NEXT STEPS

TO
SOUTH ASIAN ECONOMIC UNION
A Study on Regional Economic Integration (Phase II)
Commissioned by the SAARC Secretariat

Executive Summary
 NEXT STEPS
TO
SOUTH ASIAN ECONOMIC UNION
A STUDY ON REGIONAL ECONOMIC INTEGRATION (PHASE II)
COMMISSIONED BY THE SAARC SECRETARIAT

EXECUTIVE SUMMARY

Report prepared for the South Asian Association for Regional Cooperation (SAARC) Secretariat

The views expressed in this report are those of the authors and do not necessarily reflect the views or policies of the
SAARC Secretariat and the Asian Development Bank, or their Board of Directors, or the governments they represent.
 Contents

Acknowledgmentsiv
1 Background1
2 Genesis of SAEU2
3 Goals, General Objectives, and Terms of Reference3
3.1 Goals 3
3.2 General Objectives and Terms of Reference 3
4 Overview of Intra-Regional Trade in South Asia5
5 Overview of Chapters8
6 Recommendations10
6.1 Elements of SAEU 10
6.2 Trade Potential of SAEU 11
6.3 Full Implementation of SAFTA 12
6.4 Reducing Non-Tariff Barriers 13
6.5 Integrating SAFTA and Bilateral Trade Agreements 13
6.6 Integrating Formal and Informal Trade 14
6.7 Facilitating Trade in Services 14
6.8 Labor Mobility 15
6.9 Investment Cooperation 16
6.10 Economic Corridors 16
6.11 Trade Facilitation 17
6.12 Poverty Eradication 18
6.13 Regional and Global Value Chains 18
6.14 Integration of Capital Markets 19
6.15 Energy Cooperation 19
7 Conclusion21
Appendix: Action Plan Recommended in the Study22

iii
 Acknowledgments

The Study on Regional Economic Integration (Phase-II) has been commissioned by the
SAARC Secretariat with the technical and financial assistance of Asian Development Bank.

The lead editor of the report is Dr. Selim Raihan, ADB consultant. The SAARC Secretariat
would also like to recognize the invaluable contributions of Mr. Cuong Minh Nguyen, Dr.
Farazi Binti Ferdous, Mr. Md. Abdur Rahim, Dr. Ather Maqsood Ahmed, Ms. Robina Ather
Ahmed, Dr. Nisha Taneja, Ms. Radhika Saini, Dr. Rupa Chanda, Dr. Arpita Mukherjee, Dr.
Khondaker Golam Moazzem, Ms. Mehruna Islam Chowdhury, Ms. Farzana Sehrin, Dr. Prabir
De, Ms. Suwendrani Jayaratne, Dr. Ganga Tilakaratna, Dr. Saman Kelegama, Dr. Mostafa Abid
Khan, Mr. Shaquib Quoreshi, Dr. Rashmi Banga, Ms. Jennifer Romero-Torres, Mr. Stephen
Wells, Ms. Susan Selwyn-Khan and Mr. P. N. Fernando in writing different chapters of the
study. Special mention is reserved for Dr. David Husband, ADB consultant, for the economic
editing of the report.

I also wish to acknowledge Ms. Savithri Lakshmanan, Director and Mr. Subash C. Sharma,
Programme Officer, Economic, Trade and Finance Division, SAARC Secretariat, for their
valuable advice and guidance and for arranging various technical workshops related to
this report.

I wish to thank Asian Development Bank for its continued support to the SAARC Secretariat,
and in the preparation of this report.

Arjun Bahadur Thapa

Secretary General
SAARC

iv
 Background 1
The South Asian Association for Regional Cooperation (SAARC) is striving to more closely
integrate the economies of its eight member countries (Afghanistan, Bangladesh, Bhutan,
India, Maldives, Nepal, Pakistan and Sri Lanka). Globalization has helped spur progress and
the Agreement on South Asian Free Trade Area (SAFTA), signed in 2006, marks an important
milestone in regional cooperation and integration (RCI). However, despite these and other
developments, South Asia is one of the least integrated regions in the world. Intra-regional
trade continues to account for less than 5% of formal trade of the eight member countries.

SAFTA results to date have fallen short of expectations due to complex safeguard measures
and non-tariff barriers (NTBs) among SAARC member countries. Global, regional and
domestic turbulences have also complicated progress in liberalizing trade, investment and
other dimensions of regional economic cooperation. Nonetheless, there has been progress
and relationships among SAARC countries have improved. Increasingly, their mutual interest
lies in accelerating and deepening their economic cooperation and integration. The Heads of
State or Government reaffirmed their commitment to regional cooperation through SAARC
and underscored the importance of annual Summit meetings in charting common strategies
for the realization of the objectives and principles set out in the Charter of the Association.
Meeting for the first time at the dawn of the new millennium, they solemnly renewed
their pledge to strengthen the Association and make it more cohesive, result oriented,
and forward looking, by adopting clearly defined programs and effective implementation
strategies in line with popular expectations. To give effect to the shared aspirations for a more
prosperous South Asia, the Leaders agreed to the vision of a phased and planned process
eventually leading to a South Asian Economic Union (SAEU). Although non-tariff barriers,
infrastructure constraints and other factors continue to hamper regional cooperation and
integration in South Asia, reference by SAARC Leaders to SAEU indicates a willingness to
consider bold action.

On the request of SAARC Secretariat, ADB supported to carry out Phase I of the SAARC
Study on Regional Economic Integration (REI). Phase I of the study on REI proposed
approaches of achieving REI through four pillars, namely market integration, cross-border
connectivity, energy cooperation and private sector liberalization. The current second phase
of the study on REI intends to provide a roadmap for achieving the SAEU.

1
 2 Genesis of SAEU

SAARC Council of Ministers has recommended the formulation of recommendations leading

to SAEU. Steps toward a Union must draw upon international experience, notably the lessons
learned by the European Union (EU), the Association of Southeast Asian Nations (ASEAN)
and other prominent regional organizations. Drawing on this international experience, there
is a need to adopt a highly pragmatic blend of RCI approaches:

• a top-down approach based on binding agreements, as illustrated by SAFTA;

• a top-down approach based on open-regionalism and voluntary principles, as
practiced by SAARC and ASEAN;
• a bottom-up market-driven approach, based on global value chains and
cross‑border production and distribution according to the most cost and time
effective locations;
• geographically-focused programs and projects to secure cross-border connectivity
(e.g., transport corridors) and to resolve impediments to trans-boundary
integration.

