South Asia, the world’s fastest growing region, can triple its regional trade from $23 billion to $67 billion by reducing trade barriers, according to a new World Bank report.
Titled “A Glass Half Full: The Promise of Regional Trade in South Asia,” the report was unveiled in Bangladesh’s capital city Dhaka on Wednesday. Documenting the gap between current and potential trade in South Asia, the report provides a road map for expanding regional trade.
South Asia’s rate of intra-regional trade remains among the lowest in the world, accounting for only 5% of the region’s total trade. The comparable figure for East Asia and the Pacific is 50%.
The report identifies four critical barriers to regional trade in South Asia: tariffs and para tariffs, real and perceived non-tariff barriers, connectivity costs, and a broader trust deficit.
Presenting the key findings of the report, World Bank Lead Economist and lead report author Sanjay Kathuria said it was possible to envisage a South Asia where one could travel seamlessly and have breakfast in Kabul, lunch in Lahore, tea in Delhi and dinner in Dhaka.
“Connectivity also means consumers enjoy goods at the best available prices and for that, intra-regional trade relations have to be improved,” Kathuria said.
Kathuria bemoaned the fact that intra-regional trade in South Asia falls consistently below potential. The gap between actual and predicted intra-regional trade in the region has widened from US$7 billion in 2001 to US$44 billion in 2015. This is partly because South Asia’s Gross Domestic Product has grown significantly faster than GDPs in the rest of the world during this period.
The report said South Asian countries created barriers between each other through high tariffs and para tariffs, despite its own regional free trade agreement, the South Asian Free Trade Area (SAFTA), that came into force in 2006. It noted that the average level of trade costs is 20% higher between country pairs in South Asia than between country pairs in the Association of Southeast Asian Nations (ASEAN) region.
According to the report, SAFTA’s goal of duty-free trade is compromised by long “sensitive lists” that are maintained by all countries in the region. Sensitive lists identify products deemed ineligible for tariff concessions, in order to protect a domestic market’s manufacturers from outside competition.
Almost 35% of intra-regional trade in South Asia is subject to sensitive list tariffs: 44%-45%of imports from other SAFTA members fall under sensitive lists of Bangladesh and Sri Lanka and more than 39% of Indian exports to the region fall under sensitive lists of its various trade partners. SAFTA does not provide a clear guideline for phasing out these lists.
SAFTA’s lack of effectiveness has created incentives for countries to pursue other free trade agreements both within and outside the region. India has comprehensive economic partnerships and agreements with 18 countries or groups of countries; Pakistan has ten such agreements in force and Bangladesh and Sri Lanka are pursuing free trade agreements with multiple partners, the report said.
Interestingly, protectionism in the region is more aggressive when dealing with imports from within South Asia than it is for imports from the rest of the world. Despite significant liberalization in tariff regimes carried out by South Asian countries since the 1980s, average tariffs in the region were 13.6%, more than double the world average of 6.3% and the highest among major regions of the world.
According to Kathuria, the report was not intended to be a complete treatment of country-specific trade issues, and nor does it suggest that there be an exclusive focus on regional trade. Regional trade provides only one among many development opportunities, he said.
“Intra-regional trade is a subset of global trade, and global trading opportunities supply the greatest welfare gains,” he said. “For example, most countries would benefit from greater trade with China; on the western side of the region, Afghanistan and Pakistan would benefit from expanded trade with Iran and Turkey.”
The report outlines how trade in South Asia has been hampered by a history of mutual mistrust, often rooted in historical conflict. “Trust is a fragile commodity in South Asia and persistently in short supply,” Kathuria said. South Asian nations have a “long history of political tensions and mutual suspicion, often stemming from their colonial history and the circumstances under which the countries were born,” he said.
The region’s trust deficit is also accentuated by the wide disparity in the size of nations in the region. India’s large population and economic clout leads to concerns among smaller neighbors that cross-border openness could result in economic domination. Current trade deficits in the region heavily weighted in India’s favor further add to this perception.
72.8% of Afghanistan’s exports go to South Asia, while 29.4% of its imports come from the region. For other nations in the region, the figures are 1.9% and 13.2% for Bangladesh; 88.8% and 74.3% for Bhutan; 6.5% and 0.6% for India; 14.2% and 13.6% for Maldives; 66.2% and 48.5% for Nepal; 13.7% and 5.3% for Pakistan and 8.7% and 30.6% for Sri Lanka.
Noted Bangladeshi economist Dr Mustafizur Rahman, who attended the report’s unveiling, called the data “daunting” and said, “unless India increases its import volume (from nations) within the region, the overall volume of the intra-regional trade will not increase.”
The growing influence of China in South Asian countries, despite its rivalry with India, is also complicating relationships in the region, Rahman said. Since South Asia is the fastest growing region in the world despite its low rate of intra-regional trade, policy makers in the region’s countries will struggle to change the status quo, he said. “But as the world is witnessing the trade war era between China and USA, I think very soon, that complacency will be gone if intra-regional trade isn’t increased.”