While trade between India and Pakistan is a paltry $2 billion a year, it can potentially be $32 billion, provided some of the trade barriers are removed by both the countries. Similarly, trade between the countries of South Asia can rise three times from the current $23 billion if the costs of trade are reduced.
These are some of the findings of a World Bank study titled A Glass Half Full: The Promise of Regional Trade in South Asia. Intra-regional trade accounts for just 5% of South Asia’s total trade as compared to 50% in East Asia and the Pacific and 22% in Sub-Saharan Africa. “Where the barriers are high, trade often flows along informal routes, through third countries or by avoiding customs checks,” notes the report.
Informal trade is around 50% of formal trade in South Asia. For instance, India’s informal trade with Nepal was as large as the formal trade; with Pakistan, it was 91% of formal trade and with Bhutan, it was almost three times the formal trade.
The costs of trade are very high in South Asia as compared with other regional trade blocs. The average cost of trade within South Asia is 20% higher relative to country pairs in Association of Southeast Asian Nations and over three times that of countries in the North American Free Trade Agreement.
Several nations in the region have also adopted opaque para-tariffs—duties imposed on imports.
The report underlines that policymakers in South Asia could address the trust-deficit among their countries by reinforcing the virtuous circle between trade and trust.