TRADE IN SOUTH ASIA : PROBLEMS AND PROSPECTS
By KAZI ASIF AHMED
Trade in South Asia is an ancient activity, both within and beyond. South Asia consists of seven countries namely, Bangladesh, Bhutan, India, Nepal, the Maldives, Pakistan and Sri Lanka. South Asian countries, officially known as SAARC countries contain about just over a fifth (21.7%) of the world population, but earns a mere one-sixtieth (1.65%) of the world GNP. South Asian share of the world’s imports and exports are even smaller, namely a little over one-eightieth (1.2%) of world imports and about one-hundredth (0.98%) of world exports. It is noteworthy that while world exports grew about 50.4 percent during a six year period (1994-99), SAARC’s exports to the world grew significantly more, about 80 percent over 1994-99 . During the same period world imports grew 48.9 percent while SAARC’s imports from the world grew 85.8 percent. It shows, overall, that SAARC as a region has been gradually integrating with the world trade, nibbling at a slightly larger share of both the global exports and imports.
In South Asia, both exports and imports have been growing during all the past three decades, so that the overall trend is positive. In Intra-SAARC flows of trade, India dominates exports while Bangladesh dominates imports. It is seen that the imbalances between exports sent and exports received increased over the years, as Pakistan and India reduced their imports from SAARC as a percentage of Intra-SAARC exports and still more as a percentage of their global imports, while Bangladesh did the opposite. It is important to note that Bhutan and Maldives are very small and their trades do not affect the overall picture of SAARC trade materially at all. India has consistently shied away from the much desired task of importing from her neighbors, so that India’s imports from SAARC remained far less than one percent of her global imports. The enthusiasm with which Bangladesh and some other South Asian countries have opened their markets to SAARC exporters need to be reciprocated by India and Pakistan. Unless India and Pakistan take the necessary steps to reverse the trend by encouraging Intra-regional imports, the regional trade performance would not improve.
The process of economic integration in South Asia gathered momentum with the implementation of the SAARC Preferential Trading Arrangement (SAPTA) in 1995, which lay the foundation for cooperation in trade. Basic Principles of SAPTA are: overall reciprocity and mutuality of advantages, step-by-step negotiations and periodic reviews so as to improve and extend the preferential trade arrangements in successive stages, inclusion of all products, raw, semi-processed and processed and special and favorable treatment to Least Developed Countries(LDCs). Three rounds of Trade negotiations have so far been completed under SAPTA and tariff concessions have been extended to 5550 products. It may appear that India and the Maldives have offered concessions on a very large number of products (1917 and 368 respectively) compared to other nations in the third round. However, it may be noted, for example, that India has offered concessions on 84 kinds of fish and 26 kinds of meat, thus having given 110 products under concession that could have been simply counted as two items. Bangladesh, being a net importer of these 110 items, has no capacity to export these. Maldives has offered concession on 197 kinds of forest products (wood and leaves etc.), 60 kinds of leather bags etc., 32 kinds of fats of animals/vegetables, 20 kinds of shoes, 16 kinds of umbrellas, 17 kinds of foam products and 12 kinds of hats. The products of major export interest of Bangladesh did not get much support in this round. Again, India gave concessions of 28 items to Bangladesh in the Third Round. Out of these 28 items, Bangladesh is a net importer of 20 so that the concessions mean practically nothing useful in promoting exports. However, India is a net exporter of these items too. Her imports in these categories are marginal, leaving basically no room for Bangladesh to expand exports to India in these categories even without tariff, para-tariff and non-tariff barriers. The export performance of Bangladesh under SAPTA agreement thus shows little change.
