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Boosting intra-regional trade in South Asia

Helal Uddin Ahmed | Published: July 31, 2019 20:39:12


Trade has been playing a critical role in economic growth and poverty reduction in many countries of the world. Numerous prosperous nations in Europe, East Asia and North America have forged strong trade ties with their neighbours for harnessing the potential benefits. For example, intraregional trade accounted for 50 per cent of total trade in East Asia and the Pacific, but surprisingly it amounted to only a little over 5.0 per cent in South Asia. Even in Sub-Saharan Africa, the proportion is 22 per cent. In case of the global trading powerhouse - the USA - its two largest trading partners are the immediate neighbours Mexico and Canada. Even in terms of regional GDP (gross domestic product), the share of intra-regional trade in South Asia hovers around 1.0 per cent, as against 2.6 per cent in Sub-Saharan Africa, and around 11 per cent in East Asia and the Pacific.

In this backdrop, the World Bank has recently published a report titled 'A Glass Half Full: The Promise of Regional Trade in South Asia', highlighting the challenges and opportunities facing intra-regional trade in the region. As stated in its foreword by the former chief economist of World Bank Kaushik Basu, the report "advocates an approach of open regionalism, using intraregional trade as complimentary to, and as a stepping stone for, deeper global integration".

Ironically, many countries in South Asia have better trading terms with faraway countries than their own neighbours. The indexes for trade restrictiveness based on tariff and non-tariff barriers in India, Nepal, Pakistan and Sri Lanka are in fact two to nine times higher for South Asian imports compared to those from the rest of the world. The costs of trade are also disproportionately high in South Asia in comparison to other regional trade blocs. The average trading costs in South Asia are 20 per cent higher compared to ASEAN countries and over three times higher relative to the countries of NAFTA. The South Asian Free Trade Area (SAFTA) came into existence in 2006, but it is still far from achieving the objective of tariff-free trade.

Some countries in the region have opaque para-tariffs, but its elimination has been kept outside the scope of SAFTA. Besides, one-third of intra-regional trade falls under the purview of sensitive lists, which comprise goods exempted from the tariff rationalisation scheme. Port-based restrictions on some bilateral trade also lessen the advantages of shared land borders, especially among the three largest countries. There has also been erosion in access to each others' markets because of the application of non-tariff measures (NTMs). Informational asymmetries play a big role in generating misconceptions about the non-tariff barriers. There are delays as well owing to inadequate border infrastructure and cumbersome procedures. Trade in services like tourism, education, healthcare and businesses as well as FDIs are constrained by visa regimes in addition to other barriers.

The World Bank report has identified four critical barriers to effective integration of intraregional trade in South Asia; it also makes specific recommendations to policy makers for addressing these barriers. The focus is on incremental and concrete measures in four areas for boosting trade, which are: border tax distortions, non-tariff barriers, connectivity costs, and trust deficits.

With regard to border tax, the report recommends curtailing sensitive lists and para-tariffs for enabling real progress in SAFTA. An accelerated, time-bound schedule should be set for the elimination of sensitive lists under SAFTA within a period of maximum 10 years, making exceptions for only a few products. An initial step may be reducing the number of products in the lists for aligning them with those in bilateral South Asian agreements. Secondly, an expert panel can be formed for fixing a time-frame for the elimination of para-tariffs, which should be credible, sufficiently ambitious, and acceptable to all. A first step can be removal of para-tariffs outside the sensitive lists.

Regarding non-tariff barriers, the World Bank favours a multi-pronged approach by targeting information flows, procedures and infrastructures. It suggests finding a resolution mechanism for enhancing transparency and information flows about non-tariff barriers and making a push for swifter complaints resolution. Information campaigns should be initiated for reducing informational asymmetries. Bilateral institutional mechanisms should be established between India and other trading partners in order to boost agricultural trade. Electronic data interchange, risk management systems, and single windows at additional points on the Indian borders should be installed for realising gains from improved coordination and efficiency.

The report draws attention to the lessons learnt from the liberalisation of bilateral air services between Sri Lanka and India that led to reduction in costs of connectivity. This approach focuses on benefits accruing to businesses and consumers and remains open-minded about the impact of liberalisation on transport companies irrespective of the country of origin. An incremental approach can be adopted, which may ultimately lead to the signing of open skies agreement (OSA). Reforms that reinforce the gains from liberalisation like the granting of visa-on-arrival privileges to Indian tourists by Sri Lanka should also be supported.

Trust deficits among the countries of South Asia should be addressed by the policy makers for forging a virtuous cycle of trade and trust. The Bangladesh-India 'border haat' initiative offers some useful insights in view of its positive impact on livelihoods and the strengthening of ties between the peoples and officials on both sides of the border. The procedures should be streamlined, the facilities improved and the use of technology enhanced to optimise the beneficial gains.

Finally, the World Bank recommends the following steps for ensuring a sustainable process of trade integration: precise articulation of trade strategy with timelines for reform; gradual liberalisation in sectors where concerns exist for significant jobs displacement; diversification of tax revenue sources for curtailing excessive dependence on trade taxes; undertaking critical reforms for enabling the private sector to take advantage of trade liberalisation; enhancing market access within South Asia; strengthening safety nets and training for vulnerable workers; improving links between education, training and the job market for sectors gaining from trade reforms; and outlining a fiscal package for sectors affected adversely by trade liberalisation. 

 

Dr. Helal Uddin Ahmed is a retired Additional Secretary and former Editor of Bangladesh Quarterly. hahmed1960@gmail.com

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