South Asian countries trade with each other far less than they could. The high cost of doing trade in the region, among the highest in the world, is the prime deterrent of trade among South Asian countries. An urgent upgrade of transport connectivity is needed in order to revitalise regional trade and decrease costs.
But there is more to trade connectivity than usually thought, and, in South Asia, improvement in transport connectivity alone may not be enough to spur a rise in trade volume.
Many studies carried out recently have uncovered wide gaps in the construction and maintenance of South Asia’s transport infrastructure, in particular, infrastructure along the cargo traffic corridors predominantly used for intra-regional trade. In one such study, Prabir De of the New Delhi-based Research and Information System for Developing Countries prescribes a comprehensive approach to revamping not only the physical infrastructure of all modes of cargo transport (road, rail, air, inland waterways and maritime) but also non-physical soft infrastructure, including cross-border transit facilitation measures, customs clearance and other facilitating policies and regulations.
A study undertaken by CUTS International estimates that potential savings on trade costs from transport reforms, both physical and non-physical, could be US$4.6 billion annually. This is roughly one-fifth of the total value of intra-regional trade.
The case for improvements in transport connectivity is therefore very compelling. There is a universally held view that better transport connectivity will bring down inefficiencies and costs. Improved transport connectivity, according to this view, will enhance the competitiveness and commercial viability of trade for a number of products with high trade potential that are currently not traded.
But a closer look at the state of existing intra-regional trade indicates that transport connectivity is not the only factor preventing greater regional trade.
After all, the volume of intra-regional trade has been steadily increasing, albeit at a lower rate than might be desired. A number of products have found their place in the regional trade basket, thanks to their commercial viability and despite the high cost inflicted by transport barriers. Competitive advantages due to geographical proximity, favourable positioning in the global sourcing pattern and intra-regional supply–demand complementarities, among other factors, have favoured these products. One would expect these products to trade at full potential even if the status quo in current transport conditions remains.
Unfortunately, that is not the case. CUTS International’s research points out that, currently, most regionally traded product categories reach less than 50 per cent of their true potential. According to 2013 trade data, an estimated US$20 billion worth of regional trade is lost because of reasons other than transport inefficiencies.
The literature on intra-regional trade in South Asia shows that asymmetries in market information, frequent complaints of defaults on trade-related payments and perceived risk factors have discouraged traders from exploring regional markets. In light of this, financial connectivity and business-to-business interactions within the region assume as much importance as transport connectivity.
If governed by similar principles that led to the formation of industrial clusters, trade relations can grow gradually on account of factors such as ease of communication and an improved flow of information on market conditions. They can also help business communities make use of established trade networks. Often, analysts of trade barriers ignore the effects of imperfect information, under-developed cross-border business relations, and the like, because of the difficulty in quantifying them.
It is therefore imperative to expand the idea of connectivity in the context of regional trade to include financial and informational aspects. In an ideally connected South Asia, getting business visas, obtaining trade finance, having institutions for contract enforcement and an exchange of information for extending business relations would be made as easy as possible. The scalability of trading channels would see a significant increase under such an enabling environment, cutting down transaction costs for South Asian businesses entering into and executing trade deals with partners from their neighbourhood.
Bipul Chatterjee is Deputy Executive Director, CUTS International and Head of CUTS Centre for International Trade, Economics & Environment. Joseph George is Policy Analyst, CUTS Centre for International Trade, Economics & Environment.