It is therefore needed to reinforce all four RCI approaches, with private and public sector
business interests guiding coordinated initiatives. There is also a need to be clear by what is
meant by SAEU. While the original call a decade ago included the possibility of a common
currency and monetary unification, the Euro debt crisis has cautioned against going beyond
what may be sustainable and of mutual benefit—especially in light of marked differences in the
size and economic status of SAARC member countries. ASEAN provides the evolving model
most closely aligned with the aspirations of South Asia. The ASEAN Economic Community
(AEC) is scheduled to come into effect in 2015, characterized by open, outward-looking,
inclusive and market-driven economies of its ten member countries. Sector roadmaps and
rules-based systems are designed to ensure mutual benefits and effective compliance and
implementation of agreed commitments. The AEC is essentially a Free Trade Area (FTA)
Plus model, in which the barriers to movements of goods, capital, labor and services will be
reduced as much as possible. ASEAN is designed neither as a customs union with common
external tariffs, nor as an economic union with a common currency. ASEAN’s FTA Plus model
can help guide SAARC’s conceptualization of SAEU, taking into account regional needs.

2
 Goals, General Objectives,
and Terms of Reference 3
3.1 Goals
The goals of the Second Phase of the study are to provide a detailed road map for SAEU
along with identification of specific priority steps to be taken under each stage of regional
economic integration and quantification of potential gains from various phases of regional
economic integration on priority sectors.

3.2 General Objectives and Terms of Reference

The objectives and Terms of Reference of the study are to:

• review and update the completed draft report of SAARC Study on REI along with
country reports of Bangladesh, Bhutan, India, Nepal, Pakistan and Sri Lanka;
• prepare a road map for the identification of 2–3 priority sectors for trade
liberalization under South Asian Free Trade Area (SAFTA), including the
quantitative assessment of reducing tariff to 0–5 % and their implications to each
individual SAARC country, especially on Least Developed Countries (LDCs);
• prepare a road map for reducing and removing Para-tariff Measures (PTMs) and
Non-tariff Measures (NTMs) by carrying out the following tasks: (a) Examine
the Notifications on NTMs/PTMs submitted by Member States; (b) Examine
Responses and counter-responses on notifications/responses submitted by
Member States; (c) Categorize each NTM/PTM mentioned in each Notification/
Response/Counter-response in broad categories; (d) Examine whether each
NTM/PTM mentioned in the Notifications is compatible with WTO provisions of
not; (e) Suggest ways and means of reducing those identified NTMs/PTMs which
are not compatible with WTO provisions; and (f) make suggestions on how to
address the trade barriers;
• chart out a course of action on how to ultimately move towards SAEU including
the action plan and/or suggestion for harmonization of customs schedules of
countries in the region and identification of specific priority steps to be taken
under each stage of regional economic integration;
• quantify potential gains from various phases of regional economic integration,
including SAEU on priority sectors;
• assess implications of regional economic integration on SAARC countries,
especially on LDCs and provide mechanisms to support LDCs;

3
4 Next Steps to South Asian Economic Union

• provide a detailed analysis on remittances;

• prepare a road map for cross-border connectivity in the region by considering
road network both within and beyond neighboring countries, e.g. Nepal-Sri Lanka,
Nepal-Bhutan;
• prepare a road map for energy cooperation by specifying projects and programs
to tap on national resource endowment of SAARC countries, particularly in the
development of hydropower, and power trading in the region;
• suggest measures and actions to be taken to achieve the goal of poverty alleviation
and targets of Millennium Development Goals (MDGs) and SAARC Development
Goals (SDGs); and
• assess the role of larger economies in the region, such as India and Pakistan, in
facilitating regional economic cooperation and integration in South Asia.
 Overview of Intra-Regional Trade
in South Asia 4
Figure 1 outlines the regional market shares in 2011 for SAARC countries. Regional market
shares represent the relative importance of each SAARC member country in the intra‑regional
trade bloc; the larger the share, the greater the importance of the country in question. Intra-
regional exports were heavily dominated by India and Pakistan, which together accounted
for over 86% of total intra-regional trade. However, Sri Lanka had the largest share (24%) of
intra-regional imports; in contrast, it accounted for just 5% of intra‑regional exports. India
accounted for only 13% of total intra-regional imports but for 73% of total intra‑regional
exports. Afghanistan, Bhutan and the Maldives accounted for less than 1% of intra‑regional
exports and between 1%–5% of total intra‑regional imports.

Table 1 records regional exports as a percentage of a country’s total exports. The shares varied
widely, from 82% in the case of Bhutan to only 2% for Bangladesh and 4% for India. Like
Bhutan, intra-regional exports accounted for 67% and 71%, respectively, of Afghanistan’s and
Nepal’s total exports. Similar to exports, there were wide variations in the relative importance
of intra‑regional imports for SAARC countries. Approximately 50% of Afghanistan imports
and 44% of Nepal’s imports were from SAARC countries. In sharp contrast, only 1% of India’s

Figure 1 Country Shares (%) of Intra-SAARC Imports and Exports, 2011

Imports Exports

Total Sri Lanka Total

regional Afghanistan
regional 5% 1%
import Afghanistan export Bangladesh
Nepal 0%
0% 5% 4%
3%
Maldives Bhutan
0% 1%

Sri Lanka
Pakistan
24% Bangladesh 13%
23%

Nepal
India
20% India
Bhutan 73%
13%
4%
Pakistan
10%
Maldives
1%

5
 6

Table 1 Intra-regional Trade in South Asia

Column Labels

Regional
export as %
of country’s

Afghanistan
Bangladesh
Bhutan
India
Maldives
Nepal
Pakistan
Sri Lanka
Total Intra
regional Export
Total export

Row Labels total export

Next Steps to South Asian Economic Union

Afghanistan 0 0 70,438 0 0 180,650 0 251,088 375,851 67

Bangladesh 1,227 3,658 579,125 925 19,385 82,734 24,348 711,403 33,098,384 2
Bhutan 0 26,403 343,018 0 1,639 0 0 371,060 452,963 82
India 504,566 3,405,516 21,9077 118,293 2,559,910 1,678,131 4,452,043 12,937,535 301,483,250 4
Maldives 0 0 0 1,773 0 0 9,755 11,529 83,279 14
Nepal 117 26,037 3,209 614,379 22 2,641 208 646,613 907,634 71
Pakistan 2,656,391 946,700 0 272,495 5,477 1,275 347,708 4,230,045 25,140,082 17
Sri Lanka 3,075 46,308 112 521,264 55,204 642 75,231 701,837 10,011,282 7
Total exports 19,861,109 371,552,724 5
Total intra-regional 3,165,376 4,450,963 226,057 2,402,493 179,922 2,582,850 2,019,387 4,834,062 19,861,109
imports
Total Imports 6,390,311 39,190,326 1,051,747 462,402,791 1,411,701 5,915,923 43,542,006 19,696,480 579,601,286
Regional imports as 50 11 21 1 13 44 5 25 3
% of country’s total
imports

Source: Data compiled from WITS and calculated for 2011.

