But in case of Pakistan- India trade relations, India prefers to resolve political issues first than go towards economic integration. The Continues interruption in political dialogue affect trade relations negatively” (Sardrar, 20177).

The ex-vice president of the SAARC Chamber of Commerce and Industry said, “For the success of SAFTA, peaceful political relations between the two major countries of SAARC are crucial and ever demanded by the business community of both sides. Trade liberalization Programme under SAFTA, requires infrastructure development for better regional connectivity for commercial frights and cargo containers, harmonization of customs rules and revised tariff policies. All of these mega projects demand political will of the both governments.” (Iftakhar, 2017)

An interviewee responded,“If comprehensive and meaningful political dialogue continue, it may possible strong common ground to develop business cooperation between the two Nations” (warsi, 2017)

One of the exective member of the federation of Pakistan chamber of commerce said, “Economic relations should continue along with political relation. It is the idea existing on global level but in case of Indo – Pak relation, India prefer to resolve political issues first then go toward economic integration” (Barlas, 2017).

The ex-presedent Lahore chamber of commerce replied to this question that,

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“Result oriented and sustainable Political dialogue between India and Pakistan can make trade relation good. Even along with political dialogue trade dialogue should also continue simultaneously. It will facilitate trade but continues interruption in Political dialogue and even dead lok make the situation worse.” (Irfan, 2017)

In short, the aggregate of the total responses was that though SAFTA proclaim that it is beneficial of all SAARC member countries as it will enhance intraregional trade and investment, narrow down the distance among states which will decrease the transport’s cost and mobilize the civil society, business community to develop people to people social-cum-economically beneficial relations which will work as the trust-building measure and eventually perpetual peace in the region. But this dream objective of SAFTA cannot be achieved in its full spirit until Pakistan and India continue political dialogue.

Q6. What Policy Options Should SAARC opt to perform better.

All of the interviewees gave valuable suggestion, the crux of their suggestion are given in the conclusion of this thesis. However, some of them are given here quote in quote in interviewees’ own words.

“I think progressive leadership at SAARC top level is required, secretory general should be a charismatic person who can bring all the state and non- state stakeholders at negotiation table and highlight them the potential gains of integrated economies of South Asia.” (barlas, 2017)

“Civil society organizations can take a part in sensitizing the citizens about the political and economic benefits of regional economic cooperation”(Sabir)

“Political leaderships of each SAARC member country should adopt rational approach instead of Whimsical approach to resolve their interstate political

214 issues. In this way they may can perceive that political deadlock with neighbors lead to economic stagnation. I believe that political dialogue and economic cooperation go hand in hand.”(Suleri, 2017)

One political person expressed his view that, “SAARC would not perform effectively until and unless India-Pakistan political rivalry on Kashmir issue resolved.” (Nasreen, 2017)

However, most of the respondents emphasized on the urgent need of macroeconomic reforms on domestic level, so that local business community be fully equipped with research and development facilities and can face the foreign competition.

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References

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Chapter 6

Conclusion

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The study finds out that the phenomena of regional integration is directly linked with the liberal economic order (global economic integration). In addition it presents the synthesis of two extremely opposite academic views i.e. regional integration is the anti-globalization force (means it is a stumbling bloc to global integration) and regional integration is a preparation for the long leap towards globalization (means it is a stepping stone towards global integration).

This study proves that regional integration and globalization both are interdependent elements of global economic system and both views, instead of opposing, re-enforce each other. The convincing arguments in this regard is that, world trade organization which is the central pillar of multilateral trading system and main vehicle of globalization never opposes regional trade agreements, while its article GATT – XXIV provides legitimacy to regional trade agreements (RTAs).

Further, WTO’s enabling clause legally protects the Generalized System of Preferences (GSP). Developed countries can give unilateral preferential treatment to the products which are originated from developing countries. Though it seems contradictory to the spirit of WTO’s core principles of non- discrimination (MFN) and reciprocal trade liberalization, yet it is not against the overall spirit of global trade liberalization agenda of WTO. For example after (WW – II) U.S opened its market to Western European products, though Western Europe did not reciprocate this act of U.S. Even, U.S supplied monetary aid to Europe in the guise of Marshal Plan to rehabilitate the European economy from the distracting effects of World War Second. Hence U.S plan towards reconstruction of Europe through offering it unilateral trade liberalization and providing it economic aid simultaneously, made possible the impressive recovery and growth in Europe. Eventually, the developed Europe made it possible to achieve more far-reaching trade liberalization in 1960s.World Trade organization has also adopted the same strategy (which adopted U.S from late 1940s to early 1950s).

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For the world wide promotion of free trade, WTO provides space for regional and bilateral free trade agreements (though Parallel to this, WTO has started working on the success of its global integrated free trade agenda), especially after the battle of Seattle (when riots erupted against global free trade agenda which surrounded the WTO Ministerial Conference in Seattle) and the unsuccessful Doha Round of trade liberalization negotiations (which raised a question mark on the survival of WTO).

All members of WTO are obliged to notify the Regional Trade Agreements (RTAs) in which they participate. RTAs, which are reciprocal preferential trade agreements between two or more than two partners, are authorized under the WTO but they are subject to a set of rules. WTO has constituted the committee on RTAs that considers individual regional agreements under the transparency mechanism for RTAs (WTO, 2018). The Committee is authorized to make possible the systematic implication of RTAs for the multilateral trading system. United States of America and European Union took the initiative and signed a number of bilateral and regional trade agreements with developing countries and regions. So, the first model of regional integration was ‘North-South’ model, where developed countries signed the free trade agreements with one or more than one developing countries or regions.

However, the second model of regional Integration was comprised of ‘South- South’, where the developing countries entered into one or more than one RTA with other developing countries or regions. In this developing countries were motivated by the idea that to compete with the outside world, in the realm of WTO led multilateral trading system, they will had to integrate their economies with each other to get comparative advantage on the rest of trading blocs and to be a single vice at WTO trade negotiation forum that might not be go unheard (their sole inspiration in this regard was the success story of EU).

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After analyzing the stated above post-World War – II international economic scenario in detail (in the first chapter), this study concludes that South Asian countries entered into the agreement of regional cooperation at intergovernmental level in the context of international economic scenario (which also affect the international political scenario as well). The convincing argument in this regard is that the One of the aims of SAARC was to collaborate with international political and economic organizations to cope with the changing global politico-economic scenario. Though it took seven years to create SAPTA (the first practical initiative of SAARC for trade liberalization), yet SAARC had started to work on the agenda to find out the possible area for economic cooperation since its own creation. This process accelerated after the establishment of the regional apex body of SAARC Chamber of Commerce and Industry (SCCI) in 1992 (see details in chapter two), It was representative of private sector and proved a life line for economic integration in the region in the purview of SAARC.

The regional offices of SCCI were located in all SAARC member countries, where, with the collaboration of respective Federal Chamber of Commerce and Industries, they motivated the government officials in their respective countries to adopt intraregional trade liberalization policy and assisted SAARC in preparing the frame work draft of SAPTA. So, at many summits, prior to the establishment of SAFTA, South Asian states showed their determination to use all regional synergies to get the maximum benefits of globalization and trade liberalization. In addition, at Colombo Summit (1998) it was decided that SAARC with the coordination of its member states would articulate the issues of common concern and took a position on them at WTO. Even SAARC Free Trade Agreement follows the WTO core rules of reciprocity and non-discrimination (though this theoretical foundation is not implemented practically yet). It also adopts the WTO based trade liberalization design which is led by tariff reduction strategy to liberalize the trade and have dispute settlement system on the line of WTO (but it is

220 relatively weak). In addition, like WTO, SAARC gives space to sub-regional cooperation under the Articles VII and X of the SAARC charter.

Moreover, this study concludes that South Asian Association for regional Cooperation (SAARC) is not a dead organization, though its progress is slow compare to its contemporary regional organizations. Actually, most of the academic literature try to judge its effectiveness on the lines of European Union and ASEAN and finds it ineffective-entity. On contrary, this study analyzes the effectiveness of SAARC in the context of critical geo-political and socio-economic realities which have been prevailed in heterogeneous society and finds it potentially effective forum that can keep aligned the whole South Asia region on the road of enormous growth (if utilize this forum properly).

The valuable contribution of SAARC to the region is that it has mobilized the two hostile nuclear countries of the region (India and Pakistan) for trade with each other in the purview of SAFTA (though the potential of trade at both side of the border is untapped yet) and reduced the tension of potential nuclear war (as the danger of nuclear war had been increased after kargil combat in 1999). Steve Coll, a renowned American journalist, writes that Clinton seriously advised Pakistan (when prime minister Nawaz Sharif visited him after kargil event) to engage India with Trade, as Clinton was hopeful that free trade would help out Pakistan to solve its socio-political crisis along with easing border tensions (Coll, 2005).

It is a fact that the only commercially beneficial border reduces the danger of hot war (as liberal economic, theory suggests that peace can be achieved in low politics). This claim seems right when we look at the near history that when after Uri Attack in Indian Occupied Kashmir, Indian government announced to abandon trade with Pakistan, but she could not closed the borders for bilateral trade due to intensive protest of Indian exporters against this decision which may could be the potential losers in this regard (Express

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Tribune, 2016). Eventually, Government of India took the decision back. So, it is the need of the time for both Pakistan and India to avoid high politics and to make full use of all bilateral synergies to facilitate bilateral trade, because trade is the life line for the progress of SAARC and the development of this region.

However, as for as Pakistan-India trade relations are concerned, along with SAARC, there are some other factors which have mobilized bilateral trade between India and Pakistan. Most of the South Asian economies undertook reforms to achieve trade openness from the mid-1980s to mid-1990s due to international pressure. On the directions of Washington Consensus, IMF and WB both introduced Structural Adjustment plans in third world countries as a strategy for economic development and poverty alleviation. The main pillars of Washington consensus were, trade liberalization; liberalizations of inward foreign direct investment; privatization of state enterprises; deregulation (abolition of regulations that restrict market access or competition); and legal security for property rights. Especially, IMF bailouts tended to involve free market reforms as a condition of receiving money.

So, under the extreme pressure of IMF, Pakistan and India abandoned trade protectionism in favor of openness as the strategy for development and poverty alleviation in early 1990s. India resisted the trade liberalizing policy after 2000 and remained its economy closed to free trade. While Pakistan followed the route of liberalization since 1996/97 (including its agriculture trade policies). Consequently, Pakistan was least protected market in the South Asian region in about 2004 while India was the highly protected economy of the region.

