Tapping on the trade-investment nexus for improving bilateral economic cooperation between Bangladesh and India

Selim Raihan and Farazi Binti Ferdous

Bangladesh and India have long bonds in culture and history. Despite such bonds and neighborly proximity, economic cooperation between the two countries has remained far below potential. A number of studies have shown that bilateral trade and investment offer immense opportunities for accelerating growth and reducing poverty in Bangladesh and India. These studies suggest that India could become a major player for accelerating the growth of intra-industry trade and uplifting foreign direct investment (FDI) inflow to Bangladesh. Also, for India, Bangladesh could become an additional source of trade as well as a critical destination for investment thus addressing many concerns relating to the economic isolation of its backward Eastern and North-Eastern states. Furthermore, better connectivity between Bangladesh and India through multi-modal transport and transit facilities will further enhance the strength of the economic relations between these two countries.

Although it experiences annual volatility, the overall trade between Bangladesh and India has increased over time, and the balance of trade remained heavily in favor of India. Total exports from Bangladesh to India increased from US$ 50.2 million in 2001-02 to US$ 527.2 million in 2014-15 (which was only 0.1% of India’s total import). The share of Bangladesh’s exports to India in the country’s overall export increased from 0.3% to around 1.5% during the same period. On the other hand, India’s exports to Bangladesh increased from about US$ 1019 million in 2001-02 to US$ 5.8 billion in 2014-15 (around 2% of India’s total export). At present, India is the second largest import source for Bangladesh. In 2014-15, the share of Bangladesh’s import from India was around 16% of the country’s total import from the world.

Looking at the product details we find that in recent years Bangladesh’s exports to India (Figure 1) have been dominated by readymade garments (RMG) (HS code 6) and jute products (HS code 5). Bangladesh also exports products like textile articles, edible fruit and nuts, salt, fish, inorganic chemicals, mineral fuels and raw hides and skins. In contrast, large parts of Bangladesh’s import from India have been raw materials and capital machineries (HS codes 5 and 8) (Figure 2) which are used in Bangladesh’s export oriented and domestic industries. At the product details, Bangladesh’s import from India for last decade were chiefly cotton, vehicles and parts and accessories, machinery, cereals, man-made staple fibres, iron and steel, electrical machinery, organic chemicals, tanning or dyeing extracts and plastics.

Fig1_v3n5

Fig2_v3n5

Fig3_v3n5

Though exports from Bangladesh were supposed to increase significantly as the Indian government offered Bangladesh duty-free benefit for all products except 25 alcoholic and beverage items since November 2012, exports did not increase much after 2012. A number of challenges can be made responsible for such weak export response which are related to Bangladesh’s limited export capacity, lack of diversification of export baskets, and various non-tariff measures (NTMs) and procedural obstacles (POs) due to inadequate infrastructure and lack of support facilities both at home and in the Indian market.

It is noteworthy that readymade garments (RMG) has become the major item in Bangladesh’s export to India on account of duty-free market access granted by India. In 2009-10, the share of RMG was more than 28% in total export of Bangladesh to India, which rose to 34.3% by 2014-15. However, studies have shown that there are many products in which Bangladesh has large export capacities, but actual exports to India are either very low or zero. For example, Figure 3 shows that though for products in the HS categories of 02, 16, 24, 41, 46, 64, 65 and 67, Bangladesh has either the full or significantly partial export capacities to meet India’s import demand, actual exports to India are zero. Similar observation also holds for Indian exports to Bangladesh. Therefore, there is enormous scope for raising bilateral trade between the two countries. There is a need to explore carefully, how different NTMs and POs and lack of trade facilitation affect such prospects. Necessary measures should be taken to improve the scenario. In order to address the trade infrastructural problems at the border, lately, there are some initiatives by the Government of India to set up Integrated Check Posts (ICPs) at major entry points on the land borders between Bangladesh and India. Two such ICPs have been launched recently, and they are expected to boost bilateral trade.

Bangladesh and India have to tap on the trade-investment nexus for improving their bilateral economic cooperation. The horizontal and vertical integration of Indian and Bangladeshi industries could help to improve scale economies, especially for Bangladesh, and help Indian firms gain from the use of cheap labor in Bangladesh. However, in terms of sources of FDI inflow in Bangladesh, the US, the UK, and South Korea top the list of countries, and FDI from India is still very low.

Lately, there have been a number of initiatives between Bangladesh and Indian governments to improve the investment situation. The Bangladesh Power Development Board and the Indian National Thermal Power Corporation have signed a memorandum of understanding in 2010 to set up two coal-fired power plants, each of which will have a capacity of 1,320MW, with partnership shared equally between them. Furthermore, recently, Bangladesh has offered India to establish two Special Economic Zones (SEZ) for Indian companies. Launching of these SEZs is expected to substantially increase Indian FDI into Bangladesh.

In 2015, Prime Ministers of India and Bangladesh contracted international gateway of internet service in Agartala and supply of 100MW power to Bangladesh from Tripura. India is already supplying 500 MW of power to Bangladesh, and supply of another 500 MW was also announced during Indian Prime Minister’s visit to Bangladesh in 2015. On the other hand, the bandwidth connection came as Bharat Sanchar Nigam Limited (BSNL) and Bangladesh Submarine Cable Company Limited (BSCCL) signed an agreement for leasing of international bandwidth for Internet at Akhaura. As a result, Agartala has become third station connected to submarine cable for Internet bandwidth after Chennai and Mumbai. The internet bandwidth export to India from Bangladesh will enable reliable and fast Internet connectivity for the people of Tripura as well as other parts of India’s northeastern region.

