Regional trade barriers distort markets and force South Asian consumers to buy the same goods from other regions or pay higher prices for goods from within the region. 

What does the future of regional trade in South Asia look like?

A bold push can have a transformative impact across the region.
Updated 16 Nov, 2019 11:06am

Held hostage by the legacy of Partition, the South Asian region continues to be one of the least integrated in the world.

Barriers restricting the flow of people, capital and goods are common across the subcontinent, stunting economic growth, preventing the emergence of globally competitive supply chains and limiting people-to-people contact that can help develop constituencies for peace, especially between India and Pakistan.

Trade data for South Asia highlights the impact of these barriers: while intra-regional trade accounts for about one per cent of South Asia’s GDP, it accounts for almost 11pc of regional GDP in East Asia and the Pacific, according to the World Bank.

This need not be the case, and South Asia’s economic and geopolitical future would be far more secure if it were to become more integrated.

Editorial: Trade with India

According to analysis conducted by the World Bank, the region’s trade potential currently hovers around $67 billion, almost three times the current trade of about $23 billion.

China’s annual GDP growth is expected to slow down to around 6pc compared to around 7pc in South Asia by 2020, which means the region will become a driver of global growth, and its trade potential will only increase in the coming years.

Distorting markets

Regional trade barriers, both tariff and non-tariff, distort markets and force South Asian consumers to buy the same goods from other regions or pay higher prices for goods from within the region.

Tariffs play a key role in these higher prices: South Asia’s average tariffs in 2016 were 16.3pc, while the world average of 6.3pc is less than half that amount, according to the World Bank.

This issue is compounded by the pervasiveness of sensitive lists — products that are not eligible for lower tariffs under the South Asian Free Trade Area (Safta) — that are common across the region.

Pakistan’s sensitive list includes items like butter, apples and plastic office and school supplies, while India’s list includes items such as goat meat, palm oil and hair shampoos, according to data available on Pakistan’s Ministry of Commerce Website.

The World Bank estimates that these sensitive list tariffs apply to almost 35pc of intraregional trade in the region.

Explore: Pakistan and the web of international economic corridors

Poor transportation and logistics act as a major barrier, raising the cost of trade between South Asian economies.

Compared to countries in East Asia, the average level of trade costs in South Asia is 20pc higher, with World Bank analysis showing that the cost of trade between some South Asian economies is higher than the same country’s trading costs with Brazil.

For example, Pakistan’s total exports to Bangladesh amounted to over $600 million in 2017, according to data made available by the State Bank of Pakistan.

However, the inability of these goods to be transported via a land route through India means that the goods must be transported through a long sea route, leading to longer shipment durations and higher transportation costs.

Non-tariff measures also act as a barrier and restrict growth. While the Attari-Wagah land route is the most efficient way to trade between Pakistan and northern India, Pakistan allows the import of only 138 items from this route.

Creating a virtuous cycle

Protectionist lobbies and some policymakers in South Asian economies have long argued that such measures are important to protect them from competition.

However, countries have pursued economic agreements with countries outside of South Asia: India has economic partnerships and/or free trade agreements with 18 countries or groups, while Pakistan has signed 10 such agreements, including one with China.

Cumbersome and restrictive visa regimes, coupled with a lack of air flights between regional hubs, further compound problems. The lack of people-to-people exchange means that it becomes very difficult to generate trust across countries.

Related: Pakistan’s current account in a cross-country perspective

The shared history, culture and languages of the region, particularly in Pakistan and India, means that trade, tourism and direct investment can be catalysed by encouraging the flow of people across the border.

This would initiate a virtuous cycle as the flow of people builds trust and enhances trade linkages that create economic interdependencies, which further builds trust and fosters even greater trade and investment.

Such a virtuous cycle is taking hold in the border regions of India and Bangladesh, two countries whose governments have aggressively sought to improve trade and people-to-people ties in the last few years.

According to studies conducted by the World Bank, over 95pc of Indian vendors and over 65pc of Bangladeshi vendors in these border regions have seen a substantial increase in their incomes.

Reducing barriers, normalising trade

Similar efforts across South Asia can have a considerable effect on income levels and reduced illegal trading and smuggling of goods, thereby boosting the size of the formal economy, which can also lead to increased tax collection for governments.

Current bilateral trade between India and Pakistan is well below potential, accounting for less than 0.5pc of India’s and about 3pc of Pakistan’s trade with the rest of the world, according to the World Bank.

A normalised trade relationship between India and Pakistan could see trade increase by almost 15 times and plug the $35 billion trade gap between both countries.

This would benefit citizens of both nuclear-powered nations whose governments are struggling to create jobs for a young population seeking a better future.

Both countries account for over 85pc of South Asia’s GDP and population, and the lack of trade between the rivals has a direct impact on the entire region.

