SAARC TRADE POTENTIAL
INSUFFICIENT CONNECTIVITY IS A MAJOR IMPEDIMENT IN DEVELOPING INTRAREGIONAL TRADE.
SHABBIR H. KAZMI
Jan 31 - Feb 6, 2011
The South Asian Association for Regional Cooperation (SAARC) has a great potential for inter-country trade but that is not happening. It should be a matter of great concern to all the members that the trade potential has not been realized.
The statement made by Bhutanese Prime Minister while speaking at a dinner hosted by the Federation of the Chambers of Commerce and Industry in Bangladesh describes the situation most appropriately. He said: "It's difficult to work under a culture of suspicion but we are on the right track, and we'll overcome it".
SAARC is an association of Afghanistan, Bangladesh, Bhutan, Maldives, Nepal, Pakistan, India, and Sri Lanka. Lack of connectivity among eight countries is a major impediment in developing intra-regional trade, which has the potential to grow over eight times. Asian Development Bank (ADB) estimates trade potential in South Asia at $85 billion. At present, the regional trade is barely $10 billion. The cost of intra SAARC trade is among the highest in the world. It leads to lower and restricted trade among the countries in the region and limits positive impact of cut in tariffs. Cut in infrastructure and transport costs have the same effect as tariff liberalization in boosting trade.
According to some experts, for every one per cent reduction in cost, trade stimulus is about five per cent. The benefit is passed along the entire supply chain shippers, truckers, traders or end users. Currently, the intra SAARC trade is estimated less than five per cent of South Asia's total world trade, significantly less than the figures of Asean, which is over 40 per cent, and European Union, which is over 65 per cent.
Regional economic integration cannot be achieved without comprehensively addressing the infrastructural problems, both physical and soft infrastructure, and both at national and regional level.
Even when infrastructural problems fall in national domain, their impact could be regional. Poor custom, quality control, and poorly developed port and road and rail in a country could raise transaction cost for all. It has become necessary that the member countries should strengthen traditional arteries of trade by developing regional trade and transit agreements, including regional motor vehicles agreement and railways agreement.
SAARC has already set up an expert group to commence negotiations on these agreements. There is a need to undertake faster implementation of agreed regional infrastructure projects. To build connectivity, the member countries could offer on reciprocal basis transit facilities to third countries establishing links with the larger Asian neighborhood, including West, Central, and South East Asia.
These countries are still far from their goal of regional economic integration. It is important to build a sound foundation without which the goal of South Asian Economic Union would only remain a dream.
While regionalism is perceived as indispensable, bilateralism dominates cooperation among the countries in South Asia and SAARC is not insulated from the bilateral dynamic. While regionalism in other parts of the world has proved beneficial due to political proximity of generations of leadership, developed private sectors and companies transcending national borders and multinational stakeholders. The template of political interaction in South Asia, and the contours of interface between the governments and non-governmental stakeholders, including the private sector and think-tanks, had to be built and nurtured overtime.
It is important to note that the demographics in South Asia have brought it to be in a class by itself. In fact, the one single lesson from the regional annals is that cynicism, real politic, or negativism of any kind might only aggravate problems in the short or long run, and that it is not smart to spurn out of hand a larger vision for the region. The recent history shows, negativism of any kind would grow out of control very soon among the teeming millions in South Asia, breeding more problems than solutions while deference to ideals of SAARC charter has a potential to succeed and may not do harm in any case.
Creation of free trade area among the SAARC members through implementation of SAFTA is a starting grid for development of lateral and vertical linkages in other fields of regional cooperation. SAFTA allows taking regional view of trade linkages rather than viewing them from national perspective. Initial figures of intra SAARC trade under SAFTA have been encouraging.
Large volumes of informal trade are also indicative of potential trade under SAFTA. Intra SAARC trade volume is far lower as compared to other regions. This reflects structural problems of industry and infrastructure in the region.
South Asia's population and size makes it a vast market in the world. The economies of the region vary considerably in their size and complexity but offer much greater room to come together than is realized by groups having vested interest. There are salient features of South Asian cooperation that have promise for the future. One key feature, which goes to the root of regional cooperation, is project based cooperation through the modality of SAARC Development Fund, a $300 million funding mechanism. Set up at the 15th Summit in Colombo in 2008, this can become a visible achievement of SAARC in coming years.
It is imperative to focus on reducing the size of sensitive items lists under Safta; particularly for taking out products with high regional tradability to bring a larger percentage of goods under regional preferential trading regime. Efforts should also be made to accelerate tariff liberalization program. The fundamental premise of regionalism among South Asian countries lies in the recognition that challenges confronting the region cannot be resolved through action in national domains alone. It is imperative to develop and forge regional cooperation in different areas, even though implementation would primarily have to be done nationally.