It is expected that the latest shipping arrangement between Bangladesh and India would make faster movement of goods between these two countries. Currently, such shipments are routed via Colombo or Singapore. Also, it takes around 20 days for a shipment by land. However, the direct shipping is expected to reduce the time to around 7 days, as there is no longer a need for transshipment at Colombo. The service will play a vital role in decongesting the border points and bringing down the cost and transit time involved. This improved arrangement of connectivity would bring better efficiency and thus provide the best competitive freight rates to the advantage of the industries.

The aforementioned analyses point to the fact that there are heightened political commitments among the governments of both Bangladesh and India to improve bilateral economic cooperation through different initiatives. Such initiatives need to be materialized at the earliest. As for Bangladesh, to make the most out of such initiatives, there are a number of challenges though. The country needs to significantly improve the business environment for attracting FDI, as the latest World Bank’s ranking of the ease of doing business shows that Bangladesh’s position dropped two steps to 174 out of 189 countries due to stalled regulatory reforms.

Finally, besides abovementioned economic issues, still there are some bilateral issues between Bangladesh and India, which need to be resolved for enriching mutual trust and confidence for greater economic cooperation. For example, border killing is an issue that strains India-Bangladesh relations as the victims are often ordinary people of Bangladesh living in border areas. This needs to stop, for which a political decision at the highest level is necessary. Also, the water-sharing issue between India and Bangladesh is yet to be solved properly, which undermines a lot of the developmental prospects. However, it can be hoped that these issues will be solved with the heightened commitment among political elites of the two countries for a deeper economic cooperation.

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Sub-regional cooperation can be the answer to the deadlock of regional integration in South Asia

Though there is a strong demand for a deeper regional integration in South Asia, the progress has been rather slow. Actual implementation of agreements often does not match the declared ambitions, and in this context, lack of political will and leadership, institutional weaknesses and capacity and resource constraints have been argued to be the major impeding factors. The political rivalry between India and Pakistan has often constrained the SAARC to be a functional regional forum. The recent cancellation of the SAARC summit is such an example.

In order to take forward the regional integration process in South Asia a good and effective initiative is the Bangladesh, Bhutan, India, Nepal (BBIN) initiative, which is a sub-regional coordinative architecture of countries in South Asia. BBIN operates through Joint Working Groups (JWG) comprising official representation from each member state to formulate, implement and review quadrilateral agreements. Areas of cooperation include water resources management, connectivity of power grids, multi-modal transport, freight and trade infrastructure. Focused on the subcontinent’s north east, it endeavored to cooperate on trade, investment, communication, tourism, energy and natural resources development. Its objectives have been expanded over years to incorporate substantial land and port connectivity.

The economic needs and drivers for a deeper integration in the BBIN sub-region are more prominent compared to these countries’ integration with the rest of South Asia. Especially, a deeper integration among the BBIN countries is very important to place BBIN as the gateway for further integration with China and Southeast Asian countries. The political economy drivers also seem to be more favorable. In the context of some structural factors, especially the political rivalry between India and Pakistan which has confined the progress of SAARC, and landlockedness of Nepal and Bhutan, the BBIN sub-regional initiative has seen a great interest from the political elites from these four countries. The extra-regional drivers for BBIN are also favorable as there are growing interests from the international organizations like the Asian Development Bank (ADB) and the World Bank for improvement in connectivity and infrastructural development in this sub-region.

As far as intra-BBIN trade is concerned, there are substantial potentials for the rise in intra-regional trade. However, despite that India has already provided almost full duty-free-quota-free of its market access to exports from South Asian LDCs, Bangladesh, Nepal and Bhutan are facing escalated challenges to at least secure and then to increase their exports to the Indian market. These challenges are related to their limited export capacities, lack of diversification of their export baskets, and various non-tariff measures (NTMs) and procedural obstacles (POs) due to inadequate infrastructure and lack of support facilities both at home and in the Indian market. However, streamlining of NTMs and removal of associated POs are very important as such actions are likely to intensify further market integration in the BBIN sub-region through development of regional value chains. These will also encourage larger intra and extra regional investments in the BBIN sub-region which can be instrumental for growth integration among these countries. To make these happen there is a need for policy integration among the BBIN countries.

Domestic capacities of the exporters in Bangladesh, Bhutan and Nepal need to be improved to meet different international standard requirements. Unless and until these exporters develop their capacities, they will not be able to diversify exports and become competitive in the regional and international markets. A number of supply side factors at home can actually undermine the exporters’ competitiveness and constrain economic and export diversification. These factors are directly associated with the domestic production and investment environment. Most prominent of these factors are access to finance, weak physical infrastructure, inefficient ports and high transport costs, shortage of skilled workers, technological bottlenecks, lack of entrepreneurship and management skills, lack of information, and high costs of doing business.