The question is that why SAAR could not show its progress effectively in increasing intraregional trade yet. The answer is not quite simple as most of the studies consider that political tension between Pakistan and India is the sole responsible in this regard (though it is the half-truth). The best answer to

222 this question is a little bit complicated but it can be traced in the light of international political economy. Virtually, the accelerated process of economic globalization, after 1990s, changed the politico-economic fabric of the globe. Westphalian system of states was replaced with liberal state order in new scenario. In former system, state had absolute authority over its economic subjects within its territory. So state had right to regulate the market forces for the protection of general public interest. While, in later system due to the observance of the capitalism worldwide, state was no more capable to control its economic subjects. In the age of individual property rights and copy rights, state’s sovereignty was challenged by huge multi- national and transnational corporations. So a new un-written social contract came into existence in the guise of Washington consensus. Now, the state is only responsible for the supply of public goods through promoting competitive private sector.

Hence, the burden of development has been shifted from state to the private sector while, state has its duty to make rules and regulation to facilitate private sector (so that it can be flourished strongly). Privatization, deregulations, democratization and decentralization are the basic pillars of the liberal state order. Global North (the developed states that includes U.S and Western European countries) has been surrendered before this new social contract as it was initiated and lobbied by those huge Multi-National and Transnational Corporations which belongs to them, whiles the Global South (that includes all developing and least developing countries including SAARC countries) is still hesitant to adopt this social contract.

The reason behind the reluctance of developing countries to adopt new social contract is seemed that they are not highly capitalist economies, rather they have mix economic design of production (semi-industrial and semi- agricultural). The trade and development patterns are still depended on the natural resources. While, global economic development and ranking in today’s world depends on the contribution of knowledge based products in

223 the economy that is closely linked with the advancement of technology, research and the quality of higher education. Knowledge based growth requires development in science and technology. The effective macroeconomic policy measures are required for development of human resources. For developing states, to achieve these factors of production are not an easy task. So, due to lack of scientific and technical education, developing countries have to rely on conventional style of industrialization (labour incentive production instead of Knowledge base industrialization). A large starta of society, in global South, is living below poverty line. Colonial legacy has left behind a Shaky socio-Economic structure which is still far from stability and healthy progressive norms. So, primarily, they show unwillingness to accept this social contract, because they have apprehensions that in this way they will have to abundant their newly earned sovereignty (in result of ).

Since MNCs have outsourced their production houses in third world countries (to exploit low cost input to get the competitive advantage in international market against their competitor industries), the situation has been quite changed. States in global South are running between two extremes i.e. they are simultaneously adopting commercial liberalism (through participating in bilateral, regional and global trade agreements) and mercantilisms (by adopting protectionist measures i.e. non-tariff Barriers to enhance their invested economic interests at the cost of reducing other state’s economic benefits).

So, at the same time states seek access to foreign markets for its domestic economies of scale to maximize the profit of the affiliates of MNCs (to whom they are hosting) and wealthy local producers (because both of them have bigger production units and produce products on economy of Scale that required access to foreign market for proper consumption) and take protectionist measures to restrict free flow of import to protect a large size of their small producers (that can target only local market for their product’s

224 consumption due to relatively smaller production units they carry). In case of SAARC, all members are not able to produce their merchandises on economy of scale but their economic structure is based on the small and medium sized business enterprises. However, India has developed larger unites in some sectors which have capacity to extend their business worldwide. In this situation, the business communities of other member countries are afraid of the dominance of Indian products in the region. Due to this potential threat they influence their governments towards protectionism.

As for as the Interstate political conflicts between Pakistan and India are considered the liberal economic theory allows to explore the possibility of economic integration among South Asian countries in spite of the political strategic issues; because it assumes that free trade would eventually help out to resolve their deep rooted socio-political problems through making the borders commercially beneficial, yet the possibility of economic integration and cross border investment among the South Asian countries without considering the politico-strategic questions is not a pragmatic approach. But at the same time, it is considerable that history of the region denies the impossibilities of economic integration between India and Pakistan even in the presence of geo-political tensions.

Interestingly, since 1947 to mid-1960s, the mobility of capital and labor was not restricted between India and Pakistan. During that period, a number of business entities and funds have been transferred across the borders. This free movement have provided facilitation in flourishing business empires across the borders. After partition, the process of migration took six years to be completed (till 1953). In addition, early days after the independence, Baloch Regiment (Pakistan Army) had been deployed in the major cities of India to provide safe exit to those Muslims who wanted to migrate to Pakistan. Pakistani flag on the residences of Muslims in Indian provinces and

225 deployment of Pakistan Army in major Indian cities had never created law and order problems in India.

Further, for a long time, after partition, cricket match between the two states were considered the most awaited thrilling event by both sides of the border. The unfortunate severe clashes, killing and brutalities were observed in the divided provinces of Punjab and Bengal – not in the provinces (UP, CP, Gujarat, Sindh and Mumbai), which made decision of the at earlier stage. This instance is sufficient to realize the possibility of economic integration among the two nations despite historical controversies.

The countries can maintain economic integration after partition like United States of America and Canada. Peace, between hostile nations, cannot be achieved through only defense or trade accords and agreements. All defense accords including minimum capability and first attack doctrines provide mere adjustments to minimize apprehensions. For sustainable peace and creation of an environment of mutual relations like USA and Canada, the restoration of mutual trust and relations among the people as well as the governments between Pakistan and India is required. Peace may be ensured only by free movement of goods and services and relations among the people. However, these free movements and across the border relations may create some issues in the political and civil governance, and the governments of the countries are avoiding from handling these governance related issues.

Finding about the Importance of Private Sector in Trade Negotiations

At present, all types of trade negotiations are taking place at the government level, both in the case of WTO and SAFTA. Business communities, the actual actors, have, by and large, been left out. All kinds of economic integration including permission of the cross border investment and financial integration require the greater degree of liberalization. Without liberalizing economies and economic freedom, economic integration cannot be achieved. After 1979, 226 it was observed that South Asian countries are moving towards liberalization. This movement has been accelerated after the disintegration of Soviet Union. It is noticeable that regional integration cannot be successful in the absence of private sector and new style of public management. The lesser size of government and higher contribution of private sector in state activities ensure the success of liberalization in the purview of SAARC. Economic freedom and restriction free mobilization of labor and capital will provide a catalyst in the success of regional economic integration in South Asia.

Recommendation

1. Business communities and private sector representatives must be on board (to be able to identify the trade related problems more clearly and to solve them efficiently) in all trade negotiations to materialize the true spirit and benefits of SAFTA. 2. The state should have lesser control over the monetary and fiscal policies. Because, the less regulatory role of the state allows the large markets to work. The World Development Indicators (World Bank, 2012), and World Economic Forum Report (2012) also indicate tha business regulations and economic development correlate with each other positively. 3. Theoretically, market economy is mostly considered to be beneficial as it promotes growth. However, as markets open (free trade starts), competition stiffens and fresh challenges emerge. Hence, the efforts for boosting regional trade needs to be concurrent with SAARC nations ‘aspirations. Trade should be conducted on terms that provide a level playing field to all stakeholders.

Findings about the Issue of Non-Tariff Barriers

India is more protectionist in compare to Pakistan though she has granted MFN to Pakistan since 1996, yet the excessive usage of extensive NTBs,

227 towards Pakistan export items violate the basic spirit of free trade under findings SAFTA and WTO

Though India argues that Non-tariff barriers to intra-regional trade are applied uniformly to all SAARC members’ states, yet Pakistani exporters often complain that India’s commerce department and custom office apply strict regulation to Pakistan’s consignment comparatively. For instance, India usually observes general tariff on imported goods 12.5% except agriculture, garments and textile items in which Pakistan have relative advantage and is liable to export. These items are subject to “composite tariff” in addition to ad valorem tariff. The NTBs are the main hurdle for export from Pakistan to India. Businessmen frequently complains that arbitrary reclassification of the HS code (under which the product could be released) is a norm. In addition, delay in clearance and non-transparency is a routine matter.

The Pakistani exporter also complained that Indian banks do not facilitate them, for example they do not honor letter of credits opened by Pakistani banks beyond US$10,000. Consequently, they have to release shipment in many parts that raises the transport cost and overhead. Further, there is no effective courier service between Pakistan and India, so all burden is on the Asian Currency Union (that becomes the cause of delay in payments).

Pakistan’s exports to India in all food items and agricultural products are the subject of import license and SPS certification. In addition, these products are tested at Port Health Authority (PHA). India does not accept certification from Pakistani labs, whereas accept other international labs results in this regard. Several time, when Pakistani consignment reached on the Indian ports, the officials of the PHA are not available, that cause delay. Sometime the samples are sent to other Indian Labs and Pakistani exporter have to accept the result.

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In response Pakistan also imposes NTMs to Indian food items. Pakistan restricts most of Indian imports from Wagah border. Only 138 tariff lines are allowed to inter in Pakistan via Wagah. The nature of non-tariff measures is sanitary and phytosanitary and lack of infrastructure.

Recommendations

1. Pakistan should raise the issues of NTBs and NTMs with India on related forums effectively. 2. Pakistan and India both have to harmonize and simplifies the custom rules and to encourage trade under SAFTA. 3. India should also accept the certification from Pakistani lab, on the other hand, Pakistan should try to upgrade their lab’s standard. 4. Both sides of the border take immediate policy initiatives to improve better transportation links in all modes of trade routes i.e., rail, road, sea and air routes. Due to lack of connectivity, logistic costs in South Asia are very high ranging between 13-14% per cent of the commodity value, as compared to eight per cent in US. Connectivity encompassing road and rail links, telecommunications and travel is an essential prerequisite of regional economic growth. 5. Improved infrastructure and growth through improved connectivity would allow South Asia to share its benefits more widely. The state of physical infrastructure in South Asia needs to be improved 6. Within the region, resolving financial problems pertaining to intra- regional trade and investments should not be left to the central banks of a single country. To do that all member countries should co-opt their central banks to evolve compatible structures and regulatory mechanism.

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Finding about Informal Trade between Pakistan and India

Due to restriction on formal trade, volume of informal trade is increasing day by day. Currently, Pakistan follows the negative list approach to trade with India. The tariff lines (products) that are enlisted in negative list are officially prohibited to import from India. In this regard, high potential import items (that are included in negative list) are imported (by Pakistan) from the far countries like USA, Viet Nam and Australia. Out of top 25 Pakistan’s high potential import products (that are not on the Negative List), India is an important source of imports for only 8 products. A study conducted by the Indian Council for Research on International Economic Relations shows that the estimated figure of informal trade between Pakistan and India was $ 4.7 billion in 2012-2013. Spices, jewelry, cosmetics, Textiles, auto parts and pharmaceuticals are the main commodities that are reported as being traded illegally between the two countries. Moreover, most of the informal Indian trade is re-routed to Pakistan through third countries especially via Dubai, Afghanistan (Indian goes to Afghanistan due Pakistan-Afghanistan Transit Agreement and then smuggled from Afghanistan to Pakistan via border cities), Sri Lanka and Hong Kong.

