Sunday, May 10, 2009

SAARC Regional Cumulation: Impact on Pakistan

SAARC Regional Cumulation: Impact on Pakistan

Majyd Aziz

July 14, 2006

The EU is the largest trading partner of all the SAARC countries except one, Nepal, in which it is the second largest. It is also a huge and vital export market for SAARC member states. On average in the last few years, the EU has accounted for 20-25% of SAARC exports and imports.

The EU has been one of the chief proponents to giving greater market access to the developing world through a number of instruments to promote trade between EU and the developing countries. All the South Asian countries have been beneficiaries of this policy. One of the most important trade policy instruments has been the EU’s Generalized System of Preferences (GSP), which has helped the SAARC countries to export their products to EU.

The EU has also tried to play its role in fostering regional integration within SAARC countries. This has been attempted by its policy of regional cumulation under the EU’s GSP scheme. This implies that where a product has been manufactured in or with inputs from two or more countries belonging to a group enjoying regional cumulation, inputs from other countries of the same group are treated as if they originate in the exporting beneficiary country. SAARC countries have benefited considerably from this cumulation policy especially in competitive sectors like textiles and clothing.

The issue of Regional Cumulation for SAARC countries was first mooted in the early 1990s when a Memorandum of Understanding was signed between EU and SAARC calling for more close cooperation between the two regional groups.

Cumulation is an important concept in Rules of Origin and can determine the level at which countries are able to use the trade preferences available to them within a free trade agreement or a unilateral preference program. Cumulation refers to the extent to which production may be aggregated with other countries without losing originating status for the purposes of the applicable Rules of Origin. In effect, cumulation is derived from one of the core concepts of origin, that is, that the product is totally imported from one country. The availability of cumulation, by extension, can lead to trade enhancement while non-availability may lead to diversion or suppression. Different forms of cumulation are provided under the EU's preference programs:

• Bilateral Cumulation with the EU is the simplest form of cumulation, and merely provides for the use of EU-made inputs in the production of EU-destined goods made in the beneficiary country. Such cumulation therefore deems EU-inputs to originate in the exporting country for the purpose of qualifying under a trade preference program.
• Diagonal Cumulation is also provided for in the EU's trade preference programs, and allows a limited use of intermediary inputs from third countries who are not party to a particular FTA to be counted as being of domestic origin. However, such diagonal cumulation is usually only possible following the conclusion of FTAs or cooperation agreements between the cumulating countries. Diagonal cumulation certainly has the potential to significantly widen free trade areas by incorporating countries with established trade links.
• Full Cumulation refers to provisions that allow the unlimited use by the home country of inputs originating in certain other countries.
• Regional Cumulation refers to the provision in EU's GSP that is in effect diagonal cumulation with regions. This allows production to be cumulated among three predefined groups of developing countries (i.e. the SAARC, ASEAN and Andean Community countries).

The EU is putting the final touches to the SAARC Regional Cumulation (SRC). How will this impact on Pakistan? Considering the fact that the intra-SAARC trade is less than 5% of global trade, considering the fact that Pakistan has a FTA with only Sri Lanka, considering the fact that SAFTA has only recently been ratified by all members and it still has a long way to go, and considering the fact that even today a lot of non-tariff barriers are impeding the inter-SAARC trade regime, Pakistani industrialists have to institute a pro-active and pre-emptive strategy to take maximum advantage of SRC.

Pakistani industrialists and businessmen should get their act together and prepare for the opportunities and even the threats that SRC would provide. It should be noted that textiles is the primary sector where linkages, joint ventures, and casual partnerships could be developed. Some areas where Pakistani industries could immediately set in motion these steps are as follows:

Denim is one of the fastest growing industries, especially after the expiry of the Agreement on Textiles and Clothing. Major woven garment producers have embarked upon the process of vertical integration. The heavy and tough competition has necessitated the need for maximum cost-control and full utilization of the resources. A vertically integrated denim unit consists of spinning, dyeing, weaving, finishing, and apparel. Some Pakistani manufacturers have taken it a step further and have set up functional warehouses in Europe and USA to reduce the timeframe that is so crucial in today’s global marketplace.