There are some signs of heightened ‘new’ commitment among political elites of the BBIN countries. The recent speedy resolution of land boundary agreement (LBA) between Bangladesh and India, the positive reception of the India-Bangladesh Maritime Arbitration Award announced in July 2014, establishment of border haats along the border between India and Bangladesh, and the BBIN Motor Vehicle Agreement are signs of such ‘new’ political commitments.

However, the aforementioned ‘new’ commitments have not yet been translated much to resolve the issues related to NTMs and POs discussed above. There is a need to put renewed emphasis on this. There are some recent initiatives by the Government of India to solve the trade infrastructural problems at the border by setting up of Integrated Check Posts (ICPs) at major entry points on the land borders between Bangladesh and India. Two such ICPs have been put in place recently. Such ICPs need to be established at the borders between India and Nepal and India and Bhutan.

There is also a need for cooperation among different institutions in the BBIN countries to deal with NTMs and removal of POs. Cooperation is needed in a number of areas for harmonization of TBT and SPS measures, Mutual Recognition Agreements (MRAs) among respective organizations of these countries, and for introduction of increased automation of their customs clearance procedure.

Political economy of regional integration: Where do we stand in South Asia?

The aspiration for deeper regional integration is high on the political agenda of most of the leaders in South Asia. Since the early 1980s South Asian Association for Regional Cooperation (SAARC) has been working as an economic and geopolitical organization for South Asian countries with the aim of deeper regional integration and cooperation in areas of economic, trade and other common regional issues. Until now, there have been some achievements. Still, frustration prevails, as actual implementation of agreements often does not match the declared ambitions. The resulting implementation gap is most commonly attributed to the lack of political will and leadership, institutional weaknesses and capacity and resources constraints.

The dominant literature has looked primarily at the narrow economic factors influencing regional integration. However, to have a better and systematic assessment of the factors driving and constraining regional integration, it is important to explore the political economy dimensions. While policy makers and stakeholders are often aware of such political economy dimensions, they are generally discussed only informally or in ad hoc manner. A systematic discussion of the political economy factors around the regional integration agenda can generate a broader awareness among stakeholders that may ultimately lead to more realistic and effective regional policy design and processes.

From a political economy perspective, there could be three interconnected drivers for a deeper regional integration. These are economic drivers, political economy drivers and extra-regional drivers.

PE of regional integration

The economic drivers include four integration processes: market integration, investment integration, growth integration and policy integration. ‘Market integration’ emphasizes on the integration in trade in goods and services through the removal of tariff and non-tariff restrictions. ‘Growth integration’ is the integration of economic growth processes of the respective countries in a way that growth in one country benefits growth processes in other member countries. The ‘investment integration’ calls for promotion of regional investment and trade nexus. Finally, the ‘policy integration’ is the harmonization of economic and trade policies of the countries for a deeper regional integration.

However, the aforementioned four integration processes need favorable political economy (PE) drivers. The political-economy perspective considers how various players influence the national and regional decision-making context, and what impact their actions (or lack of action) have on the integration agenda. The first PE driver is the ‘primary institution’ which are the official institutions at the regional level and in respective countries entrusted to carry out the agenda of regional integration. In South Asia, the SAARC Secretariat and relevant ministries in the member countries are such institutions. The second PE driver is the ‘secondary institution’ which are private sectors, private sector associations, civil society organizations and media. Primary and secondary institutions are a combination of market and non-market actors that govern economic and political environments in the region. The third PE driver is the ‘regional public good’ which includes regional infrastructure and the status of regional trade facilitation. In South Asia, status of such ‘regional public good’ is very weak. ‘Structural factor’ is the fourth PE driver which includes historical processes and geographic factors that shape the types of political, economic and socio-cultural institutions. In South Asia, landlockedness of Nepal, Bhutan and Afghanistan, political rivalry between India and Pakistan, and huge differences in the sizes of the countries where India accounts for around 80% of the regional GDP, trade among the South Asian countries primarily through land borders are such structural factors. The final PE driver is the role of the ‘political elite’. Strong and visionary leaderships are needed from the political elites to eliminate any ‘trust deficit’, which can emerge as a result of a variety of the ‘structural factors’ mentioned above. In South Asia, such ‘trust deficit’ is often highlighted as one of the major barriers for a deeper regional integration. Also, there are concerns with regard to hesitant and inconsistent leaderships from the political elites of these countries, especially from India, in taking the regional integration agenda to a higher level.

Finally, the extra-regional drivers include a wide range of global economic and political factors that can have influence over the region. In South Asia, countries are at different levels and with different patterns of integration with the extra-regional drivers.

There are now convincing evidences that a deeper regional integration is needed for generating and sustaining economic growth and reducing poverty in South Asia. Intra-regional trade in South Asia has been low, but there are signs of huge potentials. For a deeper market integration in goods, full implementation of SAFTA is needed with emphasis on further liberalization of intra-SAARC tariffs, reduction in the sensitive list, and establishing effective mechanisms to deal with the NTMs/NTBs.

Intra-regional services trade and intra-regional investment are also low in South Asia. Regional and sub-regional efforts have to be promoted for different trade and transport facilitation measures, for cooperation in energy generation and transmission, and for linking energy cooperation and trade and transport facilitation to investment and growth processes of these countries. Promotion of intra-regional investments and attracting extra-regional FDIs in goods and services sectors in general, and energy and infrastructural sectors in particular will be very crucial for South Asia to integrate further. There is a continued need for a greater integration in trade, macro, financial and industrial policies in the region.