Expansion in the volume of informal trade hurts the manufacturing community in Pakistan. Pakistani products cannot compete with duty free Indian products which are available at chafer prices in the local market. In addition government has to bear revenue loss, as the informally traded goods do not pass through the formal custom procedures. Further, these informally traded food and pharmaceutical items are not checked by the quality standards, so their use, some time, can be hazardous to human health.

Recommendation

1. To satisfy the rising consumer demand and to narrow down the illegal cross border exchanges or merchandise, the governments of both sides should take pro-trade policy initiatives.

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2. The trade normalization between Pakistan and India can help this endeavor. 3. Pakistan can reduce cost by importing goods from India rather than from other countries from which freight becomes an important component of cost. 4. Pakistan can achieve potential benefits of granting NDMA / MFN status to India in this manner.

Finding about the Issue of MFN/NDMA

The comparative analysis of tariffs that have been applied by Pakistan and India To each other’s exports since the implementation of SAFTA shows that Pakistan applies relatively less tariff rate on India ( for example, in 2013 average tariff rate applied by Pakistan was 6 percent) , whereas, India applies relatively high tariff rate ( of 14.6 percent in 2013) on Pakistan. In addition, Pakistan has a lower Overall Trade Restrictiveness Index (OTRI) than India. Pakistan has an OTRI value of 22.2 whereas India has an OTRI value of 46.7 (PBC, 2013). India’s OTRI value is the highest not only in South Asia, but is also the highest in Asia. Further, India offers substantive support to its producers (in the form of subsides and export support schemes) and has export capability to Pakistan.

Though, Pakistan has also a reasonable export potential to India but it does not give adequate subsidies to its producer and exporters. Along with this, Pakistan maintains benign NTBs towards India. Hence if Pakistan awards NDMA/MFN to India without taking any pre-cautionary measures, trade deficit with India will be severely high. In result, Pakistani products with relatively high prices (due to government non-supportive policies) would not be well celebrated in local Indian market, while Pakistan local market would be flooded with low price (subsidized) Indian products. In these circumstances trade normalization with India would not be beneficial for Pakistan.

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Recommendations

If Pakistan grant NDMA to India, for mutual benefits, both economies will have to observe the following issues seriously 1. Pakistan should adopt WTO sanctioned trade defence mechanism to prepare its domestic industry to cope with the challenges of post trade normalization (with India) scenario. 2. Pakistan should subsidize its producers and exporters through providing research and development facilities and reducing the cost of doing business 3. India should be agree to lower down the NTBs gradually 4. The details and time-frame of India’s promised concessions to Pakistan must be determined and considered before the granting of NDMA 5. India’s concessions to Pakistan must be consistent with its concessions to other SAFTA countries such as Bangladesh and Sri Lanka to ensure Pakistan the fair access to the Indian market in Post – NDMA/MFN scenario.

Finding about the Sub-Regional Initiatives in SAARC Countries

The study finds that though SAARC’s slow progress in regional economic integration has led to sub regional integrational initiatives, yet this sub regional trend is not the substitute of entire region integration which SAARC offers. An entirely integrated South Asia can create positive and effective impact factor on global trade as it has a great potential to become a production hub of textile and clothing.

Recommendation

Virtually, the trade in intra-industry is not fully utilized in the region for example Pakistan and India both are cotton producer countries the quality of

232 their cotton is consider the best worldwide. Both economics are enriched with state of the art industries. While, Bangladesh manufactures garments at lowest cost worldwide. In addition, Sri Lanka has great potential in shipping industry. If Pakistan and India process their high quality cotton into textile fabric Bangladesh manufactures the garments with this fabric and all of three countries shipped the garments to markets abroad through Sri Lankan shipping industry. All of them can achieve a comparative advantage in fast processing and shipping to market abroad on rest of the cotton producing and garment manufactures world.

Finding about political will

Interstate political disputes among SAARC countries (especially between Pakistan and India) are considered the basic obstacle in the implementation of SAFTA (in the light of various studies). Although, other factors such as non-tariff barriers (which includes non-tariff measures and technical measures to trade), absence of trade facilitation among SAARC members and bureaucratic hurdles are also important factors which affect the trade under SAFTA negatively, but it is obvious that large scale economic cooperation and integration is not possible in the presence of these political disputes.

So, the constrained in the evolution of SAARC as a meaningful economic entity, is not the shortage of resources, but the lack of political will in the regional leadership towards resolving their political disputes. There are examples of other regions which adopted mutual economic cooperation despite the existence of disputes. The best example of this model is the increased trade between China and India, China and Japan, and China and Philippines. The second model fitted the case of SAARC where inter-state conflicts have taken the center stage and trade and economic activity has been held hostage to their resolution.

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The trend of popular decision making to improve the vote banks of ruling political parties is another major cause of slow growth and under development both economies. Majority of the politicians in Pakistan and India think about the next elections. They take all those steps which are necessary to win the elections. In this regard, subsidies, grants, paying stipends and generating employment opportunities in public sector and unsustainable projects are the common tools of those policy measures. Sentiments and emotions, in the names of patriotism, religion and welfare create, some time, unrest in the society and can create hindrance in the way of peace, development and good relations with the neighboring countries. In addition, such popular decision making some time derail the patterns of public finance and consequently, leads to underdevelopment.

Further, Pakistan and India both spend a large part of their resource on the unproductive investment because of the fear of war. The mutual relations between the people of both neighbor countries and removal of the restrictions in the movement of people, goods, services and capital can remove such fears.

Recommendations

1. Pakistan and India both should make concerted efforts to build mutual trust so that the process of regional cooperation can move forward. For this purpose, they should display their resolve to tackle their major political disputes like Jammu and Kashmir through a sustainable dialogue framework within a given time frame. Such a comprehensive agreement will greatly help in creating trustworthy environment in South Asia and assist in achieving early economic cooperation among SAARC countries. 2. The charismatic leadership is required at the both side of the border which may can create a positive public opinion to resolve these

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sensitive interstate conflicts which have their socio-economic implications at both sides of the border; 3. Meanwhile SAARC countries should continue to facilitate bilateral trade and investment without waiting for the resolution of inter- state disputes. 4. SAARC member states need to keep in view that economic dynamism through mutual economic reliance creates its own peace dynamics and generates growth. There is a need for carefully thought-out processes of negotiations and a comprehensive package of agreements followed by a sound monitoring & management mechanism that is practical, and efficient, capable of comprehensively addressing political disputes and existing impediments to economic cooperation. 5. There is also a need to enhance people-centric regional cooperation to create social harmony in South Asia. 6. Promotion of intraregional tourism could paved the way for people to people contact which may further leads to trade, investment and economic cooperation. So, a joint Tourism infrastructure is developed is required for facilitating travel and tourism in the region. 7. To facilitate free environment, SAARC must jointly establish a competitive research Hub that can evaluate the relative competitiveness of SAARC countries. This exercise can be useful to make better policy options for economic integration. 8. To support intraregional trade Pakistan and India must review their domestic macroeconomic policy and try to develop complementarities in their economies. 9. SAARC, with the collaboration of its member states, should develop a SAARC Bank to facilitate trade and investment in the region.

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Findings of Primary Data Analysis

 Main players of SAARC are Pakistan and India, borders of other SAARC members are attached with India geographically instead of Pakistan India is playing a good game on behalf of small SAARC countries. While Pakistan only is in a position to resist with India offensive attitude (like big brother) within SAARC platform.  India vote Bank is based on Anti Pakistan slogans which hurts the Pakistan – India Trade and Political relations as well.  India’s hegemonic role in SAARC is the major hindrance in the progress of SAARC.  Political influential economic interest groups (it includes cartels in particular industries) through lobbying try to mold government trade policy in their favour. This is an un-documented fact which hinders India – Pakistan trade relations drastically.  Quality + Price + Time of delivery are the base of business and a country who provide an all of three according to our demand she is good for us (in purpose for Business)  Non-tariff barriers are altering the spirit of free trade under SAFTA for example internationally 10% inspection duty on cargo is applicable but in case of Pakistan – India trade, India charge 100% for this purpose.  Demand of difference certifications for the clearance of cargo even in SAFTA included items discourage the bilateral trade.  Visa policy is lengthy and limited, without easy movement of Business man / women trade between the two countries.  Trade policy of Pakistan is gender blind, Business women are not supported and facilitated by the government of Pakistan, whereas trade with India is economical for Pakistani Business women.

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Recommendation in the light of Primary data analysis

 India should revise its non-tariff trade restriction policy and should shift on Tariff led trade policy.  Visa facilities should be granted on reciprocal basis at both side of the Wagah border. At Wagah border (No Man’s Land) there should be specify a visa free place where business man of both sides can arrange their business meetings frequently.  Duty ratio should be Product wise / Industry wise if any country feel real domestic injury in particular sector / sectors in case of free trade but don’t restrict the bilateral trade all about.  India should shift its vote bank from anti-Pakistan slogans to other socio-economic development related slogans through harnessing the public opinion in this regard.  Civil society of Pakistan and India should sensitize their consumers about their rights and potential benefits under the trade liberalization between Pakistan and India. The insightful consumers can watch the trade policies of their respective governments consciously and can raise voice for their rights.

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Bibliography

Books

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Bolanos, A. (2016). A Steo further in the theory of regional integration: A look at the Unasur's Integration Strategy. France: Universite Lyon Press. Bose, S., & Jalal, A. (2004). Modern South Asia His, Cul, Pol. Oxford University Press. Bruslin, S., Hughes, C. W., Philips, N., & Rosamond, B. (n.d.). New Regionalism in the Global Political Economy. Lahore: www.amazon.com/regionalism-global-political-economy- globalisation/dp/041527768X. Chamber, S. (2016). NTM Bulletin October 2016 Issue 02. SAARC Chamber of Commerece and Industry. Claval. (1987). The Region as geographical economic and cultural concept international. Social Science Journal, 155-172. Contel. (2015). Concepts of region and regionalization: aspects of its evolution and possible uses to health regionalization. Saude Sao Paulo, 24(2). Darbedk, Z. (2005). An Alternative Overview of Regionalism: in can Regional Integration Arrangements Enforece Trade Disciplien? The Story of the EU Enlargeement. New York: Palgrave Press. Das, D. K. (1995). SAARC: Regional Co-operation and Development. New Delhi: Deep & Deep Publications. David Ricordo’s theory comparative advantage become core avocate for internal trade. Dougherty, J. E., & Pfaltzgratt, R. L. (2013). Contending Theories of International Relation. Lahore: biblio3.url.edu.gt/publi/libros/2013/terriapugna-relacionesI/01-.pdf. Eckuland, R., & Tollison, R. (1997). Politicized Economy: Monarchy, Monply and Marchantializm. Taxes: Cambridge University Press. Edward, D., Mansied, & Milner , V. (1999). International Organization. Cambrdidge: Cambridge University Press.

