Amidst global recession, the future lies in regional trade. Reduced distances make it a low carbon option.
Intra-regional trade accounts for roughly 65 per cent of European Union's total trade; it is 51 per cent in the North American Free Trade Agreement (NAFTA) area, 25 per cent in the Association of South East Asian Nations (ASEAN) and 16 per cent in the Latin American trade bloc, Mercosur. However, this ratio is just 5 per cent in the South Asian Free Trade Area (SAFTA) despite the existence of logistical advantages.
Is it political hostility alone, especially between two major partners, India and Pakistan, that has kept intra-regional trade and investment flows among SAARC nations low? This question acquires significance when developed countries, faced with economic slowdown and rising unemployment, are resorting to growing use of non-tariff barriers, e.g. tighter emission controls to check imports into their territories.
This leaves developing nations with no other option but to look for increasing trade among themselves. In the absence of large domestic markets, intra-regional trade can help to achieve economies of scale (more so in case of smaller nations such as Nepal or Bhutan) and rapid economic growth.
Increasing trade can also help to reduce political animosities. Besides, intra-SAARC trade can be a low carbon option compared with, say, India-Latin America trade because of geographical proximity and low transport cost among SAARC nations.
Roadblocks to Trade
Over the years, several attempts have been made to increase intra-regional trade through preferential trading arrangements. The agreement covering South Asian Free Trade Area (SAFTA), which became operational on January 1, 2006, is the most important among all such attempts.
Yet, India's trade with South Asia has not kept pace with its otherwise rapidly growing external trade. As shown in the accompanying chart, the share of SAARC region in India's export remained stagnant over the last decade. Its import share has, in fact, declined. This is expected as SAFTA is limited in nature and focuses mainly on gradual duty reduction for promotion of trade, which is only one of the trade barriers. SAFTA has not been successful in addressing other trade barriers affecting growth of intra-regional trade flows.
What has kept intra-regional trade so low?
While politics is certainly one of the key factors to restrict growth of trade among South Asian nations, there are other factors probably more important, such as enabling policy environment and supporting infrastructural facilities which have not let intra-SAARC trade, including between India and Pakistan, the two major nations of the region, take off.
India-Pak trade routes: At present, India-Pakistan trade can take place either through Atari (by rail) or Wagah (by road) or Mumbai-Karachi sea route. Trucks carrying goods are not permitted to cross over one side to another, adding to the cost of cargo loading/unloading, damage and delays. Again, moving goods from Delhi to Mumbai by rail and then to Karachi by sea route costs almost three times that of moving them directly from Delhi to Atari by rail route. This has to change if we want India-Pakistan trade to realise its true potential, which is several times higher than the current $2.6 billion.
Transit trade problems: While goods from Afghanistan may come to India via Pakistan (through land route) Indian goods are not allowed into Afghanistan via Pakistan. Similarly, Pakistani goods are not allowed to go to Bangladesh or Nepal via India. Only Nepal and Bhutan have got transit facilities from India for their trade with Bangladesh. Intra-SAARC trade can easily multiply if seamless movement of goods and services across the region is ensured.
Further, complex rules of origin make it difficult to benefit from SAFTA duty preference. Many a time, exporters, especially SMEs, forego preferential duty access because of the difficulties associated with compliance in terms of time and cost.
Poor infrastructure: Infrastructure is a key determinant of trade competitiveness. Most SAARC countries, except Sri Lanka to an extent, fare badly in terms of trade-friendly infrastructure, in particular export-import formalities, time/cost of documentation, Customs procedures, efficiency of ports and inland connectivity, as shown by World Bank's Ease of Doing Business reports. These factors keep intra-SAARC trade low. Restriction on transit movement of merchandise further adds to the transaction cost.
Areas of potential
Given the poor record of South Asia in infrastructure, especially port-related infrastructure, its development needs urgent attention for businesses to benefit from progressive duty reduction under SAFTA. Experience of South-East Asia shows that trade and investment go hand in hand, so it is time policy-makers contemplated deepening the existing FTA into a comprehensive cooperation agreement covering not only trade in goods but also services and trans-border movement of investment and personnel. The other areas that need immediate attention are rationalisation of trade documentation and removal of non-tariff barriers.
Considering the shared cultural heritage and similar demand patterns, there are immense possibilities to multiply intra-regional trade in South Asia.
Nepal can supply its surplus hydroelectricity to India for greener manufacturing. Bangladesh has natural gas which Indian producers of fertilisers and power badly need. Pakistan can cater to large Indian markets for wheat, cotton and other agricultural goods. Sri Lanka can supplement Indian supply of natural rubber for tyre manufacturers.
With growing awareness about carbon content in trade leading to preference for low carbon goods, it makes more sense for pushing intra-SAARC trade through every possible means.
While Pakistan granting MFN status to India is certainly a welcome step, we need to do more to take intra-SAARC trade from the current level of 5 per cent to, say, 10 per cent by 2015 and to 20 per cent by 2020.