South Asia—Intraregional Cooperation: the Way Forward

South Asia—Intraregional Cooperation: The Way Forward Shahid Kardar August 2011 Disclaimer: The views expressed in this paper are those of the author and do not necessarily reflect the views and policies of the Asian Development Bank (ADB) or its Board of Governors or the governments they represent. ADB does not guarantee the accuracy of the data included in this publication and accepts no responsibility for any consequence of their use. By making any designation of or reference to a particular territory or geographic area, or by using the term ―country‖ in this document, ADB does not intend to make any judgments as to the legal or other status of any territory or area. Table of Contents Abbreviations i Executive Summary ii I. Introduction 1 II. South Asia in Perspective—Regional Comparative Analysis of Key Indicators 5 III. Barriers to Trade 6 A. Introduction 6 B. Tariff Barriers to Trade in South Asia 6 i. Analyzing current tariff structures 6 ii. Efforts to reduce tariff barriers under SAFTA and other bilateral trade agreements 7 iii. Gains from lowering tariff barriers on trade in South Asia 9 iv. Conclusions 12 C. Non-Tariff Barriers 12 i. Introduction 12 ii. Overview of current barriers to trade in South Asia 12 iii. Non-tariff barriers 12 iv. Barriers to trade facilitation 14 v. Transaction costs of barriers to trade facilitation between India and Pakistan 21 vi. Gains from the Reduction/Removal of Barriers to Trade Facilitation 22 D. Informal Trade in South Asia 24 i. Introduction 24 ii. Informal trade 24 iii. Informal Trade between India and Pakistan 25 IV. Exploring the Potential for Intra-Regional Trade in Goods and Services 28 A. Introduction 28 B. Trade in Goods 28 i. Extent of intra-regional trade in South Asia 28 ii. Economic rationale for intraregional trade in goods 30 iii. Identifying opportunities for intraregional trade between SAARC member countries 31 C. Trade in Services 35 i. Introduction 35 ii. Limited options in strategy based on exports of labor-intensive goods 35 iii. Strategy for South Asia based on exports of services 36 iv. The needs of the services sector route 37 v. Spillover effects of such a strategy 38 V. Deepening Investment Integration in South Asia 39 A. Introduction 39 B. Trends in inward and intraregional FDI for SAARC countries 39 C. Barriers to Investment 40 i. Introduction 40 ii. Overview of foreign direct investment in South Asia 41 iii. An Overview of barriers to investment in South Asia 42 D. Southeast Asia‘s Experience with Investment Integration: The Success of Vertical Intra-Industry Trade and the Trade-Investment Nexus 46 Box 5. 1. Factors Underlying the Movement of Manufactured-Exports Industry to Asia 46 E. Deepening Investment Integration in South Asia: The Case for Intra-Industry Investment 47 i. Introduction 47 ii. Textiles and clothing 47 iii. Automobile sector 48 F. ASEAN‘s Experience with Investment Integration: Policy Implications for South Asia 49 G. The way forward 50 VI. Cross-Border Infrastructure 52 A. The Economic Rationale for Investment in Cross-Border Infrastructure in South Asia 52 i. Infrastructural facilities in South Asia 53 B. Potential for Intra-Regional Trade and Investment in Energy 55 i. The Imperative for intraregional trade and investment in Energy 56 ii. Identifying key areas for intraregional and inter-regional trade and investment in energy 56 iii. Promoting regional energy trade—the way forward for SAARC countries 58 C. Potential for intraregional investment in transport and logistics 59 i. Identification of priority transport corridors for development 60 ii. Creating the enabling environment for an integrated South Asia 60 VII. Regional Cooperation to Promote Inclusive Growth in South Asia 62 A. Introduction 62 B. Constraints on Inclusive Growth: Why Have Lagging Regions Remained Underdeveloped? 64 C. Promoting Inclusive Growth through Investment in Cross-Border Infrastructure 64 D. Other Areas for Regional Cooperation to Reduce Poverty 66 VIII. Recommendations 67 A. Introduction 67 B. Trade Related Policy Issues 67 C. Non-Tariff Barriers 67 i. Visas 67 ii. Transport bottlenecks 67 iii. Communications 67 iv. Banking 67 v. Information exchange 68 vi. Other trade facilitation measures 68 D. Phased Approach 68 E. Other Areas for Regional Cooperation and Coordination 69 F. Conclusions 70 IX. Possible Role for ADB 72 References 73 Tables Table 2.1 Trade as a Percentage of GDP 5 Table 3.1 Trade Weighted Average Tariff 7 Table 3.2 Percent Share of Sensitive List Items in SAARC and Global Imports of Member Country 8 Table 3.3 Comparison of Negative/Sensitive Lists across FTAs in South Asia. 8 Table 3.4 South Asian Trade and Economy from 100% Tariff Reductions in the Region 9 Table 3.5 Welfare Effects of Tariff Reductions under SAFTA 10 Table 3.6 Non-Tariff Barriers in Selected Asian Economies 13 Table 3.7 Types of Trade Facilitation Barriers 14 Table 3.8 Trade Costs of the South Asian Economies 15 Table 3.9 Country Specific Barriers to Trade Facilitation 15 Table 3.10 Average Number of Days for Customs Clearance 17 Table 3.11 Global Rankings of Quality of Infrastructure in South Asian Countries 19 Table 3.12 Efficiency of Overland Crossings 19 Table 3.13 Efficiency of Sea Ports in South Asia. 20 Table 3.14 Transaction Costs of Trade Routes between India and Pakistan 22 Table 3.15 Gains from Trade Facilitation ($ million) 23 Table 3.16 Impact of Trade Facilitation Reforms On Change in Export and Import (%) 23 Table 3.17 Impact on South Asian Trade Volumes (Intra-Regional Versus Interregional Trade) ($ million) 24 Table 3.18 Informal Trade As Percent of Formal Trade with India. 