 Overview of Intra-Regional Trade in South Asia 7

imports were from other SAARC member countries; low intra-regional dependency was also
evident for Pakistan, where imports from other SAARC member countries accounted for
only 5% of total imports.

Total exports of a SAARC member country as a percentage of total exports of all eight
SAARC member countries is another measure of their relative trade openness and size.
India accounts for 65% of the region’s combined total exports. Pakistan accounts for 21%
while Afghanistan and the Maldives together account for only about 1%. In terms of imports,
Sri Lanka accounts for 24% of total intra-regional imports, followed closely by Bangladesh at
22%. Bhutan and Maldives account for only 1% of total imports by SAARC member countries.
 5 Overview of Chapters

Chapter I is the introductory chapter of this report. It presents the major issues for
consideration for the movement toward the SAEU. This chapter provides an overview of
the literature on regional integration in South Asia. This chapter presents an analysis on the
definition of the approach for SAEU.

Chapter II provides an analysis of the trade performance and potential in South Asia,
including indicators related to overall economic conditions, the sectoral composition and
direction of trade, and tariff and non-tariff protection. The pattern of intra-regional trade is
analyzed and comparisons made with other regions.

Chapter III provides an overview of the main features of SAFTA, including sensitive lists,
rules of origin, treatment of non-tariff barriers, and the compensation and dispute resolution
mechanisms. SAFTA is compared to ASEAN’s FTA, so as to identify the policy measures and
timelines needed for greater progress toward SAEU.

Chapter IV analyzes bilateral trade agreements in South Asia and investigates how these
agreements could be harmonized with SAFTA.

Chapter V analyzes the importance of informal trade in South Asia. The methodologies
for estimating informal trade flows in South Asia are outlined, together with an analysis
of their composition and the reasons for informal rather than formal trade practices. The
differentiating characteristics between formal and informal traders are identified.

Chapter VI examines the status of trade in services in South Asia, with a view to understanding
the prospects for and challenges to deeper integration of the service sector. Brief overviews
are provided on service sector trends in the SAARC member countries and in the region as
a whole. The key features and modalities of negotiations under the SAARC Agreement on
Trade in Services (SATIS) are outlined, together with the opportunities and challenges of
trade liberalization for a representative set of services (energy, telecommunications, tourism
and health).

Chapter VII examines recent developments in labor mobility and remittances in South Asia
and provides a comparative analysis with other regions, leading to policy recommendations
for greater integration and harmonization consistent with progress toward the SAEU. Focus
is given to facilitating the movement of professionals and skilled workers, as barriers to their
movement are easier to remove, or at least reduce, under trade agreements.

8
 Overview of the Chapters 9

Chapter VIII discusses the broad similarities and differences of FDI regulatory regimes of
SAARC member countries and provides a review on SAARC’s perspective on investment
cooperation. Recommendations are made regarding formulation of a road map for investment
cooperation under the SAEU.

Chapter IX discusses the key policy and infrastructure priorities for development of
economic corridors in South Asia, and their importance in networking with regional and
global value chains (RVCs and GVCs).

Chapter X addresses trade facilitation measures consistent with creation of SAEU and
reviews the performance of SAARC member countries in promoting trade facilitation.

Chapter XI analyzes how regional integration in trade in goods and services and in investment
and other areas could help reduce poverty in South Asia. This chapter includes a theoretical
and empirical analysis of the interrelationship between regional integration and poverty
reduction.

Chapter XII outlines the methodology for identifying priority products for fast track trade
liberalization in South Asia, focusing on non-tariff measures (NTMs). Export capacity is
compared to actual export performance, and the NTMs identified 50 products where
bilateral exports are zero despite large export potential.

Chapter XIII quantitatively assesses the implications of full implementation of SAFTA (with
and without the sensitive lists) and the impact of deeper degrees of regional integration in
South Asia. The analysis is based on use of a global general equilibrium model.

Chapter XIV discusses strategic interventions required at national and local levels in support
of RVCs in South Asia and their link to GVCs. Estimates are made of the untapped potential
for regional trade in South Asia, based on a gravity model, and sectors are identified suitable
for development of RVCs.

Chapter XV examines issues related to integration of capital markets in South Asia. It provides
cross-regional analysis of the size of capital markets in South Asia and the regulations
governing them.

Chapter XVI analyzes energy demand and supply in South Asia and the prospects for
cross‑border energy trade.

Chapter XVII reviews the development of regional institutions in South Asia and outlines
broad recommendations on how to improve the overall institutional architecture for SAEU.

Finally Chapter XVIII presents an overall summary of the report and its main conclusions.
 6 Recommendations1

6.1 Elements of SAEU 1

Advancement of SAEU should entail four pillars of initiative (Table 2):

• Pillar 1, Market Liberalization (Trade Liberalization Program under SAFTA and

SAARC Agreement on Trade in Services [SATIS], Reduction of Sensitive List,
Rules of Origin, Non-tariff Barriers [NTBs], services trade, investment);
• Pillar 2, Sector Liberalization (priority sectors are identified for fast-track
liberalization);
• Pillar 3, Economic Corridors (promoting integration into global and regional value
chains);
• Pillar 4, Cross-border connectivity (especially transport and energy).

Cross-cutting issues should include building and strengthening institutions, capacity building
and financing.

SAEU’s main features are summarized in Table 3, highlighting its FTA, common market, and
growth area elements, supported by efficient regional institutions and funding mechanisms.

