Comment: SAPTA and SAFTA. (1997, 20 Marks)
The SAARC Preferential Trading Arrangement (SAPTA) and the South Asian Free Trade Area (SAFTA) are South Asia’s two attempts to climb Bela Balassa’s ladder of integration. That ladder runs from a preferential area through a free trade area, customs union, common market and economic union to complete integration. SAARC entered trade only in the 1990s, as members liberalised, after a decade of soft sectoral cooperation. Both instruments delivered tariff cuts but not much trade.
SAPTA: the first rung
- Signed at the Dhaka summit in April 1993 and in force from December 1995.
- It worked on a positive-list, product-by-product basis: each member offered concessions on chosen tariff lines, with deeper cuts for the least developed members.
- Four rounds covered several thousand tariff lines, but most were goods the region barely traded. Non-tariff barriers were untouched, and services were excluded.
- Its value was symbolic and procedural: it brought trade into SAARC, and summits from 1995 committed members to a free trade area.
SAFTA: design
- Signed at the Islamabad summit on 6 January 2004 and in force from 1 January 2006, as the first step towards a customs union and an economic union.
- Trade Liberalisation Programme: non-least-developed members were to cut tariffs to 20% within two years, then to 0–5% within five more (six for Sri Lanka). Least developed members were to reach 30%, then 0–5% over eight years.
- Sensitive lists exempted tariff lines entirely. Rules of origin required a change of tariff heading plus 40% value addition (30% for the least developed). The least developed members got revenue-loss compensation; a Ministerial Council and dispute settlement were set up.
The record
Tariffs largely came down, but trade did not follow: intra-regional trade remains about 5%. The World Bank (A Glass Half Full, 2018) puts potential regional trade near $67 billion against about $23 billion actual. The reasons:
- Sensitive lists still cover about 35% of intra-regional trade by value; the smaller members kept the longest lists.
- Para-tariffs (regulatory and supplementary duties, cesses) sit outside SAFTA, so protection simply moved.
- Non-tariff barriers: testing and standards with no mutual recognition, congested land ports, restrictive visas.
- No transit: Afghan goods cannot cross Pakistan to India, and Nepal and Bhutan depend on one corridor.
- No services: SATIS (2010) never acquired working schedules.
- Politics: Pakistan never extended MFN status to India. It suspended bilateral trade in August 2019 and halted all trade, including via third countries, after Pahalgam (24 April 2025); India banned Pakistani imports on 2 May. Amita Batra (2013) reads the region as an economy trapped in conflict.
- Low complementarity, and a spaghetti bowl (Jagdish Bhagwati) of bilateral FTAs (India–Sri Lanka, India–Nepal, India–Bhutan) that traders often prefer.
Theoretical reading
Under Jacob Viner’s test (The Customs Union Issue, 1950), a preferential area among high-tariff, similar economies risks trade diversion more than creation. Loose origin rules invite rerouting, as vanaspati surges under India’s bilateral FTAs with Nepal and Sri Lanka showed. Southeast Asia’s experience shows that integration follows value chains and openness, which an agreement can ratify but not create.
India’s role
India offered asymmetric concessions, cutting its sensitive list for the least developed members to 25 lines (mainly alcohol and tobacco) and for the others to 614. Its trade with Bangladesh, Nepal and Sri Lanka grew faster bilaterally than through SAFTA.
Conclusion
SAPTA was a cautious opening, and SAFTA was a sound design applied to the wrong problem. In South Asia the cost of crossing a border, not the tariff, is the binding constraint. A revived SAFTA would need transit, trade facilitation, services and political normalisation more than further tariff cuts.