Rules of Origin and Sensitive List under SAFTA and Bilateral FTAs among South Asian Countries: Quantitative Assessments of Potential Implications for Nepal

This study analyzes the implications of the proliferation of ROO and sensitive list under SAFTA and bilateral FTAs among South Asian countries with particular reference to Nepal. In this regard this study makes a comparative assessment of different ROO arrangements under different bilateral FTAs as well as under SAFTA and BIMSTEC with a view to finding out the relative flexibility of SAFTA ROO vis-a-vis ROO in other regional and bilateral FTAs in South Asia. In addition, this study also explores the impact of the sensitive list maintained by India, under SAFTA, on the rise in exports from Nepal to India. The study uses a partial equilibrium model, namely the WITS/SMART model, to simulate different scenarios. It appears that when there is no ROO requirement and there is no sensitive list, the South Asian countries, under a full SAFTA scenario, are able to increase their exports within the region quite substantially. India appears to be the largest gainer from such scenario. However, Nepal also turns out to be important gainer as her exports to the South Asian region as whole increase by around US$ 90 million. Interestingly almost all of hear export increase would be targeted to Indian market (99 percent) under such a scenario. The analysis on trade creation and trade diversion for Nepal suggests that under a full SAFTA scenario, the trade creation effect (US$ 160821 thousand) will be higher than the negative trade diversion effect (US$ 19454 thousand) resulting in a net trade effect equal to US$ 141367. It also appears that the revenue loss and welfare gains for Nepal, resulting from such a scenario, would be US$ 90881 thousand and US$ 20486 thousand, In the second scenario, because of ROO (and assuming no sensitive list in India) 34 percent of the potential rise in exports from Nepal to India appears to be unrealized. In the third simulation, because of SAFTA sensitive list in India (and assuming no ROO) as high as 47 percent of the potential rise in exports from Nepal to India appears to be lost. In the final simulation, it appears that SAFTA ROO and sensitive list in India eats up more than two-third of the potential rise in exports from Nepal to India. It can therefore, be argued that since the value-additions of most of Nepal’s export products are very low, a 30 percent value-addition requirement under SAFTA as well as under the India-Nepal Trade Treaty would act as a significant barrier for her export expansion in India. This is also true for other LDCs in South Asia. Therefore, the problem of ROO will need to be resolved, keeping an eye on the manufacturing/processing capability of the LDCs. In addition, the other criteria of the ROO, namely the change in tariff head, under SAFTA should also be made consistent with those that are currently in force in the bilateral trade agreements within the SAARC region, which happen to be more liberal than the prevailing SAFTA rules. It also appears that SAFTA sensitive list is too stringent to allow significant rise in exports from the LDCs (in this case Nepal) to the Indian market. In almost all the cases, the products, which are included in the sensitive list, have significantly high export potentials. It can thus be concluded that if these sensitive lists are not phased out, there will be very little to gain from SAFTA by Nepal and other LDCs in this region.