Table 2 Pillars of SAEU

Pillar 1: Pillar 2: Pillar 3: Pillar 4:
Market Integration Sector-based Integration Economic Integration Cross-Border Connectivity
Expedite implementation Priority sectors for fast Policy coordination, Focus on transport
of SAFTA, SATIS (trade track liberalization for promoting integration into and energy, facilitating
in goods and services) trade in goods and global and regional value hydro-power development
services chains and sharing of natural gas
and other energy resources
Cross-Cutting Issues
• Building and Strengthening Institutions, Capacity Development
• Financing

1
An Action Plan recommended in the Study is provided in the Appendix.

10
 Recommendations 11

Table 3 Elements of SAEU

Elements SAEU
Freer flow of goods (FTA) Yes (SAFTA)
Freer flow of services, labor and capital Yes (Agreements on services liberalization under
SATIS; and the Draft Agreement on Investment
to be finalised)
Efficient cross-border infrastructure Yes (Transit and energy agreements)
(Sub-regional growth areas)
Integration of regional production network Yes (Regional industrial policies)
(Sub-regional growth areas)
Efficient regional institutions Yes (SAARC Secretariat, South Asian Regional
Standards Organisation [SARSO]; SAARC
Arbitration Council [SARCO], etc.)
Sufficient financial resources for regional Yes (SAARC Development Fund)
cooperation
Common external tariffs (Customs Union) No
Common currency (Economic Union) No
Harmonization of economic policies Yes (with incremental approach)

6.2 Trade Potential of SAEU

Intra-regional trade in South Asia accounts for only 5% of the total trade of SAARC countries,
underscoring their stronger trade ties—in most cases—with other countries. Only 4% of
India’s total exports are to SAARC member countries and only 2% in the case of Bangladesh.
Bhutan, Afghanistan and Nepal, however, are heavily dependent on exporting to SAARC
member countries. These same countries are also heavily dependent on imports from
SAARC member countries. The FTA between Sri Lanka and India prompted a surge in trade
between the two countries, illustrating trade potential through trade liberalization. Reflecting
their size and economic development, India and Pakistan account for more than 86% of total
intra-SAFTA export trade, but a significantly smaller share of total intra‑SAFTA import trade.
Only 1% of India’s imports are from the region, and only 5% in the case of Pakistan.

Sector intra-industry trade indices show considerable degrees of complementarity among

the imports and exports of SAARC member countries. There is, though, a great deal of
variation in the degree of complementarity—underscoring the need to carefully tailor
facilitation of intra-regional trade. The companion document provides country-by-country
complementary values for exports and imports. For Bangladesh, Bhutan, India, Nepal and
Sri Lanka the intra-industry trade indices are relatively higher for manufactured goods,
while for Afghanistan, the Maldives and Pakistan intra-regional trade appears to be more
primary oriented.

Economic analysis provided in the companion document indicates that full implementation
of SAFTA would generate significant increases in intra-regional trade and income gains for
all SAARC member countries. In volume terms, the largest trade gain would accrue to India;
in terms of boosts to GDP, the largest gain would accrue to Nepal. All SAARC countries
12 Next Steps to South Asian Economic Union

would experience measurable increases in their total exports, with the largest increase by
Nepal (32%) followed by Bangladesh (5%), Pakistan (5%), Sri Lanka (3%) and India (1.3%). It
is estimated that intra-regional trade could triple over current levels, providing more than a
$30 billion boost to the region annually.

6.3 Full Implementation of SAFTA

SAARC member states should agree that a common agenda to transform the region into
a much more highly integrated market and production base must include clear targets and
specific timelines.

Full implementation of SAFTA should be accelerated, notably through tariff liberalization.

More effective progress should be made in reducing the number of tariff lines in Sensitive
Lists and in reducing the number of sectors protected under the Sensitive Lists. While
Article 7.3 (b) of SAFTA stipulates revision after four years or earlier, the stipulation is not
mandatory. The first 20% reduction in the Sensitive Lists took nearly four years to complete
and discussions for the next round of reduction has just begun. SAARC member states have
agreed to reduce their respective Sensitive Lists and agreement must now be reached as to
the degree and in which sectors.

Two measures should be adopted:

• Reduction Based on Priority Sectors: Based on trade potential, 29 priority sectors

have been identified, with the highest numbers of tariff lines protected under the
Sensitive Lists relating to textiles, electronic equipment, iron and steel, and plastic
and rubber products. Following further analysis, it is recommended that member
countries agree on annual reduction in tariff lines in priority sectors by non-least
developed countries (NLDCs) and least developed countries (LDCs) by 20% and
10% respectively by 2016, and having not more than 100 tariff lines in the Sensitive
List by NLDCs and LDCs by 2020 and 2025, respectively.
• Reduction Based on Tariff Structure: Tariffs for the priority sectors range from
5%–50%. Following further analysis, it is recommended that member countries
adopt Tariff Liberalization Programs for Sensitive Lists whereby, by 2016, peak
tariff will be reduced to 30%, and by 2020, peak tariff will be reduced to 20% with
some flexibility for highly sensitive products.

A High Level Task Force should review the legal, technical, institutional and administrative
features of SAFTA, identifying changes needed to accelerate full implementation of SAFTA.
The review will include not only the Sensitive Lists and Non-Tariff Barriers but also the Rules
of Origin, Compensation Mechanism and Dispute Resolution. The Rules of Origin should
be liberalized, so as to take account of the changing business environment and bilateral
agreements in the region. Combined value addition requirements and the issuance of origin
certificates should be facilitated through better use of technology. The scope and jurisdiction
of the Dispute Resolution Mechanism should be strengthened, thereby providing greater
confidence that SAFTA is being implemented as intended.
 Recommendations 13

6.4 Reducing Non-Tariff Barriers

SAARC’s capacity to deal with core non-tariff barriers (e.g., sanitary and phytosanitary
standards, technical barriers to trade, port entry restrictions and para-tariffs) should be
strengthened. The SAARC Secretariat must be able to deal effectively with the reports and
complaints received by the SAARC Chamber of Commerce and Industry and apex trade
bodies. Greater harmonization is required concerning technical barriers to trade and sanitary
and phytosanitary standards, particularly for animal and plant products. Harmonization of
non-tariff barriers will enable acceptance by importing countries of certificates issued by an
exporting country, reducing the need for inspections at border points.

