H OW C A N SOU T H A SIA T U RN ITS P R OX IMITY FR OM A B U R D E N TO A N2019  MARCH A D VA NTAG E? 5 |  ISSUE 1 How Can South Asia Turn Its Proximity from a Burden to an Advantage? Sanjay Kathuria and Priya Mathur A round the world, trade has played a critical role appears on the list of product-market combinations with the in reducing poverty. Some of the most successful highest trade restrictiveness index in the region. countries in East Asia, Europe, and North America Barriers that have held back trade and investment owe much of their success to strong trade relations with within South Asia include tariffs and para tariffs, real and their neighbors. However, South Asian countries have yet to perceived non-tariff barriers, connectivity costs as mani- reap the benefits of proximity. Intraregional trade accounts fested in the cost of air travel, and the broader trust deficit. for a little more than 5 percent of South Asia’s total trade, compared with 50 percent in East Asia and the Pacific and Tariffs and Para Tariffs 22 percent in Sub-Saharan Africa. Despite the significant liberalization of tariff regimes in The World Bank’s recent report, A Glass Half Full: The South Asia since the 1980s, average tariffs in the region Promise of Regional Trade in South Asia, clearly illustrates are still high compared with the world average (13.6 and the gaps between current and potential trade in South Asia. 6.3 percent, respectively, in 2016). Using a gravity model, it shows that total goods trade within The South Asian Free Trade Area (SAFTA) was South Asia could be worth $67 billion rather than the current established in 2006, but it is still far from achieving the goal value of $23 billion. For instance, formal trade between of tariff-free trade. Although South Asian countries have India and Pakistan could be 15-fold more than current reduced tariffs, several countries in the region have simul- levels. The force of gravity—the degree of trade attraction taneously introduced protectionist para tariffs, which are between countries—is also manifest in high levels of infor- nontransparent taxes levied on imports, but not on domestic mal trade. Informal trade has been estimated at 50 percent of formal trade in South Asia, aggregating assessments of various studies covering the 1993 to 2005 period.1 TABLE 1. Overall Trade Restrictiveness Index, The large gaps between actual and potential trade arise Selected Countries in South Asia, 2011 because South Asian trade regimes discriminate against Origin of imports each other. This can be shown through an index of trade Importing country South Asia Rest of world restrictiveness. Based on global trade data, such an index Afghanistan 3.84 4.65 generates an implicit tariff that measures a country’s tariff India 4.59 0.50 and non-tariff barriers on imports. In India, Pakistan, and Sri Lanka 1.01 0.33 Sri Lanka, the index is two to nine times higher for imports Nepal 10.59 6.87 Pakistan 3.00 0.51 from South Asia than from the rest of the world (table 1). Source: Kee and Nicita 2017. Moreover, although the average burden of non-tariff Note: The Overall Trade Restrictiveness Index calculations use applied measures may not appear high, it is high for specific product tariffs that take into account bilateral preferences. (See Kee, Hiau Looi, and Alessandro Nicita. 2017. “Trade Fraud, Trade Elasticities and Non-Tariff and market combinations in South Asia. It varies from over Measures.” Paper presented at the First Mid-Atlantic International Trade 75 percent to over 2,000 percent. Sri Lanka consistently Workshop, University of Virginia, Charlottesville, VA, December 8–9.) www.worldbank.org/southasia 2 HO W CA N S OU T H AS IA T U R N IT S PR O X IMITY FR OM A B U R D E N TO A N A D VA N TA GE ? output. Elimination of para tariffs has been kept outside Safety and Standards Authority of India (FSSAI). Hence, the ambit of SAFTA and other free trade agreements in the the historical dependence on only one public laboratory, region. Bangladesh, Pakistan, and Sri Lanka maintain high namely, the Central Food Laboratory in Kolkata, continues para tariffs; they are not used in Nepal and are low in India.2 for testing food imports into India, adding to the time taken Including para tariffs, the simple average tariff in Bangla- for border clearance. desh in fiscal year 2016/17 almost doubles, from 13.3 to Another common theme in the survey results is delays 25.6 percent; in Sri Lanka in 2016, the average tariff rises stemming from inadequacies in border infrastructure. For from 10.8 to 22.4 percent. For many individual products in instance, very few border points have electronic data inter- these countries, the combination of para tariffs and customs change, risk management systems, and single windows.4 duties results in high protection rates of 40 to 80 percent. India has integrated FSSAI into its