A deeper regional integration in South Asia requires clear and visible leadership from the political elites in this region, especially from India, in taking the agenda forward. The political elites have to be convinced and act accordingly to reduce the ‘trust deficit’. Regional institutions, like SAARC Secretariat, have to be institutionally reformed and reoriented with much stronger engagements from the respective ministries and relevant organizations of the member countries. Business associations, civil society organizations and media have to pursue the regional integration agenda in South Asia more pro-actively than ever.

Published at the Thinking Aloud on 1 April 2016

Published at The Daily Star on 12 April 2016

Why should Bangladesh integrate more with East and Southeast Asia?

Selim Raihan and Sunera Saba Khan

The Bangladesh economy over the past two and half decades has been experiencing steady rise in economic growth rate which has been accompanied by country’s increasing trade-GDP ratio. The economy has become more and more trade-oriented. However, when it comes to integrating with its neighboring countries, there are still large untapped potentials for Bangladesh to gain from such integration. Effective regional integration, through enhanced scope for larger economies of scale and pathway for integration with global and regional value chains, can be a critical tool for Bangladesh to boost its economic growth process. Over the past three decades, regional integration agenda for Bangladesh has focused primarily on integrating with its South Asian neighboring countries. However, there are reasons to believe that Bangladesh can also gain significantly by integrating more with the East Asian countries (China, Japan and South Korea) and Southeast Asian countries (10 ASEAN countries. i.e. Brunei, Myanmar, Cambodia, Indonesia, Laos, Malaysia, the Philippines, Singapore, Thailand and Vietnam). Bangladesh government also wants to pursue the “Look East Policy”, and for this it is high time for Bangladesh to begin the quest for expanded trade and investment opportunities with these countries.

The Bangladesh economy is now at a cross-road. Further growth acceleration is essential to make a transition to a higher growth path in order to obtain the upper-middle income country status. The country needs to promote economic diversification, with a simultaneous diversification of the export basket, in order to boost its growth rate. When it comes to export diversification, in terms of both product and destination, integration with East and Southeast Asian countries is very important for Bangladesh. A major reason why integration with East and Southeast Asia will prove to be beneficial for Bangladesh is because East and Southeast Asia are essentially integrated with the Global Value Chains (GVCs) in a number of manufacturing products. Thus, such integration will pave the way for linking Bangladesh with wider GVCs and in diversifying its export basket. In addition, flows of Foreign Direct Investment (FDI) from these countries to Bangladesh will be beneficial for the economy. Among the Southeast Asian countries Indonesia, Malaysia and Vietnam are large exporters of electronics, machinery and leather goods, primarily driven by the leading multinational companies in the world. Therefore, integration will lead to a number of multinational companies specialized in electronics, machinery and leather goods investing in Bangladesh, thus generating large spill-over benefits to the domestic economy.

However, Bangladesh’s level of integration with East and Southeast Asian countries is mixed. Table 1 clearly depicts that Bangladesh’s imports from East and Southeast Asia are significantly higher compared to exports to these regions. With a share of around 30% of total import, China in 2014 was the major source of import for Bangladesh. Singapore also had more than 8% share. Except Philippines, Thailand and Vietnam, all other countries accounted for more than 1 billion US$ import for Bangladesh. In contrast, Bangladesh’s exports to most of these countries were very low. The largest export was to Japan, which was close to 1 billion US$, followed by export to China by 760 million US$. The lowest export was to the Philippines with an amount of only 21.4 million US$.

Figure 1_east asia

The current scenario clearly portrays that Bangladesh’s exports to East and Southeast Asia are significantly low and immediate initiatives need to be adopted in order to raise export levels. Product diversification followed by market and need assessments in those countries will help Bangladesh accelerate the desired integration process. Bangladesh’s exports to these countries can be improved if Bangladesh engages in exports of non-traditional goods. Bangladesh should actively pursue the agenda of free trade agreements (FTAs) with these countries, either bilaterally or with the region as a whole (i.e. with ASEAN). In this context, it is important to mention that four Southeast Asian countries (Brunei Darussalam, Malaysia, Singapore and Vietnam) are part of the recently signed Trans-Pacific Partnership Agreement (TPP), which is a free trade agreement among nine countries. The other countries are the United States, Australia, Chile, New Zealand and Peru. Furthermore, all 10 ASEAN countries are part of the proposed Regional Comprehensive Economic Partnership (RCEP), which is a free trade agreement (FTA) between these ten countries and the six states with which ASEAN has existing FTAs (Australia, China, India, Japan, South Korea and New Zealand). With the emergence of these mega FTAs, where a large number of East and Southeast Asian countries are involved, there are risks of negative impacts on Bangladesh as Bangladesh is not part of these FTAs. Therefore, it is imperative for Bangladesh to proactively take up the FTA agenda with the East and Southeast Asian countries. At this moment, Bangladesh is part of BIMSTEC, where two of the Southeast Asian countries (Thailand and Myanmar) are members. However, the BIMSTEC FTA is yet to be implemented.

Table 2 presents the results from simulations using the GTAP model, where we have explored hypothetical scenarios of FTAs between Bangladesh and East and Southeast Asian countries. Under certain assumptions, Bangladesh stands to gain from these FTAs. The largest gain seems to appear from the FTA with both East and Southeast Asian countries.

