Intra-regional trust deficit bogs down fastest growing states in South Asia

Recently, the Sustainable Development Policy Institute (SDPI) in Islamabad hosted the 11th South Asia Economic Summit. At the event, leading World Bank economist Sanjay Kathuria presented his report, “Glass Half Full: The Promise of Regional Trade in South Asia,” which is an analysis of future economic prospects for the region.

Being the world’s fastest growing region, South Asia represents a massive market but the ratio for intra-regional trade remains a negligible 5 percent due to lack of trust and neglect. In comparison, 50 percent of the trade in East Asia and the Pacific region is within its immediate neighborhood.

Trade barriers

Identifying the four main impediments that slow down trade within this region, Kathuria specified connectivity costs, mutual trust deficit, tariffs and para tariffs as well as some real and perceived non-tariff barriers as the main factors.

Apparently, costs of trade within South Asia are more than double the average rates around the world, as much higher trade barriers have been placed on imports from within the region than from outside.

In fact, South Asian states have imposed extra fees in addition to the tariffs and more than a third of regional trade falls in the sensitive list category detailing goods that cannot be offered concessional tariffs under the South Asian Free Trade Area (SAFTA).

Despite having shared land borders, South Asia has failed to reap any rewards from its geography. At the moment, Pakistan trades at cheaper rates with Brazil in South America than with neighboring India.

Reducing policy barriers, eliminating trade restrictions at the Wagah-Attari border, streamlining the electronic data interchange at border crossings and doing away with “sensitive lists” and para-tariffs was recommended by the expert panel from the World Bank.

Pakistan’s trade in South Asia is hardly $23 billion but can be raised to the tune of nearly $67 billion just by taking some immediate measures

Sabena Siddiqui

Taking similar steps, India and Sri Lanka gradually grew their trade links by enhancing connectivity and liberalizing air services.

As per the World Bank, Pakistan and India both represent 88 percent of the collective Gross Domestic Product (GDP) in South Asia but their bilateral trade remains negligible.

Renewing and re-establishing trade links just between these two neighbors could bring up the value of trade to as high as $37 billion as well as create more jobs and help in poverty alleviation.

Without wasting further time, Kathuria recommends the removal of unnecessary non-tariff barriers and the promotion of people-to-people links between India and Pakistan. Most of all, improved road and air connectivity would help both countries reach their actual trade potential.

Regretting Pakistan’s untapped trade potential for its immediate neighborhood, he noted that its trade in the South Asian region is hardly $23 billion but can be raised to the tune of nearly $67 billion just by taking some immediate measures.

Talking to the press at the World Bank premises, Kathuria explained that, “Pakistan's regional trade with South Asia accounts for only 8 percent of its global trade and the country can increase its export to South Asia by eight-fold.”

In Pakistan’s case, approximately 39 percent of its exports to South Asia and almost 20 percent of its imports to this region also get included in the ‘sensitive lists’.

Untapped potential

Explaining how this happened, Director of Macroeconomics at the World Bank Caroline Freund says that Pakistan frequently uses tariffs to encourage local firms and reduce imports and this in turn raises prices and costs of production, “making it difficult for them to integrate in regional and global value chains”.

Evaluating Pakistan’s economy, she noted that there was a ‘significant improvement’ during the previous year when the GDP touched the 11- year high of 5.8 percent. However, it was based mainly on consumption and Pakistan badly needs to promote its exports to achieve sustainable economic growth.

As far as the present currency exchange was concerned, the World Bank director explained that if the currency of a country is undervalued, the imports get cheaper while the exports get costlier. In case the country’s currency appreciates by 10 percent, the exports contract in value by 5.7 percent. Therefore, the exchange rate value should be determined keeping the implications like inflation, rising debt and business costs in mind.

Speaking on the occasion, World Bank Country Director for Pakistan Illango Patchamuthu observed that, “Pakistan is sitting on huge trade potential that remains largely untapped. A favorable trading regime that reduces the high costs and removes barriers can boost investment opportunities that is critically required for accelerating growth in the country.”

As a trade destination, Pakistan undoubtedly possesses excellent economic credentials such as a vibrant and varied demography, ample natural resources, low labor and productivity costs and a growing local market. In addition, it has a liberal investment regime and positive macro-economic trends.

Taking immediate steps to facilitate and promote regional trade would not only help Pakistan overcome its financial problems, it would also allow South Asia to overcome its trade gap.
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Sabena Siddiqui is a foreign affairs journalist and geopolitical analyst with special focus on the Belt and Road Initiative, CPEC and South Asia. She tweets @sabena_siddiqi.

Last Update: Friday, 14 December 2018 KSA 10:42 - GMT 07:42

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