single-window system Additionally, almost 35 percent of intraregional trade and introduced risk-based profiling to identify high-risk in the South Asian Association for Regional Cooperation consignments of food imports. This allows border authorities (SAARC) falls under sensitive lists, comprising goods that to subject food imports to risk-based, random testing of up are exempted from the tariff rationalization program. In to 10 percent of the consignments when accompanied by Bangladesh and Sri Lanka, up to 45 percent of imports from valid test certificates recognized by India. However, elec- other SAARC members fall under their sensitive lists, and tronic data interchange, which is generally a prerequisite for over 39 percent of India’s exports to the region fall under single-window systems, is required to enable the risk-based the sensitive lists of various partners. Intraregional trade in system to work and expedite clearance of food imports. goods on the sensitive lists is subject to normal tariffs, which Eventually, to realize their efficiency gains fully, national can be quite high in many sectors, including consumer single windows need to be interoperable between countries, goods and agriculture. so that border authorities of exporting and importing coun- tries can exchange information, doing away with the need to Non-Tariff Measures furnish the same information twice. Access to each other’s markets has also been eroded The analysis in the report also highlights procedural through the application of non-tariff measures, that is, policy delays. For instance, product registration and authoriza- measures other than tariffs. Although all countries can tion processes, which are mandatory for pharmaceutical legitimately impose non-tariff measures to protect consumer imports, are cumbersome and time-consuming in Ban- health and plant and animal life, they become non-tariff barri- gladesh and Nepal.5 Such processes harm the countries’ ers if they are more burdensome than necessary, such as pharmaceutical industries, given their heavy dependence on border testing of imports taking inordinate amounts of time. imports of raw materials. An example of a non-tariff barrier is the port restrictions imposed by several countries in the region. For instance, High Costs of Connectivity Pakistan allows only 138 items to be imported from India The disproportionately high cost of trading in South Asia over the Attari-Wagah land route, the only land port between arises, among others, from complex customs procedures, the two countries. Thus, bilateral trade is dominated by inadequate infrastructure at many border points, and trade along the sea route, which is not necessarily the most compliance costs associated with non-tariff measures. The cost-effective for two countries with a long, shared land average level of trade costs is 20 percent higher between border. Bangladesh and India impose some restrictions on country pairs in South Asia than between country pairs in imports from each other at certain ports. the Association of Southeast Asian Nations.6 It costs more It is important to distinguish between real and per- to trade between some countries in South Asia than with, ceived complaints, to focus the attention of policy makers say, Brazil.7 on genuine issues. Indeed, the results of detailed surveys A key aspect of trade costs is connectivity. Regional carried out among traders involved in Bangladesh-India air connectivity in South Asia is restricted, and poor even and India-Nepal trade3 demonstrate clearly that information between capitals. From this context emerged the success asymmetries play a large role in creating misperceptions story of India–Sri Lanka air services liberalization, which about the existence of non-tariff barriers. For example, has involved the progressive liberalization of bilateral air exporters and importers of food products in Bangladesh, connectivity. Today, Indians and Sri Lankans enjoy direct India, and Nepal are not aware that there are several connections between Colombo and at least 12 Indian cities public and private laboratories in India that are accredited on around 147 flights per week. by India’s National Accreditation Board for Testing and The first bilateral Air Services Agreement between India Calibration Laboratories as well as recognized by the Food and Sri Lanka was signed in 1948. Decades of negotiations, www.worldbank.org/southasia H OW C A N SOU T H A SIA T U RN ITS P R OX IMITY FR OM A B U R D E N TO A N A D VA NTAG E? 3 amendments, and policy persistence, especially from laborers at the haats earn one-third or more of their average Sri Lanka, helped liberalize air services between the two monthly income from just four days of working at the haats. countries. Major amendments in 2003 and 2011 led to a The haats have also led to a reduction in informal and freer bilateral air services