24 Table 3.19 Official Policy on Items Involved in Informal Trade from India to Pakistan 26 Table 3.20 Types Of Transactions Costs Along Major Informal Trading Routes. 27 Table 4.1 South Asia Intraregional Exports (2007) 29 Table 4.2 South Asia Intraregional Imports (2007) 29 Table 4.3 Trade Complementarity Index: Exports and Imports 31 Table 4.4 India-Pakistan Export Potential 32 Table 4.5 Computer and Information Services Exports 37 Table 5.1 Share in World FDI of Selected Regions and South Asia 40 Table 5.2 Net FDI Inflows for South Asian Countries (2005-2006) 40 Table 5.3. Foreign Direct Investment in South Asia in 2008 41 Table 5.4. Foreign Ownership in South Asian Countries 41 Table 5.5 Comparative Analysis of Barriers to Doing Business in South Asia 42 Table 5.6 Barriers to Investment 43 Table 5.7 Infrastructure Quality in South Asia 44 Table 5.8 South Asian Openness to Capital Flows. 45 Table 6.1 Infrastructure and Income in South Asia 52 Table 6.2. Comparing South Asian Infrastructure to Other Regions 54 Table 6.3. Trade and Investment Possibilities in the Western Energy Market 57 Table 6.4. Trade and Investment Possibilities in the Eastern Energy Market 58 Figures Figure 6.1 Infrastructure–Income Relationship in South Asia 53 Figure 6.2. Potential Transport Hubs in South Asia 61 Figure 7.1 Poverty Incidence between Leading and Lagging Regions (headcount percentage) 63 Appendices Appendix 1: Terms of Reference 77 Appendix 2: South Asia in Perspective – Regional Comparative Analysis of Key Indicators 78 Appendix 3: Barriers to Trade 84 Appendix 4: Exploring the Potential for Intra-regional Trade in Goods and Services 105 Appendix 5: Deepening Investment Integration in South Asia 112 Appendix 6: Investment in Cross Border Infrastructure 127 Appendix 7: Regional Cooperation to Promote Inclusive Growth in South Asia 139 i Abbreviations ADB Asian Development Bank AFTA ASEAN Free Trade Agreement APIBM Afghanistan-Pakistan-India-Bangladesh–Myanmar corridor APTA Asia Paciﬁc Trade Agreement ASEAN Association of Southeast Asian Nations ASYCUDA Automated Systems for Customs Data BIMSTEC Bay of Bengal Initiative for Multi-sectoral Technical and Economic Cooperation CGE computable general equilibrium EU European Union FDI foreign direct investment FTA free trade agreement/free trade area FY fiscal year GDP gross domestic product GTAP Global Trade Analysis Project ICRIER Indian Council for Research in International Economic Relations ICT information and communications technology IMF International Monetary Fund ISFTA India–Sri Lanka Free Trade Agreement LDC least developed country MFN most favored nation MOU memorandum of understanding MRA mutual recognition agreements NAFTA North American Free Trade Agreement OECD Organisation for Economic Co-operation and Development PSFTA Pakistan Sri Lanka Free Trade Agreement PPP public–private partnership SAARC South Asian Association for Regional Cooperation SAFTA South Asian Free Trade Agreement SASEC South Asian Sub regional Economic Cooperation SME small and medium enterprise SPS sanitary and phytosanitary standards TBT technical barriers to trade TCI Trade Complementarity Index UNCTAD United Nations Conference on Trade and Development UNESCAP United Nations Economic and Social Commission for Asia and the Paciﬁc US United States WTO World Trade Organization ii Executive Summary 1. Mutual distrust embedded in historical political disputes has dogged the South Asian Association for Regional Cooperation (SAARC) since its inception 25 years ago, leaving SAARC‘s goals distant and the region‘s full trade potential untapped. That it took 10 years to reach a preferential tariff agreement and another 10 to create the South Asian Free Trade Agreement (SAFTA) has left South Asia the least integrated region in the world. 2. The region‘s exports concentrate disproportionately on just a few regions and products. However, in recent years the importance of South Asian markets as consumers or providers of raw material inputs has increased, especially the smaller economies such as Sri Lanka or less-developed countries such as Afghanistan, Bangladesh, Nepal, and Sri Lanka. For example Sri Lanka‘s exports to India after the inception of the India–Sri Lanka Free Trade Agreement increased from $58 million in 2000 to $489 million in 2005.

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