Editorial: Trading potential

In addition to maintaining a long sensitive list, Pakistan does not allow land access for Indian goods bound for Afghanistan and beyond.

While India granted Pakistan most-favoured-nation status in 1996, Pakistan has not yet moved to grant the same to India and has continued to maintain a negative list of 1,209 items that cannot be imported from its eastern neighbour, according to the World Bank.

The opening of the Kartarpur Corridor is an opportunity to slowly reduce trade barriers and encourage the cross-border movement of people and goods.

A timely reduction in the barriers that restrict the movement of people across the Line of Control can further lead to economic opportunities, and the opening of the Kartarpur Corridor provides an opportunity.

The phasing out of onerous documentary requirements, mandatory security clearances and reduction of lengthy processing times can encourage normalisation of ties among local communities and initiate a virtuous cycle that builds trust and facilitates trade and investment.

Keeping trade going

Hard-liners on both sides of the border argue that increased trade, connectivity and flow of people is simply not possible due to unresolved disputes between India and Pakistan.

While it is true that several issues need to be resolved including the Kashmir dispute, the fact of the matter is that countries around the world have been able to do business despite the existence of thorny issues.

The Taiwan-China relationship is a case in point. Taiwan, with a population of over 23 million, is an island that has been governed independently from mainland China since 1949. During this entire period the Chinese government has argued that Taiwan is a province of China, leading to a decades-long sovereignty dispute.

India-Pakistan ties: Difficult equation

This has not stopped both governments from developing and growing economic ties, and bilateral trade has witnessed a spectacular rise, going from $35 billion in 1999 to over $180 billion in 2017, according to the Council on Foreign Relations. China today accounts for over 30pc of Taiwan’s total trade and is the island’s largest trading partner.

The Chinese have not allowed the sovereignty dispute to impact economic development, and over 90,000 Taiwanese businesses have invested in China since 1988. Both countries have also encouraged people-to-people exchange and over 9 million people travelled between both countries in 2014.

Revitalising ties along the east-west axis

At a time when Pakistan has invested in building infrastructure under the China-Pakistan Economic Corridor, it is important that the country pursue efforts to enhance trade and connectivity across the east-west axis in South Asia.

As the data shows, there is a significant potential for growth, and the cultural, linguistic and historic ties across this axis make it an important factor in future economic growth of the region.

Furthermore, a look at the population centres of the region, including China, shows that the east-west corridor has far more potential than the north-south economic corridor that connects Gwadar to Kashgar.

Revitalising the historic trade ties of South Asia, which have been disrupted in the decades since Partition, is integral to the long-term economic growth of the region.

The economic opportunity is there for the taking and a bold push by policymakers in the region can have a transformative impact across South Asia.

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Uzair Younus is a non-resident senior fellow at the Atlantic Council in Washington DC.

The views expressed by this writer and commenters below do not necessarily reflect the views and policies of the Dawn Media Group.

