The South Asian Free Trade Area (SAFTA) is a multilateral trade agreement that established a free-trade area among the member states of the South Asian Association for Regional Cooperation (SAARC). The agreement was signed on January 6, 2004, at the 12th SAARC summit in Islamabad, Pakistan, and came into force on January 1, 2006. SAFTA succeeded the less ambitious SAARC Preferential Trading Arrangement (SAPTA), which was signed in 1993 and had failed to significantly reduce trade barriers due to its product-by-product approach. The core problem SAFTA was created to solve was the need to promote and sustain mutual trade and economic cooperation by eliminating barriers to trade and facilitating the cross-border movement of goods among the contracting states.
The agreement's mechanism is primarily the Trade Liberalisation Programme (TLP), which aims to reduce customs duties on nearly all traded goods to a range of 0-5 per cent. The TLP established different timelines for developing countries (India, Pakistan, Sri Lanka) and Least Developed Contracting States (LDCs) (Afghanistan, Bangladesh, Bhutan, Maldives, Nepal). For example, non-LDCs were required to reduce tariffs to 20 per cent in the first phase ending in 2007, with the final reduction to 0-5 per cent targeted by 2012. A key provision is the Sensitive List, which allows each country to exempt certain products from tariff concessions, though there is a commitment to gradually reduce these lists. The agreement also includes Rules of Origin (Annex IV) to ensure that only genuinely South Asian products receive preferential treatment, requiring a minimum of 40% value addition for non-LDCs and 30% for LDCs. SAFTA is intrinsically connected to SAARC, as it is the free trade arrangement of the regional body. While the goal was to complete the free trade area by January 1, 2016, the full realization of its objectives is still challenged by non-tariff barriers and political tensions. Discussions on further reduction of Sensitive Lists under Phase III of SAFTA are ongoing.