market by allowing prices to be illegal trading and generated a peace dividend. In supplying market-determined, permitting private airlines to operate spaces for people to meet, reconnect, or establish fresh flights on bilateral routes, easing capacity limits and rede- social and economic ties, they have improved cross-border fining them as flights per week rather than seats per week, relations. More than half of the Indian respondents to the and opening new destinations. survey have a positive view of Bangladeshis, and an over- During 2004–17, air services between India and Sri whelming proportion of the Bangladeshi respondents have a Lanka grew rapidly, and picked up at a faster pace after positive view of Indians at the haats, views they attributed to the end of the civil war in Sri Lanka in 2009.8 In 2017, air their exposure to their Indian neighbors. services between the two countries continued to exceed, by a large margin, the services between the other two The Way Forward well-connected country pairs in South Asia: India-Nepal and Given South Asia’s context, an incremental approach India-Bangladesh. The reforms also had a positive impact to intraregional trade, backed by policy persistence, is on competition and pricing: prices fell, initially by 20 to 40 appropriate. Such efforts would be complementary to, and percent on routes with competition, but the declines were a stepping stone for, deeper global integration. India’s rolled back partially as Sri Lankan Airlines came to dominate leadership would be critical to reduce the trust deficit and the bilateral air services market, accounting for 80 percent deepen regional cooperation. A Glass Half Full provides of the supply capacity. some specific policy options to catalyze regional trade: The demand for India–Sri Lanka air services was also shaped by events such as the end of the Sri Lankan civil Border tax distortions. To make SAFTA effective, reduce war, authorization of visas upon arrival for Indian travelers sensitive lists and para tariffs, in a time-bound manner. by the Sri Lankan government in 2003, and implementation of the India–Sri Lanka Free Trade Agreement in 2000. Non-tariff barriers. A focus on improving information flows, Multiple connections with India have allowed Sri Lanka simplifying procedures, and boosting infrastructure will be to capitalize on the widespread growth of the Indian middle effective. Since India is the region’s largest market, it could class. By 2005, India had become the largest source of take the lead in creating awareness about its standards and foreign tourists in Sri Lanka, and this also played a part import regulations. It could also proactively help partner in the post–civil war spurt in growth in the island country. countries build up their testing and certification capacity by The number of Sri Lankan tourists arriving in India has also fostering cooperation between Indian standards bodies and steadily grown since 2003. their South Asian counterparts, eventually working toward establishing equivalence and mutual recognition. Trust Deficit Trust promotes trade, and trade fosters trust, interde- Connectivity costs. Policy makers across South Asia can pendency, and constituencies for peace. South Asia’s draw several lessons from the India–Sri Lanka air services complicated history and size asymmetry, perpetuated by liberalization experience. It is in their interests to pursue this insufficient people-to-people interactions, have rendered agenda more proactively with India, as did Sri Lanka, which trust a fragile commodity. An initiative by the Govern- had more to gain from improved connectivity with a larger ments of Bangladesh and India, aimed at recapturing market. There is a need to accelerate the operationalization the once-thriving economic and cultural relationships, is of connectivity initiatives, such as the Bangladesh-India-Ne- changing cross-border relations and reducing incentives pal Motor Vehicles Agreement, while also working toward for smuggling. This is occurring through haats, local border expanding the agenda to improve connectivity with the markets that enable small-volume trading among local western part of South Asia, and beyond. communities on both sides of the border. Detailed field work and a stakeholder survey in the four Trust deficit. The trust deficit can be reduced by reinforcing operational India-Bangladesh border haats confirm signifi- the virtuous circle between trade and trust, as demonstrated cant increases in the income of vendors and the creation of by the Bangladesh-India border haats. They could be scaled livelihood opportunities for women and marginalized work- up and replicated at other land borders in the region—per- ers, such as transporters, laborers, and providers of ancil- haps on the India-Pakistan or Pakistan-Afghanistan border, lary services, in India and Bangladesh. For