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Lindberg, L. (1971). Political Integration as a Multidimensional Phenomenon Requiring Multivariate Measurement. Cambridge: Harvard Univsity Press. Little, I. M. (1991). Economic Development: Theory, Policy and International Relations, Pakistan. National Book Foundation. Little, M. (19991). Economic Development Theory, Policy and Internaional Relations. New York: Cambrdidge University Press. M, S. (n.d.). Goals and Objective of the South Asian for Regional Cooperation. Lahore, Pakistan: www.preservearticles.com/201104105205/saarc-south-asian- association-for-regional-cooperation.html. Mahmood, A. (2002). WTO Agreement on Agriculture in Post Doha Scenario (SAARC). SAARC Chamber of Commerce & Industry. Mahmood, M. (1987). Regional Integration in South Asia Perspective. New Delhi: Chand & Company Ram Nagar. Mander, J., & Goldsmith. (1996). The Case Against the Global Economy and Turn Toward the Local. San Fransisco: Sierra Club book. Mason, T.D. and Turay, A.M, eds.(1994). Japan, NAFTA and Europe. New York: Scholarly and references division, ST. MARTIAN’S Press, INC. Ministry of Commerece. (2011). Ministry of Comerece, India. Ministry of Commerece, New Delhi, India. Mujtaba, S. A. (2005). Sounding in South Asia. New Dawn Press. Muni, S. D. (2010). The Emerging Dimensions of SAARC. Singapore: Foundation Book. Naqvi, S. N., & Samad, S. A. (1992). SAARC Link: An Econometric Approach. Lahore: Vanguard Books (pvt) ltd. Oatley, T. (2004). International Political Economy: Interest and Institutions in the Global Economy. Delhi: Pearson Education. Pasha, H., & Pasha, A. (201). Non-Tariff Barriers of India and Pakistan and their Impact. Retrieved from

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http://www.sjbipp.org/publications/PR/projectreport/PR-25-16.pdf: http://www.sjbipp.org/publications/PR/projectreport/PR-25-16.pdf\ Phadnis, A., & Hussain, K. (2011, September 11). India-Pakistan trade: India tackles non-tariff barriers head-on. Karachi, Pakistan, Sindh. Priyanka Kher, (2010) “Political Economy of Regional Integration in South Asia”. Background Papers RVC. 5. UNCTADD. Rabkin, J. A. (2005). Law Without Nations? New Jersey: Princeton University Press. Rahman, D. S. (2001). SAARC in The New Millenium. Rawalpindi: A Friends Publication. Rawalpindi Chamber Of Commerce . (2011). Non Tariff Barriers (NTB’S) Between Pakistan & India . The Rawalpindi Chamber Of Commerce & Industry. Romana Alexandra Rosu, (2013) “Asymmetric Interdependence Power and Crisis in integration systems”. Romanian Review of International Studies. Vol. 2. Page No. 1. Romana Alexandra Rosu, (2013) “Asymmetric Interdependence Power and Crisis in integration systems”. Romanian Review of International Studies. Vol. 2. Page No. 1. S. Akbar Zaidi, “Issues in Pakistan’s Economy”. Oxford University Press. Pakistan. Page No. 486. Saurabh, & Upreti, B. C. (2012). Strengthning SAARC: Exploring Vistas for Expanded Cooperation. New Delhi: Indian Council of World Affairs. Schmidt, K. J. (1995). An Tlas and Survey of South Asia History . New York: ME Sharpe. Shaikh, N. (2006). The Future of Indo-Pak Relations. SAFMA South Asian Studies. Sharma, P. L. (2002). SAARC As a regional Allience . Jaipur: sublise Publishers. Sharma, S. (n.d.). SAARC Problems and Prospect. www.dailyexcelsior.com/saarc-problems-and-prospects/.

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Singh, S. K. (2012). Hand Book of SAARC: Sixteenth Summit and Beyond. New Delhi: Pentagon Press. Waters, Malcolm.(2003). Globalization, London: Routledge. Weiler, J.H.H.(2004). The EU, the WTO the NAFTA. Oxford: oxford university press. Whitelessey D. (1954). The Regional concept and the regional method. Retrieved from http://epgp.inflibnet.ac.in/epgpdata/uploads/epgp_content/S000017GE /P001784/M025349/ET/1512624973RegionandRegionalGeography.p df: http://epgp.inflibnet.ac.in/epgpdata/uploads/epgp_content/S000017GE /P001784/M025349/ET/1512624973RegionandRegionalGeography.p df Yin, R. K. (1984). Case Study research: Design and Methods. Newbury Park , 03. Zaidi, S. A. (2005). Issues in Pakistan's Economy. Karachi: Oxford University Press. Zanial, Z. (June 2007). Case Study as a Research Method. Journal Kemanusiaan bil , 09, 01. Websites Business Line. (2012). https://www.thehindubusinessline.com/economy/remove-non-tariff- barriers-to-facilitate-indo-pak-trade-cuts/article20477068.ece1. Retrieved from Remove non-tariff barriers to facilitate Indo-Pak trade: CUTS: https://www.thehindubusinessline.com/economy/remove-non- tariff-barriers-to-facilitate-indo-pak-trade-cuts/article20477068.ece1 Chamber, S. (2016). NTM Bulletin October 2016 Issue 02. SAARC Chamber of Commerece and Industry. Globalization. (2008). Wikipedia, the free encyclopedia. [online]. http://en.wikipedia.org/wiki/globalization

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Heinonen, H. (2006). Regional International and the State: The Changing Nature of Sovereignty in South Africa and Europ. Retrieved from https://helda.helsinki.fi/bitstream/handle/10138/21770/regional.pdf?se quence=2: https://helda.helsinki.fi/bitstream/handle/10138/21770/regional.pdf?se quence=2 Kayani, U., & Shah, S. (2014). Non-Tarif Barriers and Pakistan’s Regional Trade: A Legal and Economic Analysis of Non-Tarif Barriers in Pakistan, India, China and Sri Lanka. International Grow Centre. Lairds. (1999). Regional trade agreements: dangerous Liasons?:. Retrieved from https://onlinelibrary.wiley.com/doi/pdf/10.1111/1467- 9701.00254: https://onlinelibrary.wiley.com/doi/pdf/10.1111/1467- 9701.00254 Mahmood, A. (2002). WTO Agreement on Agriculture in Post Doha Scenario (SAARC). SAARC Chamber of Commerce & Industry. Ministry of Commerece. (2011). Ministry of Comerece, India. Ministry of Commerece, New Delhi, India. Pasha, H., & Pasha, A. (201). Non-Tariff Barriers of India and Pakistan and their Impact. Retrieved from http://www.sjbipp.org/publications/PR/projectreport/PR-25-16.pdf: http://www.sjbipp.org/publications/PR/projectreport/PR-25-16.pdf\ Phadnis, A., & Hussain, K. (2011, September 11). India-Pakistan trade: India tackles non-tariff barriers head-on. Karachi, Pakistan, Sindh. Rawalpindi Chamber Of Commerce . (2011). Non Tariff Barriers (NTB’S) Between Pakistan & India . The Rawalpindi Chamber Of Commerce & Industry. UNCTAD. (2012). http://unctad.org/en/PublicationsLibrary/ditctab20122_en.pdf. Retrieved from http://unctad.org/en/PublicationsLibrary/ditctab20122_en.pdf: http://unctad.org/en/PublicationsLibrary/ditctab20122_en.pdf

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Journals

Burki, S. (2006). South Ssia and the Multilateral Tading System. Lahore: South Asian Policy Analysis Network (SAPANA).

Claval. (1987). The Region as geographical economic and cultural concept international. Social Science Journal, 155-172.

Either, J. (1998). The New Regionalism. The Economic Journal, 108(449), 1149-1161.

Haberler, G. (1978). Less Developed Countires and the Liberal International Economic Order. Journal of Economics, 38(2), 145-160.

Hassan, M. (2001). SAARC a viable economic block? Evidence From gravity model. Journal of Asian Economic, 263-290. Heinonen, H. (2006). Regional International and the State: The Changing Nature of Sovereignty in South Africa and Europ. Retrieved from https://helda.helsinki.fi/bitstream/handle/10138/21770/regional.pdf?sequenc e=2:

Iqbal, M. (2006). SAARC: Origin grwoth, potential and achievements. Pakistan Journal of History and Culture, 7-23. Kelegama, S. (2004). SAFTA: A Critique. South Asian Journal, 1-8. Kemal, A. (2004). SAFTA and Economic Cooperation. South Asian Journal, 1-21. Panagariya, A. (1999). Trade Policy in South Asia Recent Liberalization and Future Agenda. The world Economy, 353-377. Pomfret, R. (1997). The Economics of Regional Trading Agreements. U.K: Oxford University Press.

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Rizvi, A. (2006). Problems of Regional Cooperation. South Asian Policy Analysis Network (SAFTMA), 131. SAARC Chambers. (2017). NTM Bulletin. ntm bULLETIN eDITION - iii .

SAFTA. (2006). SAFTA: Opportunities & Challenges. SAARC Chamber of Commerece and Industry (SCCI).

Slocum, N., & Langenhove, L. (2004). The Meaning of Regional Integration: Positioning Theory in Regional Integration Studies. Journal of Europen Integration, 26(4), 28-15.

Slocum, N., & Langenhove, L. (2004). The Meaning of Regional Integration: Positioning Theory in Regional Integration Studies. Journal of Europen Integration, 26(4), 28-15.

Wang, N. (2010, Februrary 04). The Relationship Between Regional Trading Block and Gloablization. International Jouornal of Economics and Finance, 2(1), 179-200.