Mutual Recognition Agreements (MRAs) for specific products or sectors will greatly
expedite intra-regional trade. Adequate funds should support the human and financial
resources needed to make the South Asian Regional Standards Organisation effective. The
process of accreditation and certification should be advanced by more ready acceptance
of certificates issued by competent laboratories in SAARC countries. National treatment is
to be accorded to all products in respect to registration, labeling and testing, together with
charges and fees thereof. SAARC countries should expedite automation of their customs
clearance procedures under the Automated System for Customs Data (ASYCUDA) system.

6.5 Integrating SAFTA and Bilateral

Trade Agreements
SAFTA will endeavor to match the tariff reduction and other provisions of the bilateral
FTAs (notably of the India/Sri Lanka and the Pakistan/Sri Lanka FTAs), harmonizing the
commitments and eventually eliminating any differences.

SAFTA’s rules of origin provisions, notably the 30% value-addition provision, should be
adjusted so as to better facilitate intra-regional export trade expansion in South Asia.
Value‑additions of most LDC export products are very low, hence the current 30%
value‑added provision acts as a barrier to export trade. SAFTA rules of origin should also
better align with the Pakistan/Sri Lanka and other bilateral FTAs regarding tariff headings and
shifts in headings following processing (e.g., final product classification at the first four digit
level vis-à-vis non-originating materials). Trade diversion in South Asia will be minimized by
reducing the absolute level of external tariffs of SAARC member countries and narrowing
inter-country differences in their external tariff rates.

Harmonizing SAFTA preferences with those of bilateral FTAs should be addressed through
easing the rules of origin:

• a ‘de minimis’ rule, where a specified maximum percentage of non-originating

materials is allowed without affecting the determination of origin; and
• easing the regional cumulative rule concerning domestic value added.
14 Next Steps to South Asian Economic Union

6.6 Integrating Formal and Informal Trade

Informal trade among SAARC member countries is substantial, in part because of the
extensive Sensitive Lists under SAFTA and the relatively tight rules of origin. Further, export
restrictions (e.g., on food exports) and non-tariff factors (e.g., trade-restrictive product
standards) are additional impediments to formal trade.

Lack of proper transport and transit facilities, cumbersome customs procedures, excessive
paperwork and poor infrastructure at border areas prompt traders to rely on informal rather
than formal channels. While SAARC member countries have made important progress in
facilitating cross-border trade and in reducing the associated transaction costs (including
time), further improvements are urgent. Customs procedures and paperwork need to be
simplified and connectively improved through improved cross-border infrastructure and
transport protocols. Easier visa processes, cellular services and courier facilities are further
measures for spurring formal trade.

The trade information base should be upgraded, including through increased communication
among export and import traders in SAARC member countries. Greater dialogue among
traders will contribute to a more active and amenable business environment, along with
filling gaps in information concerning trade regulations and procedures. SAARC on-line
networks, trade fairs and exhibitions will be further means for promoting intra-regional trade.

Streamlined border security is another step toward SAEU. Security checks, payment of
bribes, and harassment by border officials discourage formal trade. Border officials must be
better able to differentiate between legitimate trade and informal or illegal trade. Information
concerning legitimately traded goods, routes, correct standards and bonafide trading partners
should be improved.

The payment process for formal trade transactions need to be streamlined. Establishment
of cross-border banking facilities will facilitate traders throughout the region. Easier access
to credit and banking systems will encourage informal traders to gradually switch to formal
trade, although ethnic trading networks are expected to continue.

6.7 Facilitating Trade in Services

The SAARC Agreement on Trade in Services (SATIS) should be advanced though a number
of initiatives, including the following:

• streamlining of investment regulations, through fast track procedures for regional

investors and for selected commercial services; also, improved information on
the investment regulatory framework in SAARC member countries and on the
bidding processes for service contracts; a regional investment treaty addressing
investment-related SATIS concerns will be formulated, harmonized with the
India-Pakistan bilateral investment treaty currently under discussion; a SAARC
investment treaty will address investment facilitation, investor protection,
 Recommendations 15

dispute settlement and contract enforcement; double taxation treaties will also
be developed;
• greater institutional and regulatory cooperation, notably through harmonization
of financial services regulations and standards, thereby facilitating remittances and
investment flows though formal banking and capital market channels; additional
steps will include the reduction of exchange restrictions, adoption of common
standards and strengthening regulatory enforcement of the financial sector;
• improvements in the business environment, including through improved
transport connectivity and transit trade agreements; standards and regulatory
principles for the service sector will be established; and
• an incremental, phased approach to liberalization of trade in services, focusing
first on the least contentious services, such as tourism and information technology
services; negotiations concerning service trade liberalization will proceed on issues,
sectors and sub-sectors where there is a minimum core group of three or more
interested members, following ASEAN’s open approach; bilateral and multilateral
agreements (e.g. BIMSTEC) will also serve for advancing trade in services; SAARC
member countries will consider a request and offer approach to liberalizing the
movement of natural persons for selected categories of service providers; SATIS
discussions will be linked with those on trade facilitation.

Implementation of SATIS should involve four critical steps: first, improving information on the
service sector so as to better understand its importance and the barriers to trade in services;
second, focus regional discussions on regulatory and institutional issues critical to trade in
services; third, development of the regional transport and trade facilitation infrastructure;
and fourth, capacity building, including selected services such healthcare, environment,
education, renewable energy, and tourism.

6.8 Labor Mobility

SAARC member countries should take short- and long-term measures to facilitate the
movement of skilled- and highly-skilled labor in the region:

• member countries should work together to design an agreement which facilitates

the movement of certain categories of professionals and specialized skills under a
common framework;
• a special visa category should be issued for business travel, including an easier
entry process;
• barriers to Mode 4 trade under SATIS should be phased out;
• standards and qualifications should be harmonized by universities, professional
bodies and research institutes;
• member countries should set timelines for entering into MRAs for selected sets
of professions;
• member countries should provide the supporting technology and infrastructure
(e.g., visa counters) to facilitate labor mobility; and
• member countries should reduce the cost of remittances, following the
5 percentage point reduction in 5 years being implemented by the G8 and
G20 countries.
16 Next Steps to South Asian Economic Union

In recognition of its sensitivity, SAARC member countries should focus on non-controversial

and achievable labor mobility measures. SAARC member countries recognize that they must
work together to create a skilled, mobile workforce.