Figure 2_east asia

As far as Bangladesh’s imports from these countries are concerned a major chunk of the imports are used as raw materials and capital machineries in the export industry as well as in the domestic industrial sector. Being the dominant export sector, until now the benefits from such imports have largely been enjoyed by the RMG sector in Bangladesh. However, the non-RMG export sectors and domestic manufacturing sectors have not been able to benefit much from such imports. In addition, there are a number of policy-induced and supply-side constraints for these non-RMG sectors which constrict their expansion. Sector specific infrastructural problems, poor overall physical infrastructure, lack of investment fund and working capital, high interest rate, shortage of skilled workers, invisible costs of doing business, etc. are major impediments to export prospects and export diversification. Therefore, while pursuing the deeper integration agenda, it is also imperative to address these supply side constraints; otherwise the country will not be able to make much progress towards export diversification and will fail to reap the benefit from such integration.

Figure 3_east asia

Bangladesh should also invite much larger FDIs from East and Southeast Asian countries. The current level of total FDI in Bangladesh is very low, and Table 3 shows that FDI inflows from East and Southeast Asia are also low. Bangladesh can immensely benefit from higher FDI inflows from these countries in terms of export diversification and large employment generation. The government’s initiative of setting up special economic zones should give priorities to the leading investors from East and Southeast Asian countries targeting electronics, leather and different processing industries. Finally, enhanced connectivity with China and other Southeast Asian countries through BCIM, Asian highway and Trans-Asian Railway network should be accentuated.

Published at the Thinking Aloud on 1 April 2016

Published at The Financial Express on 10 April, 2016

Demystifying non-tariff barriers in South Asia

In the initial years of SAARC in the 1980s, the popular hypothesis for the reason behind limited intra-regional trade was the prevailing high tariff rate among the member countries. High tariff rates have come down substantially over the years since the formation of SAARC, due to increased globalisation of trade, and establishment of the WTO regime and the South Asian Free Trade Agreement (SAFTA). Despite significant reduction in tariff rates in the region, the intra-SAARC trade has been as static as before, i.e. about only 5 percent of the total trade of this region. Now the popular hypothesis is that it is not the high tariff rates, but the Non-Tariff Measures (NTMs) and the resulting trade barriers, i.e., Non-Tariff Barriers (NTBs) which are the main reasons behind limited intra-regional trade in South Asia. This view is reflected in many contemporary studies and documents.

NTMs are generally defined as policy measures other than ordinary customs tariffs that can potentially have an economic effect on international trade in goods, changing quantities traded or prices, or both (UNCTAD, 2013). In contrast, NTBs are thought to be policy measures that surely affect the quantity traded and prices, and have proven discriminatory effects against foreign firms (as pointed out in a paper by A. Nicita and Peters for the WTO workshop titled ‘The Effects of NTMs on the Exports of Small Economies,’ Geneva, October 23, 2013).

The UNCTAD classification of NTMs comprises technical and non-technical measures, such as sanitary or environmental protection measures, technical barriers to trade (TBTs) and other traditional instruments of commercial policy, e.g. quotas, price control, exports restrictions, or contingent trade protective measures, as well as other behind-the-border measures, such as competition, trade-related investment measures, government procurement or distribution restrictions. This classification acknowledges the existence of measures and does not judge on legitimacy, adequacy, necessity or discrimination of any form of policy intervention used in international trade (United Nations Conference on Trade and Development, Geneva, 2013).

Detailed information, and appropriate and specific analysis is required for better understanding of the impacts of NTMs on trade. It is important to emphasise that many NTMs are legitimate and thus cannot be negotiated away. For example, sanitary and phytosanitary (SPS) measures and TBT are there to protect consumers and environment; pricing and licenses are there to regulate domestic markets; anti-dumping duties, subsidies, quotas are there to protect domestic firms; and rules of origin is there to avoid unintended trade deflections.

Regardless of whether NTMs are imposed with protectionist intent or to address legitimate market failures, NTMs often impose additional costs on trading, and thus may have substantial effects on trade (Nicita and Peters, 2013). And these costs may be higher for some countries or firms than for others. For example, compliance costs are often fixed costs when small firms are in a disadvantageous position. Most of the small and medium-sized firms in South Asia face this challenge, especially with respect to meeting the SPS and TBT standards. Therefore, there is a need to develop the capacities of these firms so that they can meet the justified SPS and TBT standards in other countries. In this regard, technical assistance in their production and export processes is required, and different aid for trade and similar initiatives should be put in place on a priority basis. Also, there is a need to strengthen the capacities of the National Standards Authorities so that certificates issued by them are accepted in other countries. Furthermore, there is a need for harmonisation of standards, custom procedures and establishing mutual recognition principles in South Asia through regionally coordinated efforts.

Cost of complying is often dependent on infrastructure. Since the intra-regional trade in South Asia happens predominantly through land borders, a large part of the NTM-related complaints in South Asia are linked to weak infrastructure at land custom stations in South Asian countries, as well as to the lack of testing and laboratory facilities near the stations. In this process, many legitimate NTMs turn into NTBs, affecting the intra-regional trade. Therefore, improvements in relevant infrastructure should be a top priority.

