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Lost trade among South Asian nations

A book identifies the principal barrier as the non-transparent and protective tariffs, especially the "paratariffs".

Hyundai vehicles ready for shipment at a port in Chennai, India. Protectionism is greater in the case of imports from within the South Asian region than from the rest of the world.

REGIONAL trade among the South Asian countries could be worth US$67 billion annually rather than the actual amount of just US$23 billion, according to an influential new study that reveals that their trade is held hostage by four "critical barriers to effective integration".

Edited and authored by World Bank Lead Economist Sanjay Kathuria and a team of economists, the book, A Glass Half Full: The Promise of Regional Trade in South Asia', first identifies a principal barrier as the non-transparent and protective tariffs, especially the "paratariffs", which are taxes levied on imports but not on domestic output.

The paratariffs, accompanied by the sweeping exclusions from tariff preferences in the form of the "sensitive lists" kept by all the region's countries, have rendered ineffective the South Asian Free Trade Area (Safta) that came into force in 2006 and whose signatories are Afghanistan, Bangladesh, Bhutan, India, Maldives, Nepal, Pakistan and Sri Lanka.

It gives cause for worry that the paratariffs are not part of the "phase-out programme" under the Safta or under the other free trade agreements in the region. Bangladesh, Pakistan, and Sri Lanka maintain high paratariffs.

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Secondly, the book explains that the real and perceived non-tariff barriers exacerbate the trust deficit and directly affect the growth of trade. Thirdly, the higher costs of connectivity arising, for example, from restrictive bilateral air travel agreements, hamper trade growth. Lastly, the trust deficit has adversely affected the overall effort to integrate South Asia.

The trust deficit is being reduced in a small but significant way at the local markets, or border haats, along the Bangladesh-India frontier which are enabling small-volume trading among communities through close people-to-people contacts.

The book explains that despite these handicaps, trade among the South Asian countries has continued to grow. "Where the barriers are high, trade often flows along informal routes, through third countries or by avoiding customs checks," it reveals.

The intra-regional trade in South Asia has been widening, from only US$7 billion in 2001 to US$44 billion in 2015, partly because of the significant acceleration in GDP growth in South Asia.

It is extraordinary that the informal trade in South Asia was 50 per cent of formal trade between 1993 and 2005. India's informal trade with Nepal was as big as their formal trade; with Pakistan, it was 91 per cent of formal trade; with Sri Lanka, it was about 30 per cent; and, with Bhutan, it was almost three times the formal trade. More recently, the informal trade between India and Pakistan in 2012-13 was almost double the value of formal trade, and most of this was routed through a third country.

The authors correctly observe with alarm that South Asian trade regimes discriminate massively against neighbours. Protectionism is greater in the case of imports from within the South Asian region than from the rest of the world.

Although the burden of the average non-tariff measures may not appear high, it is high for specific product and market combinations in South Asia. It varies from over 75 per cent to over 2,000 per cent. Sri Lanka's trade regime leads to that country's consistent appearance on the list of highest import ad valorem duties in the region.

Several countries impose nontariff barriers in the shape of port restrictions. Despite their long shared border, Pakistan allows only 138 items to be imported from India over a single land link, the Attari-Wagah route. As a result, their bilateral trade occurs by sea, which is not the most cost-effective for two countries with an extensive shared land border. Bangladesh and India also impose some restrictions on imports from each other at certain ports. In 2016, average tariffs in South Asia were 13.6 per cent, more than double the world average of 6.3 per cent.

It is obvious that the objective of Safta to achieve duty-free trade is compromised by the long sensitive lists that are maintained by all the South Asian countries because nearly 35 per cent of trade is subject to sensitive list tariffs. In Bangladesh and Sri Lanka, about 45 per cent of the imports from other Safta members fall under the sensitive lists, and over 39 per cent of India's exports to the region come under the sensitive lists of various partners. It is alarming that Safta does not provide a clear guideline for phasing out the sensitive lists.

While Bangladesh, Pakistan, and Sri Lanka maintain high paratariffs, they are not used in Nepal and are small in India. With paratariffs, the average tariff almost doubled from 13.3 per cent to 25.6 per cent in Bangladesh in 2016-17, and it more than doubled from 10.8 per cent to 22.4 per cent in Sri Lanka in 2016. The combination of paratariffs and customs duties results in high protection rates of 40-80 per cent in these countries.

The study proposes a timely range of solutions. First, the South Asian countries should agree on an accelerated and time-bound schedule to eliminate the sensitive lists within 10 years, except for a few products of exceptional concern.

Secondly, a panel of experts should create a schedule to eliminate the paratariffs within a time period and a goal that is acceptable to all parties. This should level the playing field between the countries that impose paratariffs and those that do not. A good starting point is to seize the low-hanging fruit: the reduction and elimination of paratariffs on items not on the sensitive lists.

Third, Safta members should continue their efforts to eliminate tariffs on intra-regional trade in their non-sensitive lists. Although they had planned to achieve full trade liberalisation within Safta by 2016 (for the non-sensitive items), some tariffs are still charged on imports from member countries.

The study rightly proposes that the goal of Safta should be to reduce all tariffs, including the paratariffs, to zero for all products on the non-sensitive lists (instead of the 0 to 5 per cent range as originally planned).

But first, the trust deficit must be erased through by increasing people-to-people contact between the citizens of South Asia, by taking a leaf out of the border haats model along the Indo-Bangladesh frontier. It is apparent that the Safta signatories are letting the situation drift. They should take hard decisions in the interests of their citizens.

  • The writer is editor-in-chief of The Calcutta Journal of Global Affairs.