Intra Region Trade: A Regional Perspective among SAARC countries

By: Staff Reporter
The intra-regional trade among the South Asian Association for Regional Cooperation (SAARC) countries is exceedingly low as compared to the European and South East Asian countries. According to the Federation of Indian Chambers of Commerce and Industry (FICCI) report, ‘The South Asian Century: Progressing Towards Regional Integration - A Study’, 2014, there is a lot of untapped economic opportunity within South Asia while there is also high dependence on extra-regional trade and investment.
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The South Asian Association for Regional Cooperation (SAARC) was founded in 1985 by seven South Asian countries – Bangladesh, Bhutan, India, Maldives, Nepal, Pakistan and Sri Lanka. Afghanistan joined the group later. SAARC emerged from the pressing need for intra-regional engagement to promote the welfare of the people of South Asia, and over the years it has become an important player in the global development strategy. Linking Central and West Asia with Southeast and East Asia, the region is home to the world’s largest working-age population and a quarter of the world’s middle-class consumers.

The region has experienced a long period of robust economic growth, averaging 6 per cent over a period of 20 years. This strong growth has translated into declining poverty and impressive improvement in human development.

Intra-regional trade (extending from Kabul to Chittagong) was as high as 19 percent in 1948, declined to a mere 2 per cent by 1967. However, over the years the trade within the region took pace and increased slightly to 5.7 per cent in 2012. Trade within the European Union (EU) is 61.8 per cent and for Association of South East Asian Nations (ASEAN) is 25.9 per cent (Fig 1).

In 2012, intra-regional trade in South Asia was estimated to be 16.6 billion USD, of which 15.5 billion USD was reported from India, viz. a share of 93 per cent of the total intra-regional trade.

India is by far the largest trading country in South Asia, but virtually all of its formal trade is with the rest of the world; trade with other SAARC members constituted barely 2 per cent of its total external trade. Its intra-regional merchandise exports constituted 4.6 per cent of its total exports to the world, while imports from the region accounted for only 0.5 per cent of its total imports from the world. The same trend is seen with the other two large countries: Pakistan–4.5 per cent trade with SAARC, and Bangladesh–10.5 per cent trade with SAARC. Sri Lanka’s commerce is relatively more integrated with the region, with intra-regional trade constituting 17.3 per cent of its total external trade. In contrast, for a small country like Nepal and Bhutan, intra-regional trade constituted about 64.9 per cent (almost two-third) and 75.6 per cent (almost three-fourth), respectively, of their total external trade in 2011.

Fig. 1: Intra-regional Trade (in million USD)
Fig. 1: Intra-regional Trade (in million USD)

The FICCI 2014 report, cites that large countries (India, Pakistan, Bangladesh and Sri Lanka) in SAARC have had bilateral political conflicts, and hence were more dependent on rest of the world for trade, rather than their neighbours. The smaller countries like Nepal and Bhutan are more integrated with the regional economy.

The composition of intra-regional trade is concentrated in few commodities such as textiles, agricultural products, iron and steel and products made of, plastics, rubber and electrical equipment.

According to the report findings, one of the reasons for limited trade is the large number of items on the sensitive lists of the SAARC countries, and restrictive rules of origin and destination. Non-tariff policy barriers have gained importance as tariff-based barriers to economic cooperation have generally declined. High transportation costs, poor institutions, inadequate cross-border infrastructure, disparate custom procedures and absence of a regional transport and transit agreement are some major factors penalising the region’s trade and integration. In addition, South Asia ranks among one of the lowest regions across the world in terms of ease of doing business due to weak legal institutions and more complex and expensive regulatory processes. The region suffers from outdated and inefficient border procedures, inadequate infrastructure (for example, lack of modern warehouse or container handling facility at borders), lack of reliable logistics services, and absence of a regional transport and transit agreement. This has led to high transactions costs and long delays affecting the overall trade.

Foreign direct investment

According to the report ‘Wake Up Call, South Asia Economic Focus’ of World Bank, 2013, while foreign direct investments (FDI) represented 91 per cent of total capital inflows to the SAARC region in 2008, by 2012 the share had declined to 31.9 per cent. Weak global demand, coupled with supply side constraints, policy uncertainties, macroeconomic imbalances and flight of capital have triggered the recent downturn in the South Asian growth story.

Total FDI received by South Asia in 2012 was 28.6 billion USD, with India receiving 25.5 billion USD, 89 per cent of the total FDI. Citing the 2013 World Bank report ‘Getting the most from FDI in South Asia’, the FICCI report identifies that investment policy openness, natural resource endowments, trade liberalisation growth, changes in control of corruption, corporate tax changes have changed the FDI inflow.

Labour market inefficiencies, relative failure of regional integration efforts in unifying these markets by removing the border and behind the border impediments and weaknesses, political interference and corruption, FDI regimes not matching international best practices, high transaction costs, procedural delays stemming from institutional requirements and presence of non transparent procedures, have contributed to the fall of FDI in the region.

Way forward

This analysis calls for concerted efforts to deepen trade and investment linkages in the region. A close assessment and early conclusion of South Asia Free Trade Agreement (SAFTA), diversification of trade basket, implementation of SAARC Agreement on Trade in Services (SATIS), signing of regional transit agreement as well as gradual removal of non-tariff barriers (NTBs) that restrict cross border trade and investments, are the need of the hour. SAARC now needs to benefit from the process of globalisation through deeper regional integration, eventually creating a South Asian Economic Union. To achieve this goal, a deliberate shift from ‘independence’ to ‘interdependence’ is needed.

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