Due to various procedural obstacles, which are related to complicated bureaucratic process, delays, corruption, and frequent changes in the policies, many legitimate NTMs turn into NTBs. In South Asia, a significant part of the NTBs is related to procedural obstacles. Therefore, policy efforts are critical to ensure that NTMs serve their intended legitimate purposes.

Policymakers in respective countries of South Asia, while negotiating for streamlining NTMs and reducing NTBs at the regional level, need very clear analysis, information and updated data on NTMs/NTBs for all South Asian countries. These data and analysis need to be relevant with concrete examples so that effective measurable actions can be undertaken. Analysis should emphasise on the respective roles and responsibilities for both home and partner countries in solving the problems.

Published at the Thinking Aloud on 1 October 2015

Published at The Daily Star on 3 October 2015

 

Towards a new regime of regional integration in South Asia

There are strong arguments for deeper regional economic integration in South Asia. It is believed to have potential for generating significant intra-regional trade and welfare gains for the countries involved. Deeper regional integration is supposed to provide countries in the region improved market access in each other’s markets, and thus help boost their exports. These will facilitate intra-regional trade and associated investment flows which will generate more trading opportunities among the countries involved since there will be tariff differentials due to the most favoured nation (MFN) vis-à-vis regional tariff regimes. These are static gains that the countries involved would be able to realise. Dynamic gains could be even greater due to the possible expansion of the scale of operation owing to easy access to the large regional market buoyed by increased investment and more efficient allocation of regional resources.

Regrettably, intra-regional trade in South Asia has hovered around 5.0 per cent for the past decade. This is significantly lower when compared to other regional arrangements such as the North American Free Trade Agreement (NAFTA), the Association of Southeast Asian Nations (ASEAN), and the European Union (EU). The current regime of regional integration in South Asia has primarily focused on the rise in intra-regional trade in goods.

“..the new regime will require clear and visible leadership from India in taking the agenda forward. Other countries in the region should not be only at the receiving end but also have to take part actively and effectively. The new regime will call for all South Asian countries to balance what effectively they can offer and what they can expect in the deeper integration process.”

However, South Asia is on the verge of a new regime of regional integration which should involve four integration processes: (i) market integration: integration in trade in goods and services; (ii) growth integration: integration in economic growth processes of the South Asian countries; (iii) investment integration: promotion of regional investment and trade nexus; and (iv) policy integration: harmonisation of economic and trade policies. A new regime on regional integration in South Asia calls for these four integration processes through responding to four fundamental questions.

On the first question “Why is there a need for a deeper regional integration in South Asia?” the answer is: there are now convincing evidences that deeper regional integration is needed for generating and sustaining economic growth in the South Asian countries, i.e. regional integration will be a critical factor in the future growth processes of these countries. This is required for larger employment creation and alleviation of poverty in a region which has the highest number and density of poor people. For the promotion of inclusive growth, regional integration will be an effective instrument.

Ensuring food security is a challenging issue, and intra-regional trade in agricultural and food products will be immensely critical. Deeper regional integration through trade and transport facilitation will increase competitiveness of these countries to better participate in the global trade. Promotion of regional supply chain will be critical in developing dynamic comparative advantages of these countries. Finally, the peace dividends, through intra-country stable political relations, will be immensely high.

On the second question “How to achieve deeper regional integration in South Asia?” the answer is: despite all shortcomings, the South Asian Free Trade Area (SAFTA) is a landmark achievement, and deeper integration has to take lessons from it. Intra-regional trade in South Asia has been low, but there are signs of huge potential. There is a need to move beyond the SAFTA; and the new regime has to put much weight on regional investment and trade nexus. Promotion of intra-regional investments and attracting extra-regional FDIs in goods and services sectors in general, and energy and infrastructural sectors in particular will be the key driver in the new regime.

On the third question “What to do?” the answer is: a comprehensive assessment is needed on achievements of the SAFTA so far. For deeper market integration in goods, full implementation of the SAFTA is needed with emphasis on further liberalisation of intra-SAARC tariffs, reduction in sensitive list, relaxing the rules of origin, and establishing effective mechanisms to deal with the NTMs/NTBs. There is a need to link intra-regional liberalisation with enhanced intra-regional investment in different services sectors. Regional and sub-regional efforts have to be promoted for different trade and transport facilitation measures, for cooperation in energy generation and transmission, and for linking energy cooperation and trade and transport facilitation with investment and growth processes of these countries. The focus should also be on promotion of regional supply chains. The new regime will call for greater integration in trade, macro, financial and industrial policies with the aim for removing different policy and structural barriers. Short-term and medium term realistic targets should be spelled out. The new regime will re-emphasise on the importance of concrete regional efforts in the diversification of the export structures of the smaller and weaker countries for them to effectively integrate with the regional economy.

On the fourth question “Who will do and what?” the answer is: the new regime will require clear and visible leadership from India in taking the agenda forward. Other countries in the region should not be only at the receiving end but also have to take part actively and effectively. The new regime will call for all South Asian countries to balance what effectively they can offer and what they can expect in the deeper integration process. Regional institutions, like SAARC Secretariat, have to be institutionally reformed and reoriented. Business associations and civil society organisations have to understand and take part in the political economy process of pursuing regional integration agenda in South Asia more than ever under the new regime.