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Annexure – 1 SAARC Agreement

AGREEMENT ON SAARC PREFERENTIAL TRADING ARRANGEMENT (SAPTA) Preamble

The Government of the People's Republic of Bangladesh, the Kingdom of Bhutan, the Republic of India, the Republic of Maldives, the Kingdom of Nepal, the Islamic Republic of Pakistan and the Democratic Socialist Republic of Sri Lanka hereinafter referred to as "Contracting States",

Motivated by the commitment to promote regional co-operation for the benefit of their peoples, in a spirit of mutual accommodation, with full respect for the principles of sovereign equality, independence and territorial integrity of all States;

Aware that the expansion of trade could act as a powerful stimulus to the development of their national economies, by expanding investment and production, thus providing greater opportunities of employment and help securing higher living standards for their population;

Convinced of the need to establish and promote regional preferential trading arrangement for strengthening intra-regional economic cooperation and the development of national economies;

Bearing in mind the urgent need to promote the intra-regional trade which presently constitutes a negligible share in the total volume of the South Asian trade; Recalling the direction given at the Fourth SAARC Summit meeting held in Islamabad in December 1988 that specific areas be identified where economic cooperation might be feasible immediately;

Guided by the declared commitment of the Heads of State or Government of the Member Countries at the Sixth SAARC Summit held in Colombo in

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December 1991 to the liberalisation of trade in the region through a step by step approach in such a manner that countries in the region share the benefits of trade expansion equitably;

Cognizant of the mandate given by the Sixth SAARC Summit in Colombo to formulate and seek agreement on an institutional framework under which specific measures for trade liberalisation among SAARC Member States could be furthered and to examine the Sri Lankan proposal to establish the SAARC Preferential Trading Arrangement (SAPTA) by 1997;

Recognising that a preferential trading arrangement is the first step towards higher levels of trade and economic cooperation in the region, Have agreed as follows: Article - 1 Definitions For the purpose of this Agreement: 1. "Least Developed Country" means a country designated as such by the United Nations. 2. "Contracting State" means any Member State of the South Asian Association for Regional Cooperation (SAARC) which has entered into this Agreement. 3. "Serious injury" means significant damage to domestic producers, of like or similar products resulting from a substantial increase of preferential imports in situations which cause substantial losses in terms of earnings, production or employment unsustainable in the short term. The examination of the impact on the domestic industry concerned shall also include an evaluation of other relevant economic factors and indices having a bearing on the state of the domestic industry of that product. 4. "Threat of serious injury" means a situation in which a substantial increase of preferential imports is of a nature to cause "serious injury" to domestic producers, and that such injury, although not yet existing, is clearly imminent. A determination of threat of serious injury shall

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be based on facts and not on mere allegation, conjecture, or remote or hypothetical possibility. 5. "Critical circumstances" means the emergence of an exceptional situation where massive preferential imports are causing or threatening to cause "serious injury" difficult to repair and which calls for immediate action. 6. "Sectoral basis" means agreements amongst Contracting States regarding the removal or reduction of tariff, non-tariff and para-tariff barriers as well as other trade promotion or cooperative measures for specified products or groups of products closely related in end-use or in production. 7. "Direct trade measures" means measures conducive to promoting mutual trade of Contracting States such as long and medium-term contracts containing import and supply commitments in respect of specific products, buy-back arrangements, state trading operations, and government and public procurement. 8. "Tariffs" means customs duties included in the national tariff schedules of the Contracting States. 9. "Para-tariffs" means border charges and fees, other than "tariffs", on foreign trade transactions of a tariff-like effect which are levied solely on imports, but not those indirect taxes and charges, which are levied in the same manner on like domestic products. Import charges corresponding to specific services rendered are not considered as para-tariff measures. 10. "Non-tariffs" means any measure, regulation, or practice, other than "tariffs" and "para-tariffs", the effect of which is to restrict imports, or to significantly distort trade. 11. "Products" means all products including manufactures and commodities in their raw, semi-processed and processed forms.

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Article - 2 Establishment and Aims

1. By the present Agreement, the Contracting States establish the SAARC Preferential Trading Arrangement (SAPTA) to promote and sustain mutual trade and the economic cooperation among the Contracting States, through exchanging concessions in accordance with this Agreement. 2. SAPTA will be governed by the provisions of this Agreement and also by the rules, regulations, decisions, understandings and protocols to be agreed upon within its framework by the Contracting States.

Article - 3 Principles

SAPTA shall be governed in accordance with the following principles:- a. SAPTA shall be based and applied on the principles of overall reciprocity and mutuality of advantages 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, trade and tariff policies and systems; b. SAPTA shall be negotiated step by step, improved and extended in successive stages with periodic reviews; c. The special needs of the Least Developed Contracting States shall be clearly recognised and concrete preferential measures in their favour should be agreed upon; d. SAPTA shall include all products, manufactures and commodities in their raw, semi-processed and processed forms.

Article - 4 Components

SAPTA may, inter-alia, consist of arrangements relating to:- a. tariffs; b. para-tariffs; c. non-tariff measures;

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d. direct trade measures.

Article - 5 Negotiations

1. The Contracting States may conduct their negotiations for trade liberalisation in accordance with any or a combination of the following approaches and procedures:- a. Product-by-product basis; b. Across-the-board tariff reductions; c. Sectoral basis; d. Direct trade measures. 2. Contracting States agreed to negotiate tariff preferences initially on a product-by-product basis. 3. The Contracting States shall enter into negotiations from time to time with a view to further expanding SAPTA and the fuller attainment of its aims. Article - 6 Additional Measures

1. Contracting States agree to consider, in addition to the measures set out in Article 4, the adoption of trade facilitation and other measures to support and complement SAPTA to mutual benefit. 2. Special consideration shall be given by Contracting States to requests from Least Developed Contracting States for technical assistance and cooperation arrangements designed to assist them in expanding their trade with other Contracting States and in taking advantage of the potential benefits of SAPTA. The possible areas for such technical assistance and cooperation are listed in Annex - I.

Article - 7 Schedules of Concessions

The tariff, para-tariff and non-tariff concessions negotiated and exchanged amongst Contracting States shall be incorporated in the National Schedules

251 of Concessions. The initial concessions agreed to by the Contracting States are attached as Annex - II.

Article - 8 Extension of Negotiated Concessions

The concessions agreed to under SAPTA, except those made exclusively to the Least Developed Contracting States in pursuance of Article 10 of this Agreement, shall be extended unconditionally to all Contracting States.

Article - 9 Committee of Participants

A Committee of Participants, hereinafter referred to as the Committee, consisting of representatives of Contracting States, is hereby established. The Committee shall meet at least once a year to review the progress made in the implementation of this Agreement and to ensure that benefits of trade expansion emanating from this Agreement accrue to all Contracting States equitably. The Committee shall also accord adequate opportunities for consultation on representations made by any Contracting State with respect to any matter affecting the implementation of the Agreement. The Committee shall adopt appropriate measures for settling such representations. The Committee shall determine its own rules of procedures.

Article - 10 Special Treatment for the Least Developed Contracting States

1. In addition to other provisions of this Agreement, all Contracting States shall provide, wherever possible, special and more favourable treatment exclusively to the Least Developed Contracting States as set out in the following sub-paragraphs: a. Duty-free access, exclusive tariff preferences or deeper tariff preferences for the export products, b. The removal of non-tariff barriers, c. The removal, where appropriate, of para-tariff barriers,

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d. The negotiations of long-term contracts with a view to assisting Least Developed Contracting States to achieve reasonable levels of sustainable exports of their products, e. Special consideration of exports from Least Developed Contracting States in the application of safeguard measures, f. Greater flexibility in the introduction and continuance of quantitative or other restrictions provisionally and without discrimination in critical circumstances by the Least Developed Contracting States on imports from other Contracting States.

Article - 11 Non-application

Notwithstanding the measures as set out in Articles 4 and 6, the provisions of this Agreement shall not apply in relation to preferences already granted or to be granted by any Contracting State to other Contracting States outside the framework of this Agreement, and to third countries through bilateral, plurilateral and multilateral trade agreements, and similar arrangements. The Contracting States shall also not be obliged to grant preferences in SAPTA which impair the concession extended under those agreements.

Article - 12 Communication, Transport and Transit

Contracting States agree to undertake appropriate steps and measures for developing and improving communication system, transport infrastructure and transit facilities for accelerating the growth of trade within the region.

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Article - 13 Balance-of-Payments Measures

1. Notwithstanding the provisions of this Agreement, any Contracting State facing serious economic problems including balance of payments difficulties may suspend provisionally the concessions as to the quantity and value of merchandise permitted to be imported under the Agreement. When such action has taken place, the Contracting State which initiates such action, shall simultaneously notify the other Contracting States and the Committee. 2. Any Contracting State which takes action according to paragraph 1 of this Article shall afford, upon request from any other Contracting State, adequate opportunities for consultations with a view to preserving the stability of the concessions negotiated under the SAPTA. If no satisfactory adjustment is effected between the Contracting States concerned within 90 days of such notification, the matter may be referred to the Committee for review.

Article - 14 Safeguard Measures

If any product, which is a subject of a concession with respect to a preference under this Agreement, is imported into the territory of a Contracting State in such a manner or in such quantities as to cause or threaten to cause, serious injury in the importing Contracting State, the importing Contracting State concerned may, with prior consultations, except in critical circumstances, suspend provisionally without discrimination, the concession accorded under the Agreement. When such action has taken place the Contracting State which initiates such action shall simultaneously notify the other Contracting State(s) concerned and the Committee shall enter into consultations with the concerned Contracting State and endeavour to reach mutually acceptable agreement to remedy the situation. In the event of the failure of the Contracting States to resolve the issue within 90 days of the receipt of original notification, the Committee of Participants shall meet within 30 days to

254 review the situation and try to settle the issue amicably. Should the consultations in the Committee of Participants fail to resolve the issue within 60 days, the parties affected by such action shall have the right to withdraw equivalent concession(s) or other obligation(s) which the Committee does not disapprove of.

Article - 15 Maintenance of the Value of Concessions

Any of the concessions agreed upon under this Agreement shall not be diminished or nullified, by the application of any measures restricting trade by the Contracting States except under the provisions as spelt out in other Articles of this Agreement.

Article - 16 Rules of Origin

Products contained in the National Schedules of Concessions annexed to this Agreement shall be eligible for preferential treatment if they satisfy the rules of origin, including special rules of origin, in respect of the Least Developed Contracting States, which are set out in Annex - III.

Article - 17 Modification and Withdrawal of Concessions

1. Any Contracting State may, after a period of three years from the day the concession was extended, notify the Committee of its intention to modify or withdraw any concession included in its appropriate schedule. 2. The Contracting State intending to withdraw or modify a concession shall enter into consultation and/or negotiations, with a view to reaching agreement on any necessary and appropriate compensation, with Contracting States with which such concession was initially negotiated and with any other Contracting States that have a principal or substantial supplying interest as may be determined by the Committee.

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3. Should no agreement be reached between the Contracting States concerned within six months of the receipt of notification and should the notifying Contracting State proceed with its modification or withdrawal of such concessions, the affected Contracting States as determined by the Committee may withdraw or modify equivalent concessions in their appropriate schedules. Any such modification or withdrawal shall be notified to the Committee.

