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Intra South Asian trade

06 March, 2014

By Dr Kamal Monnoo


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The eight member countries of the South Asian Association for Regional Cooperation (SAARC) account for around a quarter of humanity, with a population of nearly 1.7 billion. However, SAARC has a combined share of only 3% of world GDP, roughly 2% of world exports and imports and around 1.7% of world inward FDI. It is dominated by India, with 75% of the population of the region, 63% of land area and 81% of the combined GDP. Although the South Asian economies are now increasingly looking to exploit the benefits of greater market openness, their performance lags behind other regions.

While trade as a percentage of GDP has risen from 19% to 30% between 1994 and 2010, it is still well below that of other regions like East Asia (58%) and Europe (66%). Intraregional trade for the SAARC region stands at a low 2% of GDP compared to 40% for the South East Asian region. SAARC is one of the least integrated regions in the world. It is also amongst the poorest. Almost 30% of SAARC population lives on less than $ 1 per day – representing 40% of the world's poor in general. Despite the advantages of physical proximity, South Asian economies still choose to trade with the more distant economies of the United States and European Union. Clearly, something needs to be done.

However, the question that needs to be asked is: Is trade liberalization in the interest of all SAARC members and is it what they all want? After all, countries once considered to be the chief proponents of free and fair global trade seem now to be moving back towards protectionism, opting increasingly for bilateral trade agreements. Even the world's leading developed economies who are today considered “knowledge based” economies are going back several 'stages of growth' by arguing that a certain level of manufacturing base should be maintained in an economy to hedge against unemployment, inflation and restricting undesirable imports. The US, as we know, has renewed its focus on shoring up American manufacturing after a long time, in order to replace some of its imports and boost its exports.

In the European Union (EU) we see a lot of anger and criticism for Germany running a large trade surplus at the expense of deficits in other Euro-zone economies. A case seems to be building in the EU against a pattern of trade that unfairly favors a single country and is threatening the very unity of the region as a whole. Ironically, India too, in the context of SAARC enjoys a similar surplus! And when it comes to liberalizing trade between Pakistan and India, the concerns on the Pakistani side are that the hegemonic policies and designs of India might hold back free, fair and open trade within the South Asian region.

From Pakistan's perspective, freeing up trade between Pakistan and India, without first entering into comprehensive agreements on regional (SAARC) trade as a whole, will not help the cause of promoting intra-regional trade. In fact, this may be counter productive since India already enjoys favorable trading accounts with all SAARC countries and after gaining complete access to Pakistani markets, there will be very little to no interest left for India to adjust the regional trade equation in a way that makes trade within SAARC more 'equitable.'

Further, a significant segment of Pakistani experts on security, defense and foreign affairs believe that unless the MFN/NDMA and a resultant liberalized trading regime is managed very closely, the negatives will far outweigh the positives. In their opinion, there prevails a sense of skepticism over the Indian double game. They argue that not a word is said by India about the necessity of creating long term important linkages such as technology transfer, joint resource management mechanisms, cross border investments, financial connectivity, regional anti-trust treaties, equal opportunity amongst SAARC nations, and devising joint regional legislations on rules of doing business.

Also, on one side, India talks about cementing mutual ties through the instrument of trade, while on the other side their political moves tend to exacerbate the long standing security issues between the two countries. Recently, the Indo-Afghan Agreement, which covers a wide ambit from humanitarian assistance ranging from education to capacity development, can easily be interpreted to portray an India that still remains more focused on isolating Pakistan than to becoming its vibrant economic partner. They maintain that as always, we see an India eager to gain direct access to Central Asia and Europe, but not willing to offer any such reciprocal accessibility to Pakistan on its Eastern and Northern sides.

So then, why liberalize trade within South Asia? Protectionism according to a study by the famous Lawrence and Edwards (Harvard professors) is a high-cost option in an interdependent environment and the socialist countries of the post World War II era learnt this the hard way. Increased but prudent imports induce indigenous industries to be more competitive. Ultimately this enhanced competitiveness leads to an increase in the exports of the country shunning protectionism. In the 18th century, Montesquieu thought that commerce improves manners and cures most destructive prejudices. The concept is now gaining currency that intra-regional as well as inter-regional trade will lead to peace amongst conflicting nations. It will not only strengthen economies, but unleash a soft process, which can be key in resolving long standing disputes over time.

Recent economic history is full of examples where countries have achieved higher growth through enhanced economic and trade linkages; in fact the world economy itself over the last decade has mostly grown on the back of enhanced global trade. Perhaps the most notable recent work in this respect comes from the Nobel Laureate economist, Paul Krugman. What Krugman really explained in his Nobel winning work was that when trade barriers fall and trading increases, firms gain access to bigger markets, allowing them to expand production and reap economies of scale. At the same time, openness also exposes them to competition from rival foreign firms, paring their margins. Some firms may go out of business, but between the domestic survivors and the foreign entrants, consumers (meaning people) still have more to choose from. Thus the gains from trade arise not from specialization, but from 'scale economies,' fiercer competition and the cornucopia of choice that globalization provides.

This concept of scale economies for the first time gives economics a sense of space and provides empirical evidence in support of free trade. Through his work the gross importance of regional cooperation for the first time comes to the global fore front, highlighted by three main points. First, that regions that fail to offer space for joint production and common productivity development, tend to lose out in the long run. Secondly, that negative spillovers cannot be avoided (meaning a neighbor's loss cannot be your gain and a regional partner's problems cannot be bottled up within the geographical boundaries of that country). And lastly, that poverty alleviation is a geographical challenge and therefore needs to be tackled at a regional level.

When it comes to taking bold initiatives between Pakistan and India, proper homework needs to be done before embarking on the same. Too often have such endeavours failed because the key drivers in such attempts failed to adequately grapple the elements of reciprocity and fair play to provide a level playing field to all parties. Only a carefully thought out process of negotiations and a comprehensive package of agreements followed by sound monitoring and a management mechanism that is practical, efficient and comprehensively addresses long standing concerns amongst the SAARC nations - especially between Pakistan and India - can bring about sustainable progress and a win-win for the region.

The writer is an entrepreneur and economic analyst.
Email:kamal.monnoo@gmail.com

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