6.9 Investment Cooperation

SAARC member countries should advance investment cooperation under the framework
of open regionalism, appropriate home and host country measures, progress toward a
common market, harmonized regulatory provisions, and country-specific priorities for
building regional supply chains. Accordingly, SAARC member countries should undertake
the following measures:

• draw from the ASEAN model for investment cooperation, while adjusting in
recognition of conditions in South Asia;
• simplify and harmonize procedures for investment applications and approvals;
• widely disseminate investment-related rules and regulations;
• harmonize guidelines for investment in specific sectors;
• strengthen institutional capacity for regulating investment, including foreign direct
investment;
• facilitate investment transactions through improved financial and banking
networks;
• coordinate investment and trade liberalization; and
• simplify cross-border customs regulations.

SAARC member countries should take measures to facilitate public-private investment

partnerships for the development of regional or sub-regional energy and infrastructure
projects, and to facilitate regional value chains in the apparel, other industries, and the
service sector. SMEs should be accorded special supports. Member countries may consider
reducing corporate and personal income taxes to incentivize foreign investment in high
priority sectors, subject to limits to avoid counterproductive regional competition.

6.10 Economic Corridors

SAARC member countries will develop economic corridors to more closely integrate the
region (including with ASEAN) and to facilitate participation in GVCs. To this end, the
following steps should be undertaken:

• preparation of a master plan of South Asian Economic corridors, together with

time lines for their completion;
• effective coordination among key stakeholders (public and private) in formulating
the master plan;
• identification of the infrastructure (e.g., physical infrastructure, logistics networks,
maintenance) necessary for development of the economic corridors;
• mobilization of the necessary financial resources, including through partnerships
with multilateral financial institutions and the private sector;
 Recommendations 17

• identification of industries and sectors for the designated economic corridors;

• identification of the policy and regulatory (software) measures needed in
support of the industries/sectors intended as the focus of investment in the
economic corridors;
• clarification and harmonization of the rights of passage for goods, people and
vehicles, and of the associated permits, licenses and other measures;
• accession to the seven international transport conventions, especially the
Customs Convention on the International Transport of Goods under Cover
of Transit International Routier Carnets, the International Convention on the
Harmonization of Frontier Controls of Goods, and the Convention on the
Harmonization of Frontier Controls of Goods; and
• identification of the logistics requirements for effective economic corridors and
coordinated action in response.

6.11 Trade Facilitation

Supplementary to trade liberalization, the reduction of non-tariff barriers and other
measures outlined above, SAARC member countries should undertake a number of trade
facilitation measures:

• establishment of national trade facilitation committees;

• adoption of the World Trade Organization Trade Facilitation Agreement, with the
support of the Asian Development Bank, World Bank, United Nations Economic
and Social Commission for Asia and the Pacific, and other organizations;
• targeted measures by both the governments and private sectors to reduce the
time and transaction costs of cross-border trade;
• active involvement of chambers of commerce and industry associations in
simplifying and automating documentation, certificates of origin, and other steps
in the import/export process;
• progress in aligning national procedures and documents with international
standards and conventions;
• tailoring trade facilitation measures in support of cross-border production
networks, especially in support of SMEs;
• identification of backend production opportunities in South Asia and the steps
needed to realize these linkages, possibly led by a project development facility to
facilitate planning and implementation of cross-border projects;
• establishment of single-window border facilities for processing of trade-related
information and documents, modelled after successful single-window border
facilities (e.g., Republic of Korea);
• increased use of information and communication technology and development
of paperless trade (e.g., acceptance electronically of cross-border Bills of Lading);
and increased use of e-filing of documents;
• streamlining and harmonization of inspection and testing procedures and
improved risk management systems;
• harmonization of hours of operation of customs facilities;
• improvements in multimodal connectivity; and
• introduction of trade facilitation performance monitoring systems.
18 Next Steps to South Asian Economic Union

6.12 Poverty Eradication

SAARC member countries should demonstrate that regional integration addresses the
interests of the poor. Accordingly, SAARC member countries should:

• document and widely communicate how regional integration has spurred

economic growth in their countries, generating new and better paying jobs for low
income workers, including those in remote and slow growth areas;
• document and widely communicate how regional integration has spurred
increased trade, foreign direct investment, regional infrastructure investments,
migration and other benefits;
• ensure labor adjustment programs and other forms of support (e.g., social safety
nets) for low income workers and others that may be adversely impacted by
trade liberalization;
• strengthen infrastructure, health, education and other services in poor areas,
so as to strengthen the ability of workers in these areas to respond to new
employment opportunities arising from trade liberalization and other economic
integration steps;
• improve access to credit and other financial services to assist the poor to take
advantage of new investment and job opportunities; and
• ensure that the legal and regulatory system (e.g., contract enforcement) is
accessible to the poor and exercised in a fair manner.

6.13 Regional and Global Value Chains

SAARC member countries should collaborate in promoting and facilitating regional and
global value chains in South Asia, a fundamental building block for strengthening business
competitiveness in key sectors. Regional value chains in the textile, clothing, leather, food
processing and other sectors provide opportunities for businesses in South Asia to gain
higher value for their exports and to participate in global value chains. To promote and
facilitate regional and global value chains, SAARC member countries should collaborate in
the following:

• identification of strategic policy interventions needed at the regional and national

levels (e.g., preferential trade agreements, cluster formations);
• formation of regional industry associations;
• establishment of regional design centres;
• joint research and development in support of target industries;
• acceleration of trade facilitation;
• improvement of transport and other critical infrastructure, and of
telecommunications services;
• harmonization of industrial support policies;
• capacity building regarding relevant institutions and regulations; and
• capacity building regarding technical innovation, and skills development.
 Recommendations 19

6.14 Integration of Capital Markets

SAARC member countries should integrate their capital markets at a pace that reflects their
respective levels of development and the challenges they face. Integration will be guided
by pragmatism, recognizing the different starting points and different speeds but with a
common goal. Integration of capital markets will be a bottom-up process, and accompany
integration of the goods and services markets. Integration should be achieved incrementally
though step-by-step harmonization of standards, led by industry participants and building
on the considerable degree of regulatory similarity. A SAARC agreement on capital markets
is viewed as the logical result of the bottom-up process of harmonizing standards under a
common goal.

