LEAD: 7 SAARC states to launch S. Asian Free Trade Area

Asian Economic News, Jan 12, 2004

ISLAMABAD, Jan. 6 Kyodo

(EDS: CLARIFYING TARIFF REDUCTION RATES IN 6-8 PARAS & OTHER MODIFICATIONS)

Foreign Ministers of the seven South Asian Association for Regional Cooperation (SAARC) member countries will sign an agreement Tuesday in Islamabad envisaging the creation of a South Asian Free Trade Area (SAFTA) by abolishing quantitative restrictions and tariffs by 2016.

The landmark agreement has been successfully concluded after years of negotiations by trade ministry officials and experts from the member states and was approved by their leaders at the 12th SAARC summit here.

Set up at the initiative of Bangladesh President Ziaur Rahman in 1985, SAARC groups Bangladesh, Bhutan, India, Sri Lanka, the Maldives, Nepal and Pakistan.

Indian Foreign Minister Yiswant Sinha described the creation of SAFTA as a prelude to a South Asian Economic Union and Indian Prime Minister Atal Behari Vajpayee, in his speech at the summit, called for the creation of a single currency in South Asia patterned after the euro.

Pakistan is not rejecting the proposal for a single currency but calls the scheme premature.

After its ratification by the relevant authorities during next two years, the trade agreement would come into force on Jan. 1, 2006 after which the member states will reduce the tariffs on intra-regional trade in two stages from the existing level to between zero and 0.5% in 2016.

Under the schedule laid down in the agreement non-least developed contracting states would reduce the tariffs to 20% within two years of coming into force of the agreement and subsequently reduce it to between zero and 0.5% within a second time frame of five years. However, the period of second phase of tariff reductions would be six years for Sri Lanka.

The least developed countries (LDCs) would reduce the existing tariff to 30% within the first two years after Jan. 1, 2006 and within eight years to between zero and 0.5%.

The United Nations ranks 49 countries as LDCs on the basis of low gross domestic product (GDP) and high degree of economic vulnerability and four SAARC members -- Bangladesh, Bhutan, the Maldives and Nepal -- are among them.

Under the SAFTA scenario, trade between Pakistan and India would become free in 2013, with Sri Lanka in 2014 and all the seven countries in 2016.

SAFTA has been tailored to emulate the Treaty of Rome which created the European Community which has now grown into the European Union with the single currency euro.

If SAFTA were implemented in letter and spirit, it would create one of the world's biggest markets with nearly 1.4 billion people.

The agreement encourages the member states to reduce the tariffs in equal annual installments, but not less than 15% annually.

However, the reduction in tariffs will not be applicable to a sensitive list to be submitted by the member states before SAFTA agreement comes into force.

But the items on the list will be subject to a maximum ceiling to be mutually agreed by the seven member states. The list will be reviewed every four years.

Under the terms of the agreement, the contracting states affirm their existing rights and obligations with respect to each other under the Marrakesh Agreement establishing the World Trade Organization and other treaties and agreements.