It is worth mentioning that Bangladesh has a very narrow export base, only 3 top commodities like Ready Made Garments(RMG), Frozen Fish and Knit clothes making up over 80 percent of the exports in 1998-99. The RMG exports face uncertainties in 2005 with the withdrawal of quota and other special privileges. Shrimps invariably face the problem of disease, which persists for a long time and calls for alternative technology in their culture. Consideration should therefor be seriously given to diversification of exports. Old commodities like jute, specialized textiles and leather should receive renewed attention. It is also noticed that the export intensity of Bangladesh’s trade with SAARC countries is low except for Nepal. That is to say the proportion of exports by Bangladesh to Nepal, for example, exceed Nepal’s share of imports in total (net) world imports.
On the other hand, the spread of commodities is much wider in case of imports compared to exports. It takes 19 commodities to make up for 80 percent of the total imports . The import intensity index exceeds unity in the case of India, Pakistan and Sri Lanka indicating over representation of share of imports from these countries. The share of imports from Nepal is also over represented in most years. The import intensity index of Bangladesh’s trade with India shows a strong upward trend indicating growing importance of India in our import trade. Besides the import intensity index of Bangladesh is much higher relative to the export intensity index in the case of India. It shows that Bangladesh’s relative share in India’s exports is important while India’s share in Bangladesh’s exports is relatively unimportant.
India is the biggest market and trading partner in South Asia. Trade turnover between Bangladesh and India is in favor of the latter. India imports goods worth only $60 million from Bangladesh as against its exports of goods worth one billion US dollars annually to the latter. The yawning trade gap is estimated at around $ 2 billion annually if the unofficial trade( which is around US $ 1 billion) is accounted for. The quantum of export from Bangladesh is only five per-cent of the total official trade between the two countries. Bangladesh has been suffering from chronic trade imbalance with India. It has been increasing over the years. Bangladesh and India can gain by increasing trade volume. This is possible if both the governments take three major steps. First of all, remove all non-tariff barriers such as quantitative restrictions and countervailing tax imposed by India. Secondly, smuggling should be discouraged. Bangladesh and India will continue to lose if smuggling is not checked jointly. Thirdly, the real remedy lies in opening the Indian market to Bangladesh and other smaller economies of the region to improve trade balance among the neighbors.
Despite the implementation of SAPTA, however, regional trade integration remains very limited in South Asia. Intra-SAARC trade which was around 3 percent in the early 1990s, has increased marginally to around 4 percent in the late 1990s. A cool and dispassionate analysis would show that the South Asian trade is still beset with plethora of problems – chief among them are tariff and non-tariff barriers. The South Asian Preferential Trading Arrangement (SAPTA) was launched to help the weaker South Asian economies to get easy access to Indian and Pakistani markets through tariffs reduction. India did reduce tariff for a number of items. But the major export items of the neighboring countries like ready make garments, pharmaceuticals, leather products and other value added exportable items were either denied entry into the Indian market or several non-tariff restrictions were imposed on them to protect that market. Restrictive Indian trade policy turned heavily against other SAARC countries resulting in trade imbalance. India is a market of about one billion people. If India opens its market for its neighbors and allows free trade, the gap will be reduced to a considerable length. India is protecting its market by erecting non-tariff barriers flagrantly violating the World Trade Organization’s resolution to gradually open the market. But India is reaping full benefits of trade liberalization in smaller South Asian economies without reciprocating. As a consequence, exports from Bangladesh, Nepal, Sri-Lanka, the Maldives and Bhutan to India have been rapidly declining while imports from that country have been rising.
The rationale of regionalism or Preferential Trading Arrangement(PTA) entails from the motive of economic benefit from unification among some trading nations. PTA involves trade creation and trade diversion effects – trade creation refers to the replacement of relatively high cost domestic production with lower cost imports from the partner country and hence it is welfare improving. Trade diversion refers to a switch in imports from low cost rest of the world which faces higher tariff, to the high cost partner country which faces lower tariff or zero tariff and hence it is welfare reducing. The welfare effect of preferential trade arrangement depends on the relative magnitudes of trade creation and trade diversion effects. It is said that the gains from regional PTAs are greater for smaller countries like Bangladesh and Nepal and smaller gains accrue to larger countries like India and Pakistan. Thus it would be important for Bangladesh to support and extend the on going trade liberalization in South Asia. In fact, Intra-regional exports exceeds 50 percent of total exports in European Union, APEC and NAFTA. The Intra-regional share is below 25 percent in ASEAN and MERCOSUR while it is only a trickle in countries in SAPTA. The former group of PTAs include developed countries which mostly trade among themselves while the latter group include NICs or developing countries which trade mostly with developed countries.