Article - 18 Withholding or Withdrawal of Concessions

A Contracting State shall at any time be free to withhold or to withdraw in whole or in part any item in its schedule of concessions in respect of which it determines that it was initially negotiated with a State which has ceased to be a Contracting State in this Agreement. A Contracting State taking such action shall notify the Committee, and upon request, consult with Contracting States that have a substantial interest in the product concerned.

Article - 19 Consultations

1. Each Contracting State shall accord sympathetic consideration to and shall afford adequate opportunity for consultations regarding such representations as may be made by another Contracting State with respect to any matter affecting the operation of this Agreement. 2. The Committee may, at the request of a Contracting State, consult with any Contracting State in respect of any matter for which it has not been possible to find a satisfactory solution through such consultation under paragraph 1 above.

Article - 20 Settlement of Disputes

Any dispute that may arise among the Contracting States regarding the interpretation and application of the provisions of this Agreement or any instrument adopted within its framework shall be amicably settled by agreement between the parties concerned. In the event of failure to settle a

256 dispute, it may be referred to the Committee by a party to the dispute. The Committee shall review the matter and make a recommendation thereon within 120 days from the date on which the dispute was submitted to it. The Committee shall adopt appropriate rules for this purpose.

Article - 21 Withdrawal from SAPTA

1. Any Contracting State may withdraw from this Agreement at any time after its entry into force. Such withdrawal shall be effective six months from the day on which written notice thereof is received by the SAARC Secretariat, the depositary of this Agreement. That Contracting State shall simultaneously inform the Committee of the action it has taken. 2. The rights and obligations of a Contracting State which has withdrawn from this Agreement shall cease to apply as of that effective date. 3. Following the withdrawal by any Contracting State, the Committee shall meet within 30 days to consider action subsequent to withdrawal.

Article - 22 Entry into Force

This Agreement shall enter into force on the thirtieth day after the notification issued by the SAARC Secretariat regarding completion of the formalities by all Contracting States.

Article - 23 Reservations

This Agreement may not be signed with reservations nor shall reservations be admitted at the time of notification to the SAARC Secretariat of the completion of formalities.

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Article - 24 Amendments

This Agreement may be modified through amendments to this Agreement. All amendments shall become effective upon acceptance by all Contracting States.

Article - 25 Depositary

This Agreement shall be deposited with the Secretary- General of SAARC who shall promptly furnish a certified copy thereof to each Contracting State.

Annexure – 2 Agreement of SAFTA

South Asian Free Trade Area (SAFTA)

The Governments of the SAARC (South Asian Association for Regional Cooperation) Member States comprising the People’s Republic of Bangladesh, the Kingdom of Bhutan, the Republic of India, the Republic of Maldives, the Kingdom of Nepal, the Islamic Republic of Pakistan and the Democratic Socialist Republic of Sri Lanka hereinafter referred to as “Contracting States”

Motivated by the commitment to strengthen intra-SAARC economic cooperation to maximise the realization of the region’s potential for trade and development for the benefit of their people, in a spirit of mutual accommodation, with full respect for the principles of sovereign equality, independence and territorial integrity of all States;

Noting that the Agreement on SAARC Preferential Trading Arrangement (SAPTA) signed in Dhaka on the 11th of April 1993 provides for the adoption of various instruments of trade liberalization on a preferential basis;

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Convinced that preferential trading arrangements among SAARC Member States will act as a stimulus to the strengthening of national and SAARC economic resilience, and the development of the national economies of the Contracting States by expanding investment and production opportunities, trade, and foreign exchange earnings as well as the development of economic and technological cooperation;

Aware that a number of regions are entering into such arrangements to enhance trade through the free movement of goods;

Recognizing that Least Developed Countries in the region need to be accorded special and differential treatment commensurate with their development needs; and

Recognizing that it is necessary to progress beyond a Preferential Trading Arrangement to move towards higher levels of trade and economic cooperation in the region by removing barriers to cross-border flow of goods; Have agreed as follows:

Article – 1 Definitions For the purposes of this Agreement:

1. Concessions mean tariff, para-tariff and non-tariff concessions agreed under the Trade Liberalisation Programme; 2. Direct Trade Measures mean measures conducive to promoting mutual trade of Contracting States such as long and medium-term contracts containing import and supply commitments in respect of specific products, buy-back arrangements, state trading operations, and government and public procurement; 3. Least Developed Contracting State refers to a Contracting State which is designated as a “Least Developed Country” by the United Nations;

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4. Margin of Preference means percentage of tariff by which tariffs are reduced on products imported from one Contracting State to another as a result of preferential treatment. 5. Non-Tariff Measures include any measure, regulation, or practice, other than “tariffs” and “para-tariffs”. 6. Para-Tariffs mean border charges and fees, other than “tariffs”, on foreign trade transactions of a tariff-like effect which are levied solely on imports, but not those indirect taxes and charges, which are levied in the same manner on like domestic products. Import charges corresponding to specific services rendered are not considered as para-tariff measures; 7. Products mean all products including manufactures and commodities in their raw, semi-processed and processed forms; 8. SAPTA means Agreement on SAARC Preferential Trading Arrangement signed in Dhaka on the 11th of April 1993; 9. Serious injury means a significant impairment of the domestic industry of like or directly competitive products due to a surge in preferential imports causing substantial losses in terms of earnings, production or employment unsustainable in the short term; 10. Tariffs mean customs duties included in the national tariff schedules of the Contracting States; 11. Threat of serious injury means a situation in which a substantial increase of preferential imports is of a nature to cause “serious injury” to domestic producers, and that such injury, although not yet existing, is clearly imminent. A determination of threat of serious injury shall be based on facts and not on mere allegation, conjecture, or remote or hypothetical possibility.

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Article – 2 Establishment

The Contracting States hereby establish the South Asian Free Trade Area (SAFTA) to promote and enhance mutual trade and economic cooperation among the Contracting States, through exchanging concessions in accordance with this Agreement.

Article – 3 Objectives and Principles

1. The Objectives of this Agreement are to promote and enhance mutual trade and economic cooperation among Contracting States by, inter- alia: a. eliminating barriers to trade in, and facilitating the cross- border movement of goods between the territories of the Contracting States; b. promoting conditions of fair competition in the free trade area, and ensuring equitable benefits to all Contracting States, taking into account their respective levels and pattern of economic development; c. creating effective mechanism for the implementation and application of this Agreement, for its joint administration and for the resolution of disputes; and d. establishing a framework for further regional cooperation to expand and enhance the mutual benefits of this Agreement.

2. SAFTA shall be governed in accordance with the following principles:

a. SAFTA will be governed by the provisions of this Agreement and also by the rules, regulations, decisions, understandings

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and protocols to be agreed upon within its framework by the Contracting States; b. The Contracting States affirm their existing rights and obligations with respect to each other under Marrakesh Agreement Establishing the World Trade Organization and other Treaties/Agreements to which such Contracting States are signatories; c. SAFTA shall be based and applied on the principles of overall reciprocity and mutuality of advantages 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 tariff policies and systems; d. SAFTA shall involve the free movement of goods, between countries through, inter alia, the elimination of tariffs, para tariffs and non-tariff restrictions on the movement of goods, and any other equivalent measures; e. SAFTA shall entail adoption of trade facilitation and other measures, and the progressive harmonization of legislations by the Contracting States in the relevant areas; and f. The special needs of the Least Developed Contracting States shall be clearly recognized by adopting concrete preferential measures in their favour on a non-reciprocal basis. Article – 4 Instruments The SAFTA Agreement will be implemented through the following instruments:- 1. Trade Liberalisation Programme 2. Rules of Origin 3. Institutional Arrangements 4. Consultations and Dispute Settlement Procedures

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5. Safeguard Measures 6. Any other instrument that may be agreed upon. Article – 5 National Treatment

Each Contracting State shall accord national treatment to the products of other Contracting States in accordance with the provisions of Article III of GATT 1994.

Article – 6 Components

SAFTA may, inter-alia, consist of arrangements relating to: a. tariffs; b. para-tariffs; c. non-tariff measures; d. direct trade measures.

Article – 7 Trade Liberalization Programmed

1. Contracting States agree to the following schedule of tariff reductions: a. The tariff reduction by the Non-Least Developed Contracting States from existing tariff rates to 20% shall be done within a time frame of 2 years, from the date of coming into force of the Agreement. Contracting States are encouraged to adopt reductions in equal annual installments. If actual tariff rates after the coming into force of the Agreement are below 20%, there shall be an annual reduction on a Margin of Preference basis of 10% on actual tariff rates for each of the two years. b. The tariff reduction by the Least Developed Contracting States from existing tariff rates will be to 30% within the time frame of 2 years from the date of coming into force of the

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Agreement. If actual tariff rates on the date of coming into force of the Agreement are below 30%, there will be an annual reduction on a Margin of Preference basis of 5 % on actual tariff rates for each of the two years. c. The subsequent tariff reduction by Non-Least Developed Contracting States from 20% or below to 0 -5% shall be done within a second time frame of 5 years, beginning from the third year from the date of coming into force of the Agreement. However, the period of subsequent tariff reduction by Sri Lanka shall be six years. Contracting States are encouraged to adopt reductions in equal annual installments, but not less than 15% annually. d. The subsequent tariff reduction by the Least Developed Contracting States from 30% or below to 0 -5% shall be done within a second time frame of 8 years beginning from the third year from the date of coming into force of the Agreement. The Least Developed Contracting States are encouraged to adopt reductions in equal annual installments, not less than 10% annually. 2. The above schedules of tariff reductions will not prevent Contracting States from immediately reducing their tariffs to 0-5% or from following an accelerated schedule of tariff reduction. 3. a. Contracting States may not apply the Trade Liberalisation Programme as in paragraph 1 above, to the tariff lines included in the Sensitive Lists which shall be negotiated by the Contracting States (for LDCs and Non-LDCs) and incorporated in this Agreement as an integral part. The number of products in the Sensitive Lists shall be subject to maximum ceiling to be mutually agreed among the Contracting States with flexibility to Least Developed

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Contracting States to seek derogation in respect of the products of their export interest; and b. The Sensitive List shall be reviewed after every four years or earlier as may be decided by SAFTA Ministerial Council (SMC), established under Article 10, with a view to reducing the number of items in the Sensitive List. 4. The Contracting States shall notify the SAARC Secretariat all non- tariff and paratariff measures to their trade on an annual basis. The notified measures shall be reviewed by the Committee of Experts, established under Article 10, in its regular meetings to examine their compatibility with relevant WTO provisions. The Committee of Experts shall recommend the elimination or implementation of the measure in the least trade restrictive manner in order to facilitate intra- SAARC trade1. 5. Contracting Parties shall eliminate all quantitative restrictions, except otherwise permitted under GATT 1994, in respect of products included in the Trade Liberalisation Programme. Notwithstanding the provisions contained in paragraph 1 of this Article, the NonLeast Developed Contracting States shall reduce their tariff to 0-5% for the products of Least Developed Contracting States within a timeframe of three years beginning from the date of coming into force of the Agreement.