Integration of capital markets in SAEU includes the following measures:

• SAARC Expert Group on Development of Capital Markets needs to meet regularly

to guide the integration/harmonization process;
• in depth analysis of capital markets in SAARC member countries as a foundation
for establishing common standards, including analysis of market volatility,
demutualization, pension fund management, new products, bond markets and
other capital market issues;
• wide consultation with stakeholders concerning integration of capital markets;
• wide dissemination of baseline common standards and support for their
implementation;
• rules requiring prospectuses and specifying their contents;
• rules on capital adequacy and staff training of brokerage firms;
• corporate governance codes based on international best practices;
• rules for trading transparency and standards for clearing and settlement;
• accounting standards based on international standards;
• strengthening of regulatory skills and statistical measures of enforcement;
• capacity-building on financial literacy and the stock exchange business;
• support for small capital markets, including possible outsourcing of settlement
and other functions subject to economies of scale; and
• guidance from central bankers concerning exchange rate policy and management
of capital markets.

6.15 Energy Cooperation

In recognition of their collective extensive energy potential and requirements, SAARC
member countries should intensify their cooperation in developing and sharing the region’s
energy potential, including renewable energy.

Policy initiatives for the development and sharing of the hydropower potential in Bhutan,
Nepal and other areas of the region should include:
20 Next Steps to South Asian Economic Union

• encouraging and facilitating expanded participation of the private sector;

• providing assistance for detailed feasibility studies, financing mechanisms, and
PPP investments;
• developing a regional data base on possible cross-border power transmission
connections; and
• determining interconnection modalities (HVAC of HVDC), their operational
feasibility and economic viability.

Policy initiatives concerning development of a regional power market should include:

• analysis of the power structures in the member countries, their legal and regulatory
frameworks, their security and stability standards, and their compatibility;
• analysis of the power generation scheduling and dispatch procedures, energy
accounting systems, financial settlement systems and of the institutional,
regulatory and commercial requirements for cross-border power trade; and
• development of a framework for regional power exchanges linking the power
systems of SAARC member countries.

Policy initiatives concerning large-scale power generating stations should include:

• analysis of their competitiveness based on imported coal and natural gas;

• analysis of the infrastructure and policy initiatives needed to facilitate
establishment of large-scale power generating stations; and
• formulation of commercial risk mitigation strategies for the proposed
Turkmenistan-Afghanistan-Pakistan-India and the Iran-Pakistan-India pipelines.

Policy initiatives concerning renewable energy should include:

• assessment of each country’s renewable energy potential (wind, solar, biogas,

biofuel) and development to date;
• sharing of experience in promoting and facilitating renewable energy
investments; and
• collaborative research in adapting the technologies to local conditions.
 Conclusion 7
The commitment to SAEU should be a commitment by key stakeholders throughout the
region, including—in addition to the governments—the private sector, civil society, academe
and think tanks. The economic agenda presented here is neither exhaustive nor conditional
on all the elements being agreed to. As an agenda, it addresses four broad areas of interest:

(i) Why is there a need for deeper regional economic integration in South Asia?

To be more competitive and to participate more effectively in global value chains,

the region must become more integrated. Success in reducing poverty and in
opening up new and better job opportunities for workers in SAARC member
countries will importantly depend on reducing the barriers to trade, investment
and other forms of integration.

(ii) How to achieve deeper regional integration in South Asia?

In short, by building on success. While implementation of SAFTA has been slow, it

nonetheless represents a landmark achievement. In many respects, private sector
cooperation and business initiatives are leading the way, providing a course for
further steps by SAARC Summits.

(iii) What to do?

What to do is extensive. Full implementation of SAFTA is perhaps the first order

of business but other major steps—such as effective and faster implementation of
SATIS and progress in an investment agreement—should also be priorities.

(iv) Who will do what?

SAARC Summits should pave the way. SAARC’s full institutional structure must
be mobilized in making SAEU a reality. In turn, SAARC’s vast population needs to
be mobilized in support of this vital challenge.

21
 APPENDIX
Action Plan Recommended in the Study

Strategic Action 2014–2016 2017–2020 2021–2025

Tariff Liberalization Reduce tariff on all products except Reduce tariff on all products
for those in SL to 0%–5% by LDC. except those in SL to 0% by
LDC.
Reduce tariff on all products except
those in SL to 0% by NLDC.

Harmonize the SAFTA tariff

reduction scheme with Bilateral
Free Trade Agreement (BFTA) tariff
reduction schemes by introducing
regular review and monitoring
process to keep track of rapid
modifications in the BFTAs.
Reduction in 20% annual reduction in tariff lines Not more than 100 tariff lines Not more than 100
Sensitive Lists (SL) in priority sectors by NLDC. by NLDC. tariff lines by LDC.

10% annual reduction in tariff lines 10% annual reduction in tariff

in priority sectors by LDC. lines in other sectors by LDC.

Reduce peak tariff to 30%. Reduce peak tariff to 20%

with some flexibility for highly
Harmonize the SAFTA SL with BFTA sensitive products.
SL by introducing regular review and
monitoring process to keep track of
faster amendments in the BFTAs.
Elimination of Setup reporting, evaluation and Reduce NTBs by 50% in Full Elimination of
Non-Tariff Barriers monitoring mechanism. Priority Sectors by LDC. NTBs by LDCs and
(NTBs) NLDCs with flexibility
Enhance transparency by abiding to on some products.
notification requirement.

Reduce NTBs by 50% in Priority

Sectors by NLDC.
Rules of Origin Review all bilateral ROO in the
(ROO) region and explore possible
cumulation mechanism.

Reform ROO to respond to changes

in global production process to
develop value chains in the region.

Simplify procedure for Certification

through EDI.
continued on next page

22
 Action Plan Recommended in the Study 23

Appendix Table continued

Strategic Action 2014–2016 2017–2020 2021–2025

Consultation and Identify the bottlenecks/downsides Making the system more
Dispute Settlement of the existing dysfunctional effective by disseminating
settlement mechanism. significant adjustments to the
imperfections of the current
system.