Economists argue in favor of global free trade irrespective of market structure. Regional trade liberalization is a second best policy option, the first being global trade liberalization under WTO. The standard economic argument in favor of free trade is that it enhances efficiency and is conducive to development compared to a regime under protection. Free trade allows firms to achieve economies of scale and scope through access to larger markets. It rewards the competent firms and puts constant pressure on them to perform competitively by investing in new technology and in measures to cut costs and improve quality. The argument is that there is no reason to delay the introduction of free trade, because this delays the benefits of greater efficiency. But, the proliferation of PTAs in the 1990s has given rise to the question of whether such arrangements would lead more quickly to global free trade. It is said that the incentive of higher profit to join the PTA expands the PTA facilitating more towards global free trade.
Preferential trading arrangements among group of nations are usually a prelude towards the establishment of free trade areas, with the eventual goal of reaching higher levels of economic and political cooperation. Empirical studies indicate that the regional trade liberalization scheme would also bring net benefit to SAARC Countries. Nevertheless, South Asia has already committed itself further to the creation of a South Asian free Trade Area(SAFTA). With the acceptance of the broad goal of transition to a free trade area, the policy issue now boils down to that of the pace of transition to SAFTA. Fast introduction of SAFTA will enable the business community to prepare for the upcoming trade liberalization under the WTO process, especially in view of the upcoming elimination of quota privileges. Secondly, the analysis of informal trade suggests that in respect of imports, Bangladesh already resembles a free trade regime. The exports however remain restricted. FTA would help promoting our exports to the neighboring countries. Thirdly, Bangladesh happens to have installed modern technology in many new areas of production and can therefore hope to compete strongly with south Asian products still relying on old technology. On the other hand, the protectionist camp argues that the benefits of trade liberalization so far have been quite asymmetric. They see alarming evidence of disruption of our old industries. They therefore call for a slow and cautious approach to safeguard the interest of the existing domestic producers who face serious threat of competition. This argument is indeed not against free trade as such but against free imports without compensatory free exports.
As far as the optimal strategies for transition from SAPTA to SAFTA are concerned, one is to adopt trade opening program which would necessitate some adjustments in the economy e.g., (a) adjustment of the import competing industries and (b) loss of government revenue. In any event SAFTA should create a fund to compensate for the revenue loss of the LDCs. All non-tariff barriers should be identified and they should be withdrawn by a stipulated time frame, say , June 2003. If the immediate gains from free trade are less, the optimal strategy for Bangladesh would be to go for free trade in selected products. Trade Facilitation Measures like establishment, harmonization and mutual recognition of standards, adoption of common tariff nomenclatures and harmonization of customs procedures, valuation methods, etc. have to be considered. The most crucial aspect of formation of SAFTA from Bangladesh perspective is investment cooperation among the countries of the region. A coordinated investment policy should be formulated under SAFTA so that the LDCs are not by-passed and are not turned into a mere hinterland of other member states. Besides, the existing Rules of Origin(ROO) may be slightly modified to continue in the free trade area.
Finally, to promote regional trade, some specific measures may be undertaken. These include improving negotiations within SAPTA framework, promoting regional trade as a derivative of global trade, proposing free trade in selected sectors or commodities within SAARC, establishing Joint venture with other SAARC countries, seeking aid from India to support trade, relaxing certificate of origin criteria, bringing foreign exchange remittances under local control, setting up a Foreign Trade Institute (FTI), passing Act on Intellectual Property Rights, introducing a Bill on Restrictive Trade Practices etc.