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.
Published January 10, 2019

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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