SAARC countries could be targeted in this same manner. A concerted effort has to be initiated to set up warehouses in, say Colombo or Chittagong, to cater to the needs of the manufacturers in these countries. At the same time, one link in the supply chain could be transferred to other SAARC countries. The finishing of denim could be done by a processing plant set up in other SAARC countries. This would supply buyer-specified denim at a comparable cost to the manufacturers in Bangladesh or Sri Lanka and also be able to meet requirements in India (unlikely in this scenario) and also Nepal to some extent.

Cotton yarn and cotton grey cloth are two other areas where the Pakistani manufacturers can export within SAARC and create a market for their goods there. Again, a two-pronged approach could be visualized. Either yarn is exported to be woven or knitted in the importing country and made into the required fabric and in this manner utilizing the weaving or knitting capacity installed in those countries or fabrics in unprocessed form is sent for the same purpose, or by taking a process further, is dyed or printed and then exported as a finished fabric.

Home Textile sector is another such area of cooperation. Pakistan is at present at a vantage position in the home textile sector. Pakistani bedwear, towels, and other auxiliary products have earned a niche position in the global textile market. The inherent edge that Pakistani manufacturers have in this sector is evident from the increased exports inspite of anti-dumping duties levied by EU on Pakistani bedwear. There can be a very profitable arrangement with counterparts in other SAARC countries to further broaden the home textile market. It would be a practical and cost-effective deal for the Sri Lankan and Bangladeshi exporters and in some cases, even for the Indians too.

Synthetic value-added fabrics can also acquire a presence in other SAARC countries. Right now, Pakistani manufacturers have a very minuscule presence of this sector in the regional countries but the scope is there, and aggressive marketing, quality-conscious products, and favorable prices could ensure entry into these markets.

However, there are pitfalls and roadblocks that may affect the positive scenario for textiles. It has to be understood that Pakistan faces formidable competition from India because the latter has an edge due to a larger internal market, more economies of scale, proximity to other SAARC countries, already established partnerships thru linkages, joint ventures, or licenses, and functional FTAs, etc.

Indian government is providing exceptional incentives to manufacturers to establish state-of-the-art mega projects in the home textile field. Pakistani home textile would face strong competition in this sector after 2010 not only in SAARC countries but also in Europe and USA. Therefore, it is imperative that measures be initiated from now to withstand the onslaught. Indo-Chinese cooperation in textiles could create a monumental dam in the progress of other SAARC countries.

Pakistani cotton sector must ensure that contamination-free cotton becomes the norm because in the future, the discerning customer would not appreciate apparel or textile made-ups made of cotton that has plenty of impurities. Pakistan has a world class spinning sector while the weaving sector is being upgraded to international standards too. This transformation could be jeopardized if the cotton used in yarn and fabrics is not contamination-free.

Non-adherence to social compliance conditionalities, especially in matters of environment, freedom of association, child labor, etc could also impact negatively on the exports under SRC. The same pressure would be on other SAARC nations but if manufacturers in these countries become social compliant, then the onus would lie on Pakistani exporters and may affect their presence in these SAARC markets.

There is a need to standardize and streamline the various factors involved in trade and industry. SAARC countries must adopt common labor legislation, packaging grades, environmental standards, non-tariff trade barriers, free movement of men and material, fast-track judicial processes, strict implementation of intellectual proprietary rights, protection of investment, settlement of debts, and other conditions. All these are essential ingredients if the SAARC countries desire mutually beneficial advantage of the EU SAARC Regional Cumulation.
A study could also be done to ascertain what would be the impact on sports goods, surgical instruments, information technology, plastic products, and engineering goods, etc. This paper is basically confined to textiles only. However, most of the factors are equally important and must be pragmatically addressed for non-textile fields too. One significant factor that must be underlined is the volatility of the non-peaceful issues that have cast dark shadows over this region. The non-resolution of contentious issues, the mistrust syndrome, and the diverse mindset, are some other factors that would affect the taking of substantial advantages from SRC. SAARC Regional Cumulation, if successfully implemented and utilized could be the harbinger for the Super Regional Cumulation linking SAARC with the ASEAN bloc.

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