A Glass Half Full: The Promise of Regional Trade in South Asia

09/19/2018

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Sanjay Kathuria, editor | South Asia Development Forum, World Bank Group

Executive Summary

What if the trade between India and Pakistan were valued at $37 billion instead of $2 billion? What if trade between the countries of South Asia were valued at $67 billion instead of $23 billion? These are not pipe dreams. They are the predictions of detailed econometric models. These models show that, given their proximity and the size of their economies, the countries of South Asia should be trading among themselves at three times the current levels.

Why Is There Such a Large Gap between the Reality and the Potential?

Many South Asian countries trade on better terms with distant economies than with their own neighbors. Th is can be shown through an index of trade restrictiveness. Based on global trade data, such an index generates an implicit tariff that measures a country’s tariff and nontariff barriers on imports. In India, Nepal, Pakistan, and Sri Lanka, the indexes are two to nine times higher for imports from the South Asia region than for imports from the rest of the world. The costs of trade are disproportionately high within South Asia compared with other regional trade blocks. For example, the average costs of trade within South Asia are 20 percent higher relative to country pairs in the Association of Southeast Asian Nations (ASEAN) and over three times higher than the corresponding costs among the countries of the North American Free Trade Agreement. The agreement to implement the South Asian Free Trade Area (SAFTA) came into force in 2006, but SAFTA is still far from achieving the goal of tariff -free trade. Under SAFTA, South Asian countries have been lowering tariffs. However, several countries in the region have adopted opaque paratariffs, that is, duties imposed on imports, but not on domestic production. Paratariff elimination has been kept outside the ambit of SAFTA and other free trade agreements in the region. This has contributed to SAFTA’s underperformance. In addition, more than one-third of intraregional trade in South Asia falls under sensitive lists, comprising goods that are exempted from the tariff rationalization program under SAFTA. Intraregional trade in such goods is subject to normal tariffs, which can be quite high in many sectors, including consumer goods and agriculture. Port restrictions on some bilateral trade in the region tend to diminish the advantages of shared land borders, including among the three biggest countries in the region. Pakistan allows only 138 items to be imported from India over the Attari–Wagah land route, the only land port between the two countries, despite the long, shared land border. This means that bilateral trade is dominated by trade along the sea route, which is not necessarily the most cost-effective avenue of trade for two contiguous countries with a long common border. Bangladesh and India also impose some restrictions on imports from each other at certain ports. Access to each other’s markets has also been eroded through the application of nontariff measures (NTMs), that is, policy measures other than tariff s. While NTMs are applied in all countries to protect health and safety, they become nontariff barriers if they are unduly burdensome. Results of detailed surveys carried out for this report among traders involved in the Bangladesh–India and the India–Nepal trade demonstrate clearly that information asymmetries play a big role in creating misperceptions about the existence of nontariff barriers. Another common theme in the survey results is the delays stemming from inadequacies in border infrastructure and from cumbersome procedures. Intraregional trade in services, such as tourism, education and medical services, and business services, is constrained by visa regimes, among other barriers. Visa regimes also limit intraregional foreign direct investment (FDI), which affects intraregional trade given the intricate links between investment and the growth of regional value chains… (continue on page 2 of full report below) A Glass Half Full: The Promise of Regional Trade in South Asia
Kathuria, Sanjay. 2018. A Glass Half Full : The Promise of Regional Trade in South Asia. South Asia Development Forum;. Washington, DC: World Bank. © World Bank. https://openknowledge.worldbank.org/handle/10986/30246 License: CC BY 3.0 IGO.