Article – 8

Additional Measures Contracting States agree to consider, in addition to the measures set out in Article 7, the adoption of trade facilitation and other measures to support and complement SAFTA for mutual benefit. These may include, among others: - a. harmonization of standards, reciprocal recognition of tests and accreditation of testing laboratories of Contracting States and certification of products;

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b. simplification and harmonization of customs clearance procedure; c. harmonization of national customs classification based on HS coding system; d. Customs cooperation to resolve dispute at customs entry points; e. simplification and harmonization of import licensing and registration procedures; f. simplification of banking procedures for import financing; g. transit facilities for efficient intra-SAARC trade, especially for the land-locked Contracting States; h. removal of barriers to intra-SAARC investments; i. macroeconomic consultations; j. rules for fair competition and the promotion of venture capital; k. development of communication systems and transport infrastructure; l. making exceptions to their foreign exchange restrictions, if any, relating to payments for products under the SAFTA scheme, as well as repatriation of such payments without prejudice to their rights under Article XVIII of the General Agreement on Tariffs and Trade (GATT) and the relevant provisions of Articles of Treaty of the International Monetary Fund (IMF); and m) Simplification of procedures for business visas. Article – 9 Extension of Negotiated Concessions

Concessions agreed to, other than those made exclusively to the Least Developed Contracting States, shall be extended unconditionally to all Contracting States.

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Article – 10 Institutional Arrangements

1. The Contracting States hereby establish the SAFTA Ministerial Council (hereinafter referred to as SMC). 2. The SMC shall be the highest decision-making body of SAFTA and shall be responsible for the administration and implementation of this Agreement and all decisions and arrangements made within its legal framework. 3. The SMC shall consist of the Ministers of Commerce/Trade of the Contracting States. 4. The SMC shall meet at least once every year or more often as and when considered necessary by the Contracting States. Each Contracting State shall chair the SMC for a period of one year on rotational basis in alphabetical order. 5. The SMC shall be supported by a Committee of Experts (hereinafter referred to as COE), with one nominee from each Contracting State at the level of a Senior Economic Official, with expertise in trade matters. 6. The COE shall monitor, review and facilitate implementation of the provisions of this Agreement and undertake any task assigned to it by the SMC. The COE shall submit its report to SMC every six months. 7. The COE will also act as Dispute Settlement Body under this Agreement. 8. The COE shall meet at least once every six months or more often as and when considered necessary by the Contracting States. Each Contracting State shall chair the COE for a period of one year on rotational basis in alphabetical order. 9. The SAARC Secretariat shall provide secretarial support to the SMC and COE in the discharge of their functions. 10. The SMC and COE will adopt their own rules of procedure.

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Article – 11 Special and Differential Treatment for the Least Developed Contracting States

In addition to other provisions of this Agreement, all Contracting States shall provide special and more favorable treatment exclusively to the Least Developed Contracting States as set out in the following sub-paragraphs: a. The Contracting States shall give special regard to the situation of the Least Developed Contracting States when considering the application of anti-dumping and/or countervailing measures. In this regard, the Contracting States shall provide an opportunity to Least Developed Contracting States for consultations. The Contracting States shall, to the extent practical, favourably consider accepting price undertakings offered by exporters from Least Developed Contracting States. These constructive remedies shall be available until the trade liberalisation programme has been completed by all Contracting States. b. Greater flexibility in continuation of quantitative or other restrictions provisionally and without discrimination in critical circumstances by the Least Developed Contracting States on imports from other Contracting States. c. Contracting States shall also consider, where practical, taking direct trade measures with a view to enhancing sustainable exports from Least Developed Contracting States, such as long and medium-term contracts containing import and supply commitments in respect of specific products, buy-back arrangements, state trading operations, and government and public procurement. d. Special consideration shall be given by Contracting States to requests from Least Developed Contracting States for technical assistance and cooperation arrangements designed to assist them in expanding their trade with other Contracting States and in taking advantage of the potential benefits of SAFTA. A list of possible areas for such technical assistance

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shall be negotiated by the Contracting States and incorporated in this Agreement as an integral part. e. The Contracting States recognize that the Least Developed Contracting States may face loss of customs revenue due to the implementation of the Trade Liberalisation Programme under this Agreement. Until alternative domestic arrangements are formulated to address this situation, the Contracting States agree to establish an appropriate mechanism to compensate the Least Developed Contracting States for their loss of customs revenue. This mechanism and its rules and regulations shall be established prior to the commencement of the Trade Liberalization Programme (TLP).

Article – 12 Special Provision for Maldives

Notwithstanding the potential or actual graduation of Maldives from the status of a Least Developed Country, it shall be accorded in this Agreement and in any subsequent contractual undertakings thereof treatment no less favourable than that provided for the Least Developed Contracting States.

Article – 13 Non-application

Notwithstanding the measures as set out in this Agreement its provisions shall not apply in relation to preferences already granted or to be granted by any Contracting State to other Contracting States outside the framework of this Agreement, and to third countries through bilateral, plurlateral and multilateral trade agreements and similar arrangements.

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Article – 14 General Exceptions a. Nothing in this Agreement shall be construed to prevent any Contracting State from taking action and adopting measures which it considers necessary for the protection of its national security. b. Subject to the requirement that such measures are not applied in a manner which would constitute a means of arbitrary or unjustifiable discrimination between countries where the similar conditions prevail, or a disguised restriction on intraregional trade, nothing in this Agreement shall be construed to prevent any Contracting State from taking action and adopting measures which it considers necessary for the protection of i. public morals; ii. human, animal or plant life and health; and iii. articles of artistic, historic and archaeological value.

Article – 15 Balance of Payments Measures

1. Notwithstanding the provisions of this Agreement, any Contracting State facing serious balance of payments difficulties may suspend provisionally the concessions extended under this Agreement. 2. Any such measure taken pursuant to paragraph 1 of this Article shall be immediately notified to the Committee of Experts. 3. The Committee of Experts shall periodically review the measures taken pursuant to paragraph 1 of this Article. 4. Any Contracting State which takes action pursuant to paragraph 1 of this Article shall afford, upon request from any other Contracting State, adequate opportunities for consultations with a view to preserving the stability of concessions under SAFTA. 5. If no satisfactory adjustment is effected between the Contracting States concerned within 30 days of the beginning of such consultations, to be

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extended by another 30 days through mutual consent, the matter may be referred to the Committee of Experts. 6. Any such measures taken pursuant to paragraph 1 of this Article shall be phased out soon after the Committee of Experts comes to the conclusion that the balance of payments situation of the Contracting State concerned has improved.

Article – 16 Safeguard Measures

1. If any product, which is the subject of a concession under this Agreement, is imported into the territory of a Contracting State in such a manner or in such quantities as to cause, or threaten to cause, serious injury to producers of like or directly competitive products in the importing Contracting State, the importing Contracting State may, pursuant to an investigation by the competent authorities of that Contracting State conducted in accordance with the provisions set out in this Article, suspend temporarily the concessions granted under the provisions of this Agreement. The examination of the impact on the domestic industry concerned shall include an evaluation of all other relevant economic factors and indices having a bearing on the state of the domestic industry of the product and a causal relationship must be clearly established between “serious injury” and imports from within the SAARC region, to the exclusion of all such other factors. 2. Such suspension shall only be for such time and to the extent as may be necessary to prevent or remedy such injury and in no case, will such suspension be for duration of more than 3 years. 3. No safeguard measure shall be applied again by a Contracting State to the import of a product which has been subject to such a measure during the period of implementation of Trade Liberalization Programme by the Contracting States, for a period of time equal to that during which such

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measure had been previously applied, provided that the period of non- application is at least two years. 4. All investigation procedures for resorting to safeguard measures under this Article shall be consistent with Article XIX of GATT 1994 and WTO Agreement on Safeguards 5. Safeguard action under this Article shall be non-discriminatory and applicable to the product imported from all other Contracting States subject to the provisions of paragraph 8 of this Article. 6. When safeguard provisions are used in accordance with this Article, the Contracting State invoking such measures shall immediately notify the exporting Contracting State(s) and the Committee of Experts. 7. In critical circumstances where delay would cause damage which it would be difficult to repair, a Contracting State may take a provisional safeguard measure pursuant to a preliminary determination that there is clear evidence that increased imports have caused or are threatening to cause serious injury. The duration of the provisional measure shall not exceed 200 days, during this period the pertinent requirements of this Article shall be met. 8. Notwithstanding any of the provisions of this Article, safeguard measures under this article shall not be applied against a product originating in a Least Developed Contracting State as long as its share of imports of the product concerned in the importing Contracting State does not exceed 5 per cent, provided Least Developed Contracting States with less than 5% import share collectively account for not more than 15% of total imports of the product concerned.

Article – 17 Maintenance of the Value of Concessions

Any of the concessions agreed upon under this Agreement shall not be diminished or nullified, by the application of any measures restricting trade

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Article – 18 Rules of Origin

Rules of Origin shall be negotiated by the Contracting States and incorporated in this Agreement as an integral part.

Article – 19 Consultations

1. Each Contracting State shall accord sympathetic consideration to and will afford adequate opportunity for consultations regarding representations made by another Contracting State with respect to any matter affecting the operation of this Agreement. 2. The Committee of Experts may, at the request of a Contracting State, consult with any Contracting State in respect of any matter for which it has not been possible to find a satisfactory solution through consultations under paragraph 1.