Promote mutually agreed rules

for enhanced implementation
of the facilities.
Investment Set up a task force to discuss Implement fast track Design a regional
facilitation speedier clearances and approvals procedures for selected investment framework
and fast tracking of investments investors and selected services. that addresses issues of
in the region, for regular updating investment facilitation,
of information on the regulatory Start discussions for a regional investor protection,
framework governing investment in investment treaty and double dispute settlement,
different services. taxation treaties among the contract enforcement.
countries.
Initiate discussions for including an Add an investment
investment chapter in SATIS. Continue discussions on an chapter in SATIS.
investment chapter in SATIS.
Financial integration Set up a committee to discuss Take steps to ease the cross Arrive at harmonized
financial integration through border establishment of banks financial services
harmonization of financial services within the region. regulations and
regulations and standards, easing standards.
the flow of remittances, payments Take steps to remove exchange
and investment flows through restrictions.
formal banking and capital market
channels.

Ensure regular dialogues between

financial sector regulators in the
SAARC region under the SAARC
Finance network.
People mobility Set up a task force to identify Implement recommendations Develop a regional
categories of movement for which of the task force by template for recognition
visa procedures and requirements streamlining visa procedures of qualifications
can be eased. and requirements for selected and for immigration
categories of persons within requirements for
the region. a selected set of
professions and
Initiate discussions for mutual categories of
recognition of qualifications. movement.

Mutual recognition of
qualifications for some
selected professions
among the member
countries.
continued on next page
24 Appendix

Appendix Table continued

Strategic Action 2014–2016 2017–2020 2021–2025

Connectivity Set up a committee to identify Implement these projects. Integrate the regional
bilateral and sub-regional projects transport network.
to develop road and rail transport Sign open skies agreements
links and joint investments. between countries in the Create land corridors
region. through member
Provide transit facilities for the countries.
landlocked nations of Bhutan and
Nepal. Develop transit hubs in
the region.
Data and Set up mechanisms to regularly Work toward a regional
information exchange and update information database on services trade,
exchange among governments, regulatory investment and regulations.
bodies, professional associations,
industry associations, research
institutions, civil society in the
region.

Set up a taskforce to examine data

on regional and bilateral trade in
services.
Regulatory Set up a group on regulatory Develop a cross-cutting
harmonization harmonization- discuss a set of “Services Reference
regulatory principles for the service Paper” which specifies
sector under SATIS. pro-competitive principles
applicable across all services.
Fast track sectors Identify services where fast track Implement the pilot initiatives
liberalization is possible, examine and deepen commitments in
scope for pilot projects in these these sectors under SATIS.
services, take up already existing
initiatives on priority basis.
Sub-regional Create sub-regional task forces on Implement sub-regional Expand the sub-
platforms issues where a core of 3 or more projects and initiatives. regional groups to
countries interested in liberalization. a larger number of
member countries.
Identify existing bilateral
agreements and other plurilateral
agreements among countries in the
region and build on these platforms.
Synchronizing Identify priority food and agriculture Further reduction of tariffs and
deficit and surplus products where there is export non-tariff barriers applied to
in agriculture surplus and potential to trade. these products.
production and
ensuring food Sufficient allocation of resources Synchronizing the identified
security for agricultural research and deficit and surplus in
development (R&D). agriculture production.

Effective utilization of the Regional Joint agricultural research, i.e.

Food Reserve. to develop high yielding crops.

Sharing of experiences and

best practices in agriculture
R&D.
continued on next page
 Action Plan Recommended in the Study 25

Appendix Table continued

Strategic Action 2014–2016 2017–2020 2021–2025

Increasing the pledges made by Improve the coordination
member countries in order to have among member countries to
a sufficient reserve amount in the effectively manage the SAARC
SAARC Food Bank to effectively Food Bank.
address a large scale food shortage.
Managing of stockpiles
Capacity building within SAARC to and monitoring of stock
produce uniform and useable data releases.
to ensure the effective functioning
of the SAARC Food Bank—e.g. food
security information system.
Enhancing intra- Identify areas where regional supply Develop regional supply Regulatory
industry trade and capacities can be improved given capacities to enhance vertical harmonization in
promoting intra- the clear division of labor in terms specialization and economies identified key sectors.
regional investment of the region’s sectoral composition of scale.
and specialization in exports, i.e. in
the textile and clothing Develop sourcing relations
Sector. through regular meetings
of stakeholders, i.e. through
Consult and involve the private the SAARC Chamber of
sector in developing a regional Commerce and Industry.
strategy.
Undertaking measures to
Identifying specific instruments to reduce bureaucratic red tape,
promote regional investment. energy and transportation
costs.
Improving the investment climate.
Establish working groups at the
Relaxation of restrictions related to regional level to focus on key
outward FDI at country level. areas of trade and investment,
i.e. rules of origin, customs,
agricultural trade and subsidies,
standards, investment
and services, cross-border
movement of business people
and dispute settlement.
Regional migration Embark on a clearly defined Having a system at the regional
strategy migration management policy, at level which can provide legal
the country level. assistance and coordinate
enforcement on cases related
Identify impediments to ratifying to fraud and exploitation of
ILO conventions and provide workers.
adequate information on the
implications of ratifying; assisting Developing multilateral
countries to develop/make mobility agreements within the
necessary changes to national laws region.
which are in line with the provisions
of the conventions. Adopting and implementing
best practices of member
Developing effective support states.
systems in the region to reduce
irregular migration, i.e. financial Designing better financial
assistance, insurance. and investment products for
migrants.
Improving access and information
of banking and financial services,
and improving financial literacy.
continued on next page
26 Appendix

Appendix Table continued

Strategic Action 2014–2016 2017–2020 2021–2025

Promoting energy Identifying energy endowments and Committing to a common Harmonization of
co-operation and surpluses in the region for potential agreement to promote energy legal and regulatory
development of energy trade. trade. framework in the energy
a regional power sector of each SAARC
market Identifying areas of energy Developing crucial energy member state.
infrastructure that need to be infrastructure at the regional
developed. level.

Identifying energy related projects Promoting FDI and private

at the sub-regional level. sector participation in the
power sector.
Trade facilitation Facilitating vehicles crossing the Mutual recognition of
measures border areas. standards.

Simplifying visa requirements. Improving infrastructure at

borders.
Lower and more transparent fee
payment for formal trade. Cross border banking facilities.

Automated system for handling Simplification or reduction of

clearances. documentation requirements.

Dissemination of trade related Single window for lodging of all

information through enquiry trade related documents.
points and through trade related
information. Harmonization of
documentation requirements
and formalities for import
clearances.

Single form for customs

clearance.