South Asia’s Challenges in Trade Integration and Growth

Countries must continue with reforms
Liberalizing trade has become challenging
Multilateral and regional initiatives
The World Bank’s assistance strategy for trade

South Asia has made good progress on liberalizing trade regimes and cutting tariffs since the early 1990s when most of the countries started with reforms. The countries have also undertaken considerable industrial deregulation and other structural reforms.

The governments and the private sector recognize that strong exports are critical for overall economic growth and poverty reduction, and export-led growth has become a key thrust in each country.

Each country has been integrating with the global economy, as evidenced by the significant increases in the merchandise trade [(exports plus imports)-GDP] ratios.

In 2005, Bangladesh, India, Pakistan and Sri Lanka recorded strong export growth to the United States and the European Union markets.

Countries must continue with reforms

South Asian governments recognize the need to implement additional reforms and address significant constraints to ensure that trade supports growth and benefits the poor.

South Asia remains the most highly protected region in the world. It lags behind in opening up to foreign competition and in attracting foreign direct investment. It is also the least integrated region, where intra-regional trade accounts for only 5% of the countries’ total merchandise trade.

Protection levels, reflected in the significant tariff peaks and dispersed protection levels, are considerable in India, Pakistan, and particularly in Bangladesh.

Serious behind-the-border constraints to private activity in infrastructure, economic governance, financial sector, labor and land markets, and trade logistics impede productivity growth and hurt export competitiveness in all countries.

Examples of these constraints include insufficient and unreliable power supply, inhibiting red tape, limited access to financing by SMEs, inflexible labor market due to rigid labor laws and regulations, poorly defined property rights, inefficiencies at customs, and limited inland transport capacity.

Liberalizing trade has become challenging

Continuing with trade reforms has become more complex because of concerns of how these reforms will affect employment, income distribution, poverty and vulnerability.

India is focused on WTO negotiations on agricultural trade policies, and there is strong interest in services trade.

In Sri Lanka, successive governments have focused on liberalizing the manufacturing industry but have excluded agricultural products from such initiatives.

Various interest groups in Bangladesh oppose further reforms, arguing that trade liberalization has been too fast. The country also has to adjust to the abolishment of the textile and clothing (T&C) export quotas, instituted January 1, 2005.

India and Pakistan are better positioned to deal with the intensifying global competition in the T&C export markets, while Bangladesh, Nepal, and Sri Lanka need to improve their competitiveness more aggressively.

Multilateral and regional initiatives

On the global level, India, Bangladesh, and Pakistan have become active in the multilateral trade negotiations associated with the WTO Doha Development Round, playing leadership roles as speakers for other developing countries.

While South Asian countries have made significant progress in integrating with the rest of the world, intra-regional trade remains very low. The reasons for this low level of trade include protectionist trade regimes, which discriminated against trade among larger neighbors; continued conflict between India and Pakistan; and transport and trade facilitation constraints.

Since the early 1990s, the countries have attempted to increase cooperation and trade among themselves, without significant results. In 1993, members of the South Asian Association of Regional Cooperation (SAARC) – Bangladesh, Bhutan, India, Maldives, Nepal, Pakistan and Sri Lanka – signed the South Asian Preferential Trade Area (SAPTA) Agreement, which became operational in December 1995. The actual exchange of preferences remained very limited, but the process of negotiation kept the dialogue among the member countries of SAPTA alive.

However, the countries should seek to increase intra-regional trade in goods and services, investment, and development of supply chains. They should also seek to increase cooperation in the areas of harmonization of product standards and customs procedures, and in travel rules and facilities.

Recent worldwide proliferation of preferential trade agreements (PTAs) has spurred South Asian countries to do the same, and they have begun negotiating their own preferential free trade agreements. These efforts particularly intensified after the failed September 2003 Cancun Ministerial meeting, and in January 2004, the countries signed the South Asian Free Trade Area (SAFTA) Agreement. Its ultimate aim has been to turn the region into a free trade area (FTA). As of January 2006, members have been preparing their offers of gradual tariff cuts. This agreement followed the earlier bilateral FTA agreement signed between India and Sri Lanka in 1998 that became operational on March 1, 2000. Also, India, Pakistan, and Bangladesh are negotiating FTAs with other Asian countries.

The World Bank’s assistance strategy for trade

The World Bank has responded to the countries’ recent acceleration in trade reforms and complementary structural reforms by adjusting its country assistance strategies (CASs) and regional programs.

The Bank has increased and diversified its trade-related support activities: trade reports and policy notes, technical assistance in capacity building and training, and financial support for the reform initiatives.

The Bank also supports the countries’ initiatives to boost regional cooperation and intra-regional trade through analytical work and technical assistance to the South Asian Association of Regional Cooperation (SAARC) Secretariat. The bank also held a major forum on "Regionalism" during the 2004 Annual Meetings and supported a SAARC Business Leaders Conclave on Regional Integration and Growth in November 2005.