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South Asia’s missing intra-regional trade

LiveMint logoLiveMint 30-04-2017 Srinath Raghavan

The latest edition of the World Bank’s South Asia Economic Focus is well worth reading. Titled “Globalization Backlash”, the report examines whether South Asia stands to lose from the protectionist tendencies currently on the rise. It concludes, optimistically, that the region does not have much to lose from the turn away from globalization. How convincing is this claim?

Let’s start with the state of play in the region. South Asia has for some years been the fastest growing region in the world. At an impressive 6.7% year-on-year growth in GDP (gross domestic product) in 2016, it outstripped East Asia, which notched up 6.3%. Notwithstanding subregional variation, most countries have registered growth, Bhutan, Bangladesh and India being the fastest growing economies. There has been a sharp reduction in inflation. The regional consumer price index has come down from 5% in June 2016 to just over 3% recently—but again, there is variation within the region.

Despite real exchange rate appreciation, current accounts are mostly balanced. Remittance flows have rebounded from the lows touched in the previous years, though in absolute terms they remain well below the levels prior to the oil price slump. FDI (foreign direct investment) and portfolio inflows have remained stable and international reserves have grown. The areas of concern are fiscal balances and public debt to GDP ratio (at 60%, the second highest in the world after the Middle East and North Africa). But the overall macroeconomic picture is quite positive.

What is the likely impact of the wider protectionist turn on South Asia? Exports currently constitute only around 10% of South Asia’s GDP. This is the lowest of all regions barring sub-Saharan Africa. In fact, the contribution of exports to GDP has come down across the region in recent years.

Against this backdrop, and given the prospect of a rise in protectionism, it could be held that South Asia should not focus on exports to fuel its growth. This argument has lately been made in the context of India. The report, however, disagrees with this bout of export pessimism.

In the first place, it underscores the benefits flowing to the region from the collapse of mega-regional trade deals like the Trans-Pacific Partnership (TPP) and the Transatlantic Trade and Investment Partnership. Had the TPP—with zero-tariff access to US markets—gone through, countries like Nepal and Bangladesh would have lost out on textile exports to Vietnam. It could be added that the imposition of new standards under the TPP would have thrown up a range of non-tariff barriers too. The folding up of the TPP is good news for South Asian exports, though we could argue about the magnitude of the benefits.

More curious is the report’s assessment of the trade diversion scenario in the event of an imposition by the US of a 10% tariff on imports from Mexico and China. Based on a computable general equilibrium model, the report claims that exports to US from Mexico and China would slump by 25% and 35%, respectively. It goes on to argue: “South Asian countries would be able to scale up their exports to the US as a result.” The magnitude of trade diversion for South Asian countries is expected to range between 10-15%.

Leaving aside the assumptions built into the model, this is a strange claim to advance. Tucked in elsewhere in the report is the admission that South Asia currently does not export most of the products that Mexico and China are selling in the US market. Indeed, “if South Asia only expands its market share in products it is already exporting its [expected] gains are rather small”. The gains will be large only if South Asia starts exporting new products—a fact that underlines an altogether different set of challenges. What is more, the report does not seem to recognize the importance of integrated value chains, especially in the context of a country like Mexico. Much of the US-Mexico trade happens via these value chains and it will be extremely difficult for South Asian countries to step into any opening.

This brings us to another puzzling feature of the report: the absence of any discussion of trade within South Asia. It is well known that intra-regional trade in South Asia is much smaller compared to that in East Asia. In fact, the high contribution of trade to GDP in East Asia is reliant on the integrated supply chains in the region. Lack of economic integration in South Asia sharply limits the contribution of trade to regional growth.

To be fair, the World Bank has done some excellent work on these issues in the past. Its unwillingness to address this issue perhaps mirrors the growing pessimism about the prospects of economic integration in the region. As always, the problems are not economic but political and geopolitical. The drive for regional integration can only come from India. The present government’s regional policy began on a strong and positive note, but has since dissolved into inconsistency and incoherence. Political volatility in the other countries has further dimmed the prospects of economic integration.

The only bright spot is India’s deepening relationship with Bangladesh. If the government manages to push through all that it has planned and promised, then we can hope for a measure of subregional integration around Bangladesh, Bhutan and North-East India. As the report points out, these countries also happen to be economic bright spots in the region. It is important that New Delhi pushes ahead on this front—before the political tide turns in Bangladesh.

Srinath Raghavan is senior fellow at the Centre for Policy Research, New Delhi.

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