Rising economic blocks (BIMSTEC and SAFTA): implications for Nepal

By kapil Dev Subedi

These days a great number of large enterprises operate internationally.

Internationalization of business involves commercial activities from cross-national
frontier. It concerns the international movement of goods, capital, services, employees
and technology, importing and exporting, cross-border transactions in intellectual
property via, licensing and franchising, investment in physical and financial assets in
foreign countries and so on. But, there are certain barrier with country to country
regarding their own rules for trade policy e.g. tariffs barrier, non-tariff barrier and others,
which reduces the degree of dynamics of the internalization of commercial activities. Due
to unprecedented growth in communication, and break through of internet technology, the
avenues and frontiers of international trade has grown enormously but the different
barriers specific to country to country have a great implication in reduction of
international trade. Therefore, after Second World War 26 countries including developed
countries joined their hands to an agreement to reduce the trade and tariff related barriers
for something internationalization of business rapidly and this agreement is known as
General Agreement on Tariffs and Trade. Its main purpose was to encourage multilateral
trade (as opposed to bilateral) and to minimize tariff levels and non-tariff trade barriers.
After 48 years of inception of GATT with Eighth rounds of negotiation between member
countries, in 1995, it has converted into WTO which rules over now 90 percent of world
trade comprising 130 nations in its member framework.
However, there are other dynamics as well of economic integration between the countries
besides GATT (or say WTO) for internationalization of trade through dismantling tariff
and non-tariff barriers. The emergence of European Union (EU) with its strong presence
in European common markets, NAFTA to North American Countries, ASEAN for
Southeast Asian nations, CACM, COMESA, SAFTA, BIMSTEC etc. on different region
of the globe has been raised a strong question that these regional trading blocks do
support the globalization process (opportunity) of trade or not? This question has not an
easiest answer. For this purpose, it's necessary at first to analyze the debate of
international trade from the perspective of south-south vis-a-vis north-south economic
integration. Second, we should analyze empirical results of international trade among and
between the regional trading blocks from the world trade growth perspective and third it
is essential to discuss about the sustainability of regional trading block as the experts say
they have a tough road a head.

The critical question about these entire new regional trading blocks is not whether they
will promote greater internal growth but whether such regional groupings will fragment
the world economy and run counter to the recent globalization of trade. Most economists
believe that globalization is here to stay, particularly as multinational corporations set up
subsidiaries throughout the world.
Mr Subedi heads the department of management and is currently the MBS program in charge at
Saptagandaki M. Campus.

Why regional economic integration? And how it helps for globalization? It is also a
critical question for international trade. As the facts and figures suggest, there is a
lucrative correlation between South-North trades. The developing countries still
represents a meager 7% of total world trade. By 1990, South-South trade represented
almost 33% of all developing world exports. Therefore it has been argued that developing
countries should orient their trade more toward one another.
There is relative comparative advantage to South-South as opposed to North-South trade.
The move in the direction of economic integration provides the opportunities for
industries to take advantage of economics of large-scale production made possible by
expanded markets. Integration therefore needs to be viewed as a mechanism to encourage
a rational division of labor among a group of countries, each of which is to small to
benefit from such a division by itself. By economic integration, the industries of member
countries may take advantage of economics of scale, learning curve, cross-border mergers
acquisitions and technology transfer which ultimately support the process of globalization
not against of its therefore, even if in short run, economic grouping might be seen as
stumbling blocs but in long run, it supports globalization.
The empirical results of trade also reveals that the regional economic grouping do not
harm the process of globalization. For example, in 1999 54.6% of all trade of NAFTA
members was with each other, while the corresponding figure for the EU was 62.6% of
its trade. It is the case of developed countries economic integration while the case of
developing countries is quite opposite. For example, Mercosur conducts only about one
fifth of its trade internally and even ASEAN conducts only 22.2% of its trade among
member nations by 1999. The rates are much lower for most other developing country
trading blocks.
Sustainability of trading blocs also is the impetus for or against globalization especially
in the case of economic groupings within developing regions. The question of
sustainability comes from the argument of development economists. They regard
exporting to developed nations as inherently more valuable than exporting to other LDCs
because of the learning that can occur when customers provide feedback on quality or
suggest other products that firms might be able to export competitively on the other hand,
even if such an integration may seem economically logical and persuasive on paper, in
practice it requires a degree of statesmanship and a regional rather than nationalistic
orientation that is often lacking in many countries. Political and ideological conflict
among the nation can more than offset the economic logic of regional co-operation
ultimately harming the process of globalization but it should not be regarded that
economic grouping harms the rather it also promote long-run development and
globalization strategy.
Implication of BIMSTEC and SAFTA for Nepal
BIMSTEC and SAFTA are basically guided by the scope and concept of Free Trade
Agreement (FTA) within the South Asian Countries. BIMSTEC was established in
August 7, 1997 aiming for rapid economic growth and strengthening economic cooperation in the region. Originally, the BIMSTEC was the initial agreement of 4 South

Asian countries e.g. Bangladesh, India, Sri Lanka and Thailand. But at present the
member countries comprise further Nepal, Myanmar and Bhutan as well. On the other
hand, SAFTA is another regional economic grouping of SAARC countries following the
demise of preferential trading agreement (SAPTA).
Before discussing the implication of BIMSTEC and SAFTA for the countries like Nepal,
it is necessary to discuss the nature and provisions of these two economic groupings.
BIMSTEC
BIMSTEC aims and strives to develop into a Free Trade Arrangement and focus on
activity that facilitate trade, increase investment and promote technical co-operation
among member countries. The main objective of BIMSTEC is to act as a stimulus to the
strengthening of economic co-operation among the parties, lower costs increase intraregional trade and investment, increase economic efficiency, create a larger market with
greater opportunities and larger economics of scale for the businesses of the parties and
enhance the attractiveness of the parties to capital and talent.
Besides other areas of technical and economic co-operation, BIMSTEC highly focuses on
three major areas of trade and investment they are trade in goods, trade in services and
investment.
The measures of comprehensive free trade area are agreed upon as under.
(a)