example, Indian where trade often takes the informal route. The recently www.worldbank.org/southasia 4 HO W CA N S OU T H AS IA T U R N IT S PR O X IMITY FR OM A B U R D E N TO A N A D VA N TA GE ? proposed Kartarpur Corridor between India and Pakistan is to trade, because these account for a majority of the non-tariff another promising people-to-people initiative.9 barriers in South Asia. 4. So far, electronic data interchange is operational between India Expanding people-to-people initiatives and focusing and Nepal on one corridor along Kolkata to the Nepal border engagement between governments at the technical level (Jogbani and Raxaul), while coordinated risk management has may allow the balance to tilt in favor of economics over been introduced at the Bangladesh-India border (Petrapole/ politics in the region. Benapole). 5. The survey indicated that, for example, for pharmaceutical exports from India to Nepal, registration of a manufacturing About the Authors company with Nepal’s Department of Drug Administration Sanjay Kathuria is Lead Economist and Coordinator, South (DDA) could take 6–12 months; company audit of the man- Asia Regional Integration, at the World Bank. He is also the ufacturing company by DDA could take another 1–2 weeks; product registration of each product with the DDA could take editor and lead author of A Glass Half Full: The Promise of 4–6 months; and product renewal for each product each year Regional Trade in South Asia. could take 2–3 hours. 6. Trade costs are directly inferred from observable bilateral and Priya Mathur works with the World Bank on international intranational (domestic) trade data and can vary depending on the underlying assumptions. The World Bank report follows the trade, regional integration, and value chains. She is a co-au- database guidelines that advise using the database to compare thor of A Glass Half Full: The Promise of Regional Trade in across country pairs or across time and avoid stand-alone South Asia. interpretations of the data on single pairs. For the detailed methodology, see ESCAP–World Bank Trade Cost Database, United Nations Economic and Social Commission for Asia and Acknowledgements the Pacific, Bangkok; World Bank, Washington, DC, http://www. The authors would like to thank Nadeem Rizwan and Adnan unescap.org/resources/escap-world-bank-trade-cost-database. Javaid Siddiqi. 7. For example, average trade costs are 56 percent higher between Bangladesh and Nepal than Bangladesh and Brazil, and they are 84 percent higher between Sri Lanka and Nepal Series Editor than Sri Lanka and Brazil. Sanjay Kathuria, Lead Economist and Coordinator, South 8. During 2004–17, air services between India and Sri Lanka, Asia Regional Integration, the World Bank. in flights and seats, grew at a compound annual growth rate of about 6 percent. Bilateral connectivity picked up at a faster pace after the end of the civil war in Sri Lanka in 2009: flights Endnotes grew at 6.6 percent, and seats grew at 6.3 percent over 1. Taneja, Nisha. 2014. “Informal Trade in South Asia.” Back- 2010–17, more rapidly not only compared with the preceding ground paper, Asian Development Bank, Manila. years, but also relative to the air connectivity between India 2. No data on para-tariffs are available for Afghanistan, Bhutan, or and Nepal (4.3 percent in flights and 5.1 percent in seats) and Maldives. between Bangladesh and India (−1.3 percent in flights and 3. The survey focused on exports of tea, cardamom, and 3.9 percent in seats) over the period. medicinal and aromatic plants from Nepal to India; exports of 9. The Kartarpur Corridor is a proposed border corridor between processed foods, ready-made garments, and jute bags from India and Pakistan, connecting the Sikh shrines of Dera Baba Bangladesh to India; exports of pharmaceutical raw materials Nanak Sahib (located in Punjab, India) and Gurudwara Darbar to Bangladesh from India; and exports of pharmaceuticals Sahib Kartarpur (locate in Punjab, Pakistan), to allow pilgrims from India to Nepal. The study focuses on measures relating from India to visit the Gurdwara in Kartarpur, which is less than to sanitary and phytosanitary standards and technical barriers 5 km from the India-Pakistan border, without a visa. ADVANCING REGIONAL INTEGRATION IN SOUTH ASIA World Bank Group 1818 H Street, NW The SARConnect series aims to provide pointed analysis and discussion Washington, DC 20433 of topical cross-border issues in South Asia, with a view to stimulating and deepening the dialogue on regional economic cooperation. The Email: onesouthasia@worldbank.org findings, interpretations, and conclusions expressed in this work do not www.worldbank.org/southasia necessarily reflect the views of The World Bank, its Board of Executive www.worldbank.org/onesouthasia Directors, or the governments they represent. 1415233 www.worldbank.org/southasia