Comments (24) Closed

Jan 10, 2019 06:27pm
Pakistan realising importance of trade when its on the brink of bankruptcy. It has further put itself into a quagmire by taking CPEC loans, when both China and Pakistan know for cpec to succeed, they will need India on board at some point. The ball lies in India’s court, and it won’t play easy.
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Shahryar Shirazi
Jan 10, 2019 07:46pm
"Pakistan realising importance of trade when its on the brink of bankruptcy. It has further put itself into a quagmire by taking CPEC loans, when both China and Pakistan know for cpec to succeed, they will need India on board at some point. The ball lies in India’s court, and it won’t play easy" If India does not want to play ball, that should be ok. Pakistan will find other avenues eventually once honest bureaucrats take over. Severely corrupt democratic rule over the last 10 years seems to be handing India the last laugh. Hopefully Pakistan's slide will stop or slow down with PTI's government.
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Jan 10, 2019 08:57pm
The logic for Partition was that there are two nations which cannot be integrated. So why talk of common culture and trade integration now?
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Jan 10, 2019 09:32pm
@Rudraksh the cepec has nothin to do with india. Its a delusion for indians that cepec will be failed without india. China has created the route to open up another supply line through Pakistan supplies and trade.
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Indian Munda
Jan 11, 2019 12:30am
@Truthhurts I think its not Indians but Pakistanis who are deluded with CPEC. What you have not ponder over is, what Gawadar can do for China that Karachi can not? Karachi port is running just under half of it's capacity right now. If Chinese had any intention of trade via Pakistan, Karachi would have been overflowing with container to and from China. Indians know what Gawadar is for. Its would be just base for Chinese navy , nothing more nothing less. The amazing thing is, Pakistanis would be paying for this naval base of China :).
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Jan 11, 2019 01:19am
@UDAYA BOSE cultural integration can be debated but there is no point of axing trade relationship. People on both sides of the border want food to survive and not culture. Whatever the past was, trade relations should be normalized.
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pc amin
Jan 11, 2019 02:12am
@Shahryar Shirazi do not be provoked by unfriendly comments from some unfriendly indians. they are not india and do not speak for all indians. majority people in pakistan and india wants better relation so we can fight the poverty rather than fighting each other. we are too busy to pull down each other rather than learn from each other success.
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Jan 11, 2019 04:23am
85 PC of south Asia GDP. Wondering what's pak PC in that.
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Right Voice
Jan 11, 2019 05:23am
@Shahryar Shirazi Nobody wants to laugh, least of all India. It's sad that you didn't heed well meant warning and still went ahead and shot yourself in the foot with CPEC. First use the roads which exist from prehistoric times and lead somewhere rather than building roads that go no where.
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Jan 11, 2019 06:05am
@UDAYA BOSE exactly.
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Komal s
Jan 11, 2019 06:13am
@Truthhurts actually I agree, it was a supply line in case of a crisis. Everybody knows economically it is unviable to carry goods over a mountain, rather would do it over sea. If Pakistanis see it to export goods to China, the Chinese customer are on their east coast, that is a long way off by road. You will still do it by ocean. This is just a strategic link for China, for which you are taking loan and will pay with interest. Chinese are smart, agree us Indians are not as smart.
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Jan 11, 2019 08:55am
@Shahryar Shirazi where would the other "avenues" be?
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Jan 11, 2019 10:17am
@Truthhurts so you are paying the chinese for a route that they will use for easier access through pakistan?? when you should be charging them instead, wow
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Jan 11, 2019 10:24am
Trade is like a water nobody can stop it.Indian products will find its way into Pakistan if not from front then from back.
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Jan 11, 2019 10:25am
Beautiful Truck
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Jan 11, 2019 10:29am
@Usama We in India grow enough food for ourselves and then some more. We also don't have to go around asking for "help from friendly countries". The concern expressed by Pakistanis for the poor of India is very touching and brings tears to my eyes!
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Dhanus menon
Jan 11, 2019 10:33am
India can still survive decently without trade to Pakistan and use Iran for Central Asia trade. We are good, don’t need Pakistani trade.
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Jan 11, 2019 12:13pm
@Dhanus menon "We are good, don’t need Pakistani trade." Yes we can observe clearly your "lack of interest" in Pakistani affairs.
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Jan 11, 2019 12:25pm
"Both countries account for over 85pc of South Asia’s GDP" Forever riding India's coattails for relevance. India's GDP is 2.597 trillion USD, while Pakistan's is 305 billion USD. Which means, out of that 85pc, 89% is India's GDP. Not quite the false equivalence between the countries that was being insinuated, is it?
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Nadeem faisal
Jan 11, 2019 12:35pm
Trade is what it mean for countries not this approach amn
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Jan 11, 2019 12:39pm
Pakistani trucks look beautiful. No where else in the world owners take so much pride in the appearance of their goods carriers. Sadly it only adds to the cost without any real benefits. Trade between India and Pakistan should increase to its full potential. It will benefit both countries and their people. It will also help relations between the two nations and improve people to people contact and enrich both cultures.
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Jan 11, 2019 05:00pm
@Truthhurts Correct.CPEC has nothing to do with India or for that matter even for Pakistan.It is all about China and its needs to access the middle east s a shortcut.
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arshad javed sandal
Jan 12, 2019 11:41am
Dear Uzair Younus, your column about South Asia Trade and Benefits is virtual and reflective. No doubt trade between two countries especially Pakistan-India can be groomed provided traffic of both countries is open and easy. It may be noted that ex PM Mian Nawaz Sharif and even in the tenure of PPP govt., tried to improve relations but in vail. Bharat always refused to attend the SAARC whenever meeting held in Pakistan and defused for such a meeting. Lastly India exports towards Pakistan were US.$: 7.3(B) against Pakistan were US.$: 3.1(B) FY 2017-18. It may be noted that area wise India is 3 times more bigger than Pakistan and population wise it is 6 times more bigger. Hence Indian market is not opened to Pakistan and difference between Barriers and Tariffs are created eg., Tariffs for Pakistan products are higher and Barriers are not smooth at Wagha Border and other common borders for Pakistani products. Many other borders can be opened for trade in Sindh, Punjab and Kashmir. Fortunately Kartarpura corridor is a regional issue otherwise Indian govt., would have never allowed it for Sikh community, it is a great achievement by the current govt., of PTI. Can we expect the same from India about Kashmir. Let us hope of Better Future for Growing Generations.
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hem pant
Jan 13, 2019 08:53am
A good and balanced article
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