Scared of regional trade – The Kathmandu Post

Credit: Original article can be found here

The recent creation of the Regional Comprehensive Economic Partnership (RCEP) in Asia-Pacific drew much attention in the field of economic integration as it is set to become the world’s largest free trade bloc, outweighing the European Union and the North American Free Trade Agreement. Including the 10 member states of the Association of Southeast Asian Nations and its free trade partners—China, Japan, South Korea, Australia and New Zealand—RCEP makes up a third of the global economy with about one-third of the world’s population. Although the pact is perceived as an extension of China’s influence in the region and a counter to the Trans-Pacific Partnership, another mega-regional deal, it is driven by market forces, comprising the influential East Asian economies which were previously not affiliated to any specific trading bloc.

If this is the latest development in economic regionalism in Asia-Pacific, South Asia has fallen behind in this respect. The progress of regionalism in South Asia has been stymied by political wrangling at the cost of its ambition to achieve the highest level of economic integration as envisioned about two decades ago. At the 18th South Asian Association for Regional Cooperation (SAARC) summit in Kathmandu in 2014, the leaders reiterated their commitment to attaining the goal of economic union through a free trade area, customs union, common market and monetary union. But no significant progress has been made in this process as reflected by the stalemate in the South Asian Free Trade Agreement which is associated with SAARC.

Lack of commitment

The effort to promote South Asian intra-regional trade, plagued by inherent economic problems, lacks political commitment from the region’s big countries and effective pressure from the smaller ones to resolve the impasse. This has inhibited attempts to break the chain of intrinsic economic drawbacks responsible for sluggish intra-regional trade. First, it has slowed down the diversification of comparative advantage sectors within the region. There is a similar pattern of comparative advantage among South Asian countries. This means most countries specialise in and export identical products, like textiles and clothing or primary products. In order to have mutually beneficial trade, trading nations should have different comparative advantages.

Second, the similarity in comparative advantage discourages trade complementarity among the countries in the region. South Asian countries are less divergent in terms of resource endowment. They are all labour-abundant and agro-based economies, and compete among themselves in labour-intensive products and primary commodities.

Third, they are not keen on intra-industry trade or trade in similar products among themselves, fearing that it will substitute import-competing industries. This is one primary reason why most countries in South Asia, including Nepal, have a long list of import sensitive items with a protection motive.

Although the sensitive list is intended to protect domestic industries, it may be irrational if its sole objective is to substitute imports without calculating the welfare effect. Hence, it is necessary for countries to depart from this protectionist sentiment to boost intra-regional commerce that accounts for just 6 percent of their total combined trade. This is a disappointing figure compared to the Association of Southeast Asian Nations where it is more than 20 percent.

The expansion of intra-regional trade is central to economic integration. But trade among South Asian countries is not only restricted, it is also frustrating. Except for each country’s trade with India, bilateral trade between other pairs of countries in the region is trivial. For example, it is not worth mentioning the bilateral trade between Nepal and Bangladesh, or Sri Lanka and Pakistan, and so on. It is the provision of sensitive lists which is responsible for counteracting each other’s export potential. Some startling examples: Nepali farm products are subject to high tariffs in Bangladesh; and as retaliation, Bangladeshi garments face similar treatment in Nepal.

There is a good reason for the India-concentrated trade in the region. Because India offers bilateral preferential treatment to most countries, which is greater than the concessions they get under the regional arrangement, it is natural for them to direct their trade towards India. Making the situation more complex, South Asian countries are more inclined to trade with distant countries than with their regional partners as indicated by the trade restrictiveness index. This problem has been exacerbated by a lack of connectivity and trade facilitation, diminishing the advantage of shared land borders among the countries. Considering these realities, there is no other way than to tighten the provision of import sensitive lists and loosen the persistent barriers to trade to encourage trade among themselves.

Breaking the deadlock

Both political and economic considerations are involved in every regional integration movement. The movement towards Western European integration was largely motivated by political considerations and the desire to increase Europe’s interest in the international arena. Regionalism in North America reflects the natural integration of the three economies (the United States, Canada and Mexico) by market forces, and this has strengthened their position with respect to Western Europe. In Asia-Pacific, Japanese policy initiatives played an important role in addition to market forces as the most important factor in the integration.

In contrast to these inspirations, South Asian countries had the core objective of eliminating poverty in the region since the inception of SAARC over three decades ago. This was supplemented by the idea of a free trade area to attain this goal. Adding greater impetus to this ambition, South Asian countries need to advance to a higher level of economic integration, such as customs union or common market. These moves liberalise not only trade in goods, but also promote the regional flow of capital, technology and human resources, including harmonisation of tariff regimes. Consequently, it forms a single regional market through economies of scale in manufacturing and investment. But this is not possible without breaking the deadlock in regionalism in South Asia which has existed for the last six years.