First published at the Thinking Aloud on 1 July 2014

Published at The Financial Express on 6 July 2015

Time to Move Beyond SAFTA

There are strong arguments for deeper regional economic integration in South Asia, as it is believed to generate significant intra-regional trade and welfare gains for the countries involved. Deeper regional integration is supposed to provide countries in the region improved market access in each other’s markets, and thus help boost their exports, which would augment the significance of intra-regional trade and associated investment flows. That would, on the other hand, generate more trading opportunities among the countries involved since there will be tariff differentials due to the most favored nation (MFN) vis-à-vis regional tariff regimes. These are static gains that the countries involved would be able to realize. Dynamic gains could be even greater due to the possible expansion of the scale of operation owing to easy access to the large regional market buoyed by increased investment and more efficient allocation of regional resources.

There are also convincing evidences that deeper regional integration is needed for generating and sustaining economic growth in South Asian countries in a region that is home to a significant share and the highest density of poor people in the world, sustainable economic growth can ensure employment creation and contribute to poverty alleviation. Moreover, South Asia is one of the most food insecure regions in the world where ensuring food security continues to remain an insuperable challenge. Consequently, intra-regional trade in agriculture and food products is crucial to improve the situation of food security in the region.

Inarguably, deeper regional integration through trade and transport facilitation, along with the presence of efficient regional supply chains, will dramatically improve intra-regional trade and increase the competitiveness of South Asian countries to better participate in the global market. Meanwhile, peace dividends of intra-country stable political relations—a pre-requisite for regional integration—will also be immensely high.

Regrettably, intra-regional trade in South Asia has hovered around 5 percent for the past decade, which is significantly lower when compared to other regional arrangements such as the North American Free Trade Agreement (NAFTA), Association of Southeast Asian Nations (ASEAN), and the European Union (EU). Such inferior performance is despite the focus of the current regime of regional integration on improving intra-regional trade in goods. There is, however, a growing perception that South Asia’s intra-regional trade is underestimated since a large volume of informal trade among South Asian countries is not fully captured. Additionally, while formal intra-regional trade is low in the region as a whole, bilateral trade among South Asian countries, namely between India and other smaller countries such as Bhutan and Nepal, is exceptionally high. Furthermore, trade in services, particularly in education, health care, information technology and construction, is vibrant at best, but is not recorded well.

In their pursuit to improve intra-regional trade, South Asian countries crossed an important milestone in regional integration with the implementation of the Agreement on South Asian Free Trade Area (SAFTA) in 2006. SAFTA is a landmark achievement, but sadly, it has thus far failed to bring about significant changes in the status of intra-regional trade. Hence, for a deeper integration in South Asia, countries in the region have to first fully implement SAFTA and then move beyond it.

New regime of regional integration

South Asia is at the verge of a new regime of regional integration, which involves four integration processes, namely: i) market integration: integration in trade in goods and services; ii) growth integration: integration in economic growth processes of South Asian countries; iii) investment integration: promotion of regional investment and trade nexus; and iv) policy integration: harmonization of economic and trade policies.

The new regime of regional integration should focus more in promoting regional investment and trade nexus. Promoting intra-regional investments and attracting extra-regional foreign direct investments (FDIs) in goods and services in general, and energy and infrastructure sectors in particular, should be the key features of the new regime. Additionally, it is necessary to link intra-regional trade liberalization with enhanced intra-regional investment in different services sectors. Regional and sub-regional efforts must be promoted for different trade and transport facilitation measures, for cooperation in energy generation and transmission, and for linking energy cooperation and trade and transport facilitation with investment and growth processes of countries in the region. Importantly, regional focus should include the development of efficient regional supply chains to gain competitive edge in the international market. In addition, the new regime should re-emphasize the importance of concrete regional efforts to diversify the export structures of the weaker economies for their effective integration into the regional economy. Notably, realistic short- and medium-term targets should be set to ensure timely progress in achieving the ultimate goal of deeper regional integration for shared regional prosperity.

In that context, there is need to further reduce intra-SAARC tariffs and sensitive lists, relax rules of origin, and establish effective mechanisms to deal with non-tariff measures (NTMs) and non-tariff barriers (NTBs). Moreover, a more proactive policy initiative should be taken for SAFTA to match extensive tariff reductions under the bilateral Free Trade Agreement (BFTAs) within the region. Accordingly, a review of all current commitments under SAFTA should be initiated with the objective of converging SAFTA’s tariff reductions to match those provided under the bilateral FTAs. In addition, the Rules of Origin (RoO) under SAFTA should also be made consistent with those that are now in force under the BFTAs, in which the rules are often more liberal than those in SAFTA.

Some of the important elements of regional integration in South Asia, which exist today but need serious revisiting include, among others: i) overcoming NTBs; ii) deepening customs cooperation; iii) promoting services trade; iv) enhancing investment cooperation; v) smoothening trade and transport facilitation; and vi) promoting energy cooperation. These are briefly discussed below.