Article – 20 Dispute Settlement Mechanism

1. Any dispute that may arise among the Contracting States regarding the interpretation and application of the provisions of this Agreement or any instrument adopted within its framework concerning the rights and obligations of the Contracting States will be amicably settled among the parties concerned through a process initiated by a request for bilateral consultations. 2. Any Contracting State may request consultations in accordance with paragraph 1 of this Article with other Contracting State in writing stating the reasons for the request including identification of the measures at

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issue. All such requests should be notified to the Committee of Experts, through the SAARC Secretariat with an indication of the legal basis for the complaint. 3. If a request for consultations is made pursuant to this Article, the Contracting State to which the request is made shall, unless otherwise mutually agreed, reply to the request within 15 days after the date of its receipt and shall enter into consultations in good faith within a period of no more than 30 days after the date of receipt of the request, with a view to reaching a mutually satisfactory solution. 4. If the Contracting State does not respond within 15 days after the date of receipt of the request, or does not enter into consultations within a period of no more than 30 days, or a period otherwise mutually agreed, after the date of receipt of the request, then the Contracting State that requested the holding of consultations may proceed to request the Committee of Experts to settle the dispute in accordance with working procedures to be drawn up by the Committee. 5. Consultations shall be confidential, and without prejudice to the rights of any Contracting State in any further proceedings. 6. If the consultations fail to settle a dispute within 30 days after the date of receipt of the request for consultations, to be extended by a further period of 30 days through mutual consent, the complaining Contracting State may request the Committee of Experts to settle the dispute. The complaining Contracting State may request the Committee of Experts to settle the dispute during the 60-day period if the consulting Contracting States jointly consider that consultations have failed to settle the dispute. 7. The Committee of Experts shall promptly investigate the matter referred to it and make recommendations on the matter within a period of 60 days from the date of referral. 8. The Committee of Experts may request a specialist from a Contracting State not party to the dispute selected from a panel of specialists to be established by the Committee within one year from the date of entry into

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force of the Agreement for peer review of the matter referred to it. Such review shall be submitted to the Committee within a period of 30 days from the date of referral of the matter to the specialist. 9. Any Contracting State, which is a party to the dispute, may appeal the recommendations of the Committee of Experts to the SMC. The SMC shall review the matter within the period of 60 days from date of submission of request for appeal. The SMC may uphold, modify or reverse the recommendations of the Committee of Experts. 10. Where the Committee of Experts or SMC concludes that the measure subject to dispute is inconsistent with any of the provisions of this Agreement, it shall recommend that the Contracting State concerned bring the measure into conformity with this Agreement. In addition to its recommendations, the Committee of Experts or SMC may suggest ways in which the Contracting State concerned could implement the recommendations. 11. The Contracting State to which the Committee’s or SMC’s recommendations are addressed shall within 30 days from the date of adoption of the recommendations by the Committee or SMC, inform the Committee of Experts of its intentions regarding implementation of the recommendations. Should the said Contracting State fail to implement the recommendations within 90 days from the date of adoption of the recommendations by the Committee, the Committee of Experts may authorize other interested Contracting States to withdraw concessions having trade effects equivalent to those of the measure in dispute.

Article – 21 Withdrawal

1. Any Contracting State may withdraw from this Agreement at any time after its entry into force. Such withdrawal shall be effective on expiry of six months from the date on which a written notice thereof is received by the Secretary-General of SAARC, the depositary of this Agreement. That

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Contracting State shall simultaneously inform the Committee of Experts of the action it has taken. 2. The rights and obligations of a Contracting State which has withdrawn from this Agreement shall cease to apply as of that effective date. 3. Following the withdrawal by any Contracting State, the Committee shall meet within 30 days to consider action subsequent to withdrawal.

Article – 22 Entry into Force

1. This Agreement shall enter into force on 1 st January 2006 upon completion of formalities, including ratification by all Contracting States and issuance of a notification thereof by the SAARC Secretariat. This Agreement shall supercede the Agreement on SAARC Preferential Trading Arrangement (SAPTA). 2. Notwithstanding the supercession of SAPTA by this Agreement, the concessions granted under the SAPTA Framework shall remain available to the Contracting States until the completion of the Trade Liberalisation Programme.

Article – 23 Reservations

This Agreement shall not be signed with reservations, nor will reservations be admitted at the time of notification to the SAARC Secretariat of the completion of formalities.

Article – 24 Amendments

This Agreement may be amended by consensus in the SAFTA Ministerial Council. Any such amendment will become effective upon the deposit of instruments of acceptance with the Secretary General of SAARC by all Contracting States.

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Article – 25 Depository

This Agreement will be deposited with the Secretary General of SAARC, who will promptly furnish a certified copy thereof to each Contracting State.

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Annexure – 3 Name of Interviewees and Interviewer’s Interview Sr. No. Name of Interviewees Name of Date of Interviewer Interview 1. Fauzia 13th March, 2017 Ambassador (Retd) Sarfraz Ex-HOD. Centre for Policy Studies, COMSATS Batool Institute of Information Technology, Islamabad. 2. Dr. Abidsulleri 15th March, 2017 Director Sarfraz SDPI (Sustainable Development Policy Institute), Batool Islamabad 3. Dr. Vaqar Ahmad 15th March, 2017 Sarfraz SDPI (Sustainable Development Policy Institute), Batool Islamabad 4. Muhammad Sabir 17th March, 2017 Principle Sarfraz Economists & Unit Head, Batool Social Policy and Development Centre (SPDC) 5. Majid Aziz 20th March, 2017 President, Employers’ Federation of Pakistan / Sarfraz President South Asian Forum of Employers / Batool Ex-President Karachi Chamber of Commerce & Industry Ex-Director ZTB Ex Chairman SME Bank 6. Hina Rabbani Kher Sarfraz Former Foreign Minister of Pakistan Batool 7. Khursheed Kasuri Sarfraz 8th March, 2017 Former Foreign Minister of Pakistan Batool 8. Naseer Ahmad Sarfraz Deputy Secretary, Batool Ministry of Commerce Pakistan 9. Jabbar Touqeer 24th March, 2017 Sarfraz Section Officer Batool South Asia 10. Tanveer Hashmi, 6th March, 2017 Sarfraz Journalist, Batool Daily Jang (Commerce Section) 11. Azhar Jatoi, 6th March, 2017 Sarfraz Journalist, 92 News (New Channel), Islamabad. Batool Chanel 92

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12. Ms. Robina Ahmad Sarfraz 14th, March, National Tariff Commission of Pakistan Batool 2017 13. Mr. M. Munir Warsi 20th March, 2017 Sarfraz Research Fellow Batool IPRI, Islamabad 14. Ms. Samina Fazil Founder President, 10th March, 2017 Women Chamber of Commerce & Industry, Islamabad Executive Member Federation of Pakistan Chamber of Commerce and Sarfraz Industry Batool Member SAARC Chamber Women Entrepreneur Council Chef-Executive Mishas Collections Chef-Executive Empower Pakistan 15. Naima Ansari, 10th March, 2017 Sarfraz Women Chamber of Commerce, Batool Islamabad. 16. Col (Red) Hanif Sardar Director, Sarfraz 20th March, 2017 IPRI, Batool Islamabad 17. Mr. Malik Qasim Mustafa 21st March, 2017 Sarfraz Senior Research Fellow Batool Institute of Strategic Studies, Islamabad. 18. Mr. Iftikhar Ali Malik Vice-President Sarfraz 22nd March, SAARC Batool 2017 CCI, Pakistan 19. Ms. Marium Kamal 12, April, 2017 Assistant Professor Sarfraz Centre for South Asian Studies, Batool University of the Punjab, Lahore 20. Mr. Rizwan Naseer, Assistant Professor, COMSOT Sarfraz 14th March, 2017 University, Islamabad. Batool 21. Dr. Mussarat Jabeen 14th March, 2017 Sarfraz Fatima Jinnah University Batool Islamabad 22. Dr. Shahid Bukhari Sarfraz 20th, April, 2017 Batool 23. Yousif Raza Ghilani Sarfraz 25th, May, 2017 Former Prime Minister of Pakistan Batool

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24. Dr. Abdul Salam 5th, May, 2017 Professor / State Bank Chair Sarfraz Department of Economic, Batool University of the Punjab, Lahore 25. Mr. Imran Ali Sarfraz 22nd March, 2017 SAARC NTM Desk Coordinator Batool 26. Mr. Khurshid Barlas 20th March, 2017 President, Handicraft Association of Pakistan, Executive Member The Federation of Pakistan Chamber of Commerce and Industry, Vice-President, Sarfraz Pak – Iran Joint Chamber of Commerce & Industry Batool Chairman, Regional Coordination Committee, Rawalpindi Chamber of Commerce and Industry Life Member, SAARC Chamber of Commerce and Industry Chief – Executive Pak World Trade & Expo Centre 27. Mr. Iqbal Tabbish 9th May, 2017 Sarfraz Ex- Secretary General Batool SAARC Chamber of Commerce 28. Mr. Yawar Irfan 9th May, 2017 Sarfraz Ex-President Batool Lahore Chamber of Commerce 29. Pervaiz Lala 9th May, 2017 Sarfraz Expert Batool Pakistan – India, Relations 30. Fayyaz, Ahmad, Sarfraz 11th April, 2017 Collector Customs, Karachi Batool

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Annexure – 4

Survey Question Demographic Information Age Gender Province of Domicile Profession Nationality

Q. 1: What does granting the most favored Nation Means?

No special Trade advantage but equal treatment as given to other trading partner countries, that Pakistan has not had any preferential trade agreement with Declaration of Profound Friendship and Future Favour to the Country being granted the MFN Status Special Trade Advantages and terms and Conditions for the country being granted the MFN Not Sure

Q.2: When did India grant MFN to Pakistan? 1947 1996 178 Never Note Sure

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Q.3: Should the negative list of goods (which restricts some goods from being imported) be phased out to allow free trade between India and Pakistan on all goods? Should be phased out Immediately

Should not be phased out

Should be phased out eventually

Note Sure

Q.4: Should the government of Pakistan grant MFN status to India.

Yes it should be granted Immediately

It should grant it after a greater Laps of time

It should not grant the status at all

Not aware of what MFN Status is

Note Sure

Q.5: Trade with India will impact on Pakistani Consumer? Significant Positive impact Moderate Positive Impact Natural Moderate Negative Impact Significant Negative Impact

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Q.6: Do you think Good Trade relation between Pakistan and India will result in long term regional peace? Significant Positive Impact Moderate Positive Impact Neutral Positive Impact Moderate Negative Impact Significant Negative Impact

Q.7: In your opinion, to what extent is the general Public in Pakistan in favour of trade with India?

Significant Positive Impact Moderate Positive Impact Neutral Positive Impact Moderate Negative Impact Significant Negative Impact

Q.8: What does the South Asian Free Trade Agreement mean in term of trade between India and Pakistan?

Eventual and of trade banners among members countries Increase in trade barriers SAFTA does nothing in terms of trade barriers between members counters

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Q.9: Which Institution in Pakistan is responsible for Trade Policy making?

Ministry of Finance Ministry of Foreign Affairs Ministry of Commerce Ministry of commerce with the collaboration all the Departments

Q.10: Consumer are paying higher prices for the goods Imported from India due to trade restrictions

True False Don’t Know

Q.11: Are you familiar about the terms Non-Tariff Barriers (NTBs) True False Don’t Know

Q.12: Are you familiar with the role of WTO in spreading free trade? Very Familiar Vaguely Familiar Have heard of them only Never heard of them

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Q.13: Do you agree through Trade Liberalization Regional Integration process in South Asia will be accelerated? Strongly Agree Agree Natural Dis-agree

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