Progressive elimination of tariffs and non-tariff barriers in substantially all trade

in goods. Regarding this, provision of time frame is determined according to the
products listed in fast track and normal track. Products listed in fast track by our
country shall have reduced/eliminated in accordance with specified rates to be
mutually agreed by within July 1, 2006 to June 30, 2001 for developing country
parties and within July 1, 2000 to June 30, 2007 for LDC parties. Similarly, for
the normal track products, the time frame is agreed upon, within July 1, 2007 to
June 30, 2017 for developing country party and for LDC parties, it is agreed upon
within July 1, 2007 to June 30, 2015.

(b)

Progressive liberalization with trade in service with substantial sectoral coverage.

(c)

Establishing an open and competitive investment regime that facilitates and

promotes investment with in the member countries.

(d)

Provision for special and differential treatment and flexibility to the least
developed countries in the region.

(e)

Flexibility to the parties in the BIMSTEC FTA negotiations to address their

sensitive areas in the goods, services and investment sectors based on agreed
principles of reciprocity and mutual benefits.

(f)

Establishing effective trade and investment facilitating measures including, but

not limited to, simplification of customs procedures and development of mutual
recognition arrangement.

SAFTA
SAFTA is another regional trading blocs covering the seven countries of south Asian
Region i.e. Nepal, India, Bangladesh, Pakistan, Sri Lanka, Maldives, Bhutan. Before
converting SAPTA to SAFTA, SAPTA was in action. More than 7000 products of the
member nations were privileged of tariff reduction while SAPTA was active. More or
less, SAFTA, plays the same role of Free Trade Area, e.g. reduction of tariffs and nontariffs barriers in traded goods, expansion of service sectors within the members through
the provision of general agreements on traded services, coordinating and promoting
investment opportunity between the member countries and exploring other frontiers of
technical and economic co-operation for the mutual benefits of member countries.
Implication of regional trading blocs for the countries like Nepal should be measured in
terms of opportunity and challenges to the national economy and development.
Regional trading arrangement highly focuses on the reduction and elimination of tariff
and non-tariff barriers e.g. problems relating quarantine, quality checking, simplification
of custom process etc. The opportunities of regional trading blocs to the least developed
country like Nepal can be listed as under;
Countries like Nepal can take the following advantages;

a. Advantage of special provision of least developed countries. Growth of

Nepalese tea markets in Pakistan recently is the good example of this
provision for how a country can take advantage of membership of regional
trading blocs.
b. Trading on goods of comparative advantage: As classical trade theory
suggests us, the countries should trade those goods, which have comparative
advantage than others. This theory is based the principle of labor cost. Some
countries by its long experience and learning curve effect might have specific
labor productivity in particular product resulting low cost of production and
these products are the real products for international trade. Nepal has
comparative advantage on certain products like garment, carpet, vegetable
ghee etc. and these products can take advantage of regional trading blocs.
c. Advantage of factor endowment: Factor Endowment trade theory suggests
that some country have abundant of certain factor of production than other
country. Therefore, by application of those abundant factors (e.g. cheap cost)
of production, they can take advantage of international trade. Nepal being a
least developed country with large primary production sectors, has abundant
of unskilled Low cost labor force. The country can utilize these factors of
production to tap the large international market.
d. Advantage of trade creation and trade diversion: Trade creation is said to
occur when common external barriers and internal free trade lead to a shift in

production from high to low cost member states. For example, our tea and
vegetable ghee can take advantage of trade creation in Pakistan and India.
Similarly, trade diversion is said to occur when the erection of external tariff
barriers causes production and consumption of one or more member states to
shift from lower-cost non-member sources of supply to higher cost member
producers.
From consumer's point of view, it is a little odd aspect of trade, but from the
producer's point of view, trade diversion might provide greater opportunities.
e. Nepal is facing shortage of capital and technical knowledge. The
countries like, Thailand can
come to Nepal with FDI and Technology
Transfer through the provision of BIMSTEC.
f. Scale of economy of utilization and fast growing regional markets are
other opportunities that Nepal can tap, being the member of SAFTA and
BIMSTEC.

Challenges
(a)

There is an argument that the regional trading blocs like SAFTA and BIMSTEC
are the interest of powerful countries like India, Thailand and Pakistan etc. and
these trading blocs are not beneficial to the countries like Nepal since it has no
product to compete with other countries productions.

(b)

Nepals excessive dependency of foreign trade with India is another challenge for
the multilateral trade among the region. When we observe the import and export
figure of 2060/61 of Nepal, out of total import (i.e. Rs. 62. 67 billion) from
SAARC region, import from India comprises 98.8% of total import and similarly,
out of Rs. 32 billion export, Rs. 31.24 billion comprised to India.

(c)

Nepals foreign trade growth indicates that it has a good prospect of trade with EU
and other WTO member countries like USA. If Nepal runs after SAFTA and
BIMSTEC, our priority shifts to these region and it can harm our growing markets
of Europe and USA.

Besides the above challenges, BIMSTEC and SAFTA are new prospects for our
economic development of nation. We can promote our echo tourism and religious tourism
market for the Buddhist countries like Myanmar and Thailand because in this sector we
have relative comparative advantage. Nepal has a lot of sectors like education,
technology, transportation, irrigation and electricity, tourism etc. that can be benefited
from mutual co-operation of multilateral trade arrangement within regional trading blocs.