Addressing NTBs

One of the crucial factors that have largely rendered SAFTA ineffective is the various types of NTBs imposed by countries in the region. According to a recent study (Raihan, S., M. A. Khan and S. Quoreshi. 2014. NTMs in South Asia: Assessment and Analysis. Kathmandu: SAARC Trade Promotion Network), there are many products in which SAARC countries have high export capacities, but intra-SAARC trade of these products are absent due to the presence of various NTMs. In order to effectively deal with existing NTMs, the SAARC Secretariat should take the inventories on NTMs of the SAARC member states into cognizance and endorse the many initiatives taken by the private sector and development partners. Importantly, prominent NTMs should be reviewed and analyzed to identify their impact on trade. Subsequently, to reduce the trade-impeding effects of NTMs and NTBs, SAARC countries should sign mutual recognition agreements (MRAs).In that context, SAARC countries should accept certificates issued by the competent authorities of other SAARC member countries, for which the laboratories issuing the certificates should be accredited. Accreditation bodies or agencies may set up accreditation centers in collaboration with a designated national agency. It is also important to strengthen the SAARC Regional Standards Organization (SARSO) and allocate adequate human and financial resources to make it function effectively. Importantly, focused interactions on NTBs and NTMs between the private sector and the government should be conducted regularly in each SAARC country.

Deepening customs cooperation

In order to facilitate regional trade, customs valuation should be strictly in line with the WTO Customs Valuation Agreement, and the certificates issued by designated national institutions should be accepted by all ports of entry. Fees levied should be based only on the cost of services rendered. Additionally, considering the importance of automation of customs in trade facilitation, SAARC Members should expedite and prioritize the introduction of increased automation of their customs clearance procedure under the harmonized Automation System of Customs Data (AYSCUDA).

Promoting services trade

Considering the rising prominence of global trade in services, deeper regional integration in South Asia requires enlarged services integration in the region. Deeper regional integration in services trade would provide huge welfare gains for South Asian countries as almost all South Asian countries are net importers of services. SAARC countries, therefore, have signed the SAARC Agreement on Trade in Services (SATIS), which awaits implementation. Unfortunately, many South Asian countries lack established and well-functioning regulatory and institutional frameworks that support services trade liberalization and hence effective implementation of SATIS. Therefore, considering their specific economic requirements and the necessary technical assistance for capacity building, SAARC countries should frame appropriate domestic regulations without delay. . Thus, countries should be provided adequate regulatory flexibilities to promote services trade liberalization.

Enhancing investment cooperation

South Asia lacks adequate investment in different sectors, which is necessary to deepen regional integration. While much of such investments need to be attracted from countries outside the region, there is ample scope for intra-regional investment too. However, for that to materialize, effective domestic regulatory frameworks need to be harmonized with the regional investment framework, taking into account the country-specific priorities in different sectors. That will require streamlining of investment regulations, improvement of the business environment, enhancement of institutional and regulatory capacities, making regulatory cooperation effective, and enhancing people’s mobility. Notably, a regional investment treaty and double taxation treaties among SAARC countries are needed to remove existing barriers to investment in the region.

Smoothening trade and transport facilitation

Studies have shown that development of economic corridors among South Asian countries would help these countries better integrate regionally and globally. In this regard, the need for harmonization of laws and processes related to transport networks, and transit and trade facilitation among these countries, becomes obvious. Trade facilitation landscape of South Asia is unimpressive when behind-the-border issues are considered. South Asian countries suffer from excessive direct costs and time taken to cross borders and from inefficiency in cross-border transactions. Trade in the region is also constrained by the poor conditions of trade- and transport-related infrastructure, congestions, high costs, and lengthy delays. Among the major causes of high trade transaction costs is the number of cumbersome and complex cross-border trading practices, which also increase the possibility of corruption. Goods carried by road are subject largely to transshipment and manual checking at the border, which imposes serious impediments to regional and multilateral trade. The problem is further compounded by the lack of harmonization of technical standards.

Studies have shown that improved trade facilitation in South Asia would increase the volume of intra-regional trade by reducing the transaction costs of trade, thus making exports more competitive and imports less expensive. Therefore, reduction of transaction time through simplification of documentation and promotion of paperless trade should be a priority. To reduce trade-related transaction costs, governments must collaborate on a trade facilitation agenda that encompasses procedures, regulations and processes that impose costs on cross-border commercial transactions such as customs, standards and movement of people, among others.

Promoting energy cooperation

South Asian countries have wide variations in commercial energy resource endowments and commercial energy demand. Hence, they can immensely benefit from efficient sharing of their energy resources through a wider energy system integration, which would lead to more optimal energy supply solutions with greater energy security for the region. Regional cooperation is thus needed in the areas of increased energy production, expanded energy trade infrastructure, promotion of a regional power market, and harmonized legal and regulatory frameworks, together with an improved investment environment.

Conclusion

SAARC leaders have visioned an Economic Union in South Asia. To materialize this vision, SAARC should now enter into a new regime of regional integration. Building on past experiences and effectiveness of the existing regional integration regime, the new regional integration regime will require pro-active and visible leadership, mainly from India, in taking the agenda forward. The success and the effectiveness of the new regime will largely depend on the delicate balance between what each country can offer and what it can expect in the deeper integration process. Moreover, regional institutions, like the SAARC Secretariat, have to be institutionally reformed and reoriented. Business associations and civil society organizations have to understand and participate in the political economy process of pursuing regional integration agenda in South Asia more than ever under the new regime.

Published at the Trade Insight, Volume 10, No. 2, 2014, SAWTEE, Kathmandu