What if trade barriers were reduced in South Asia?

By Isabel Guerrero

It is 2020. Vasu – a trucker operating between India and Bangladesh – is both contributing to and benefiting from an economic boom. Every morning, he loads up his truck with fabrics, drives the 80 kilometres to Bangladesh, is quickly waved through the border, offloads his cargo at destination, takes on a load of low cost clothes, drives back to India, and offloads the goods into container ships awaiting at Kolkata’s port.

Indian transport infrastructure logistics with Bangladeshi apparel expertise mean that Bangladeshi garments are some of the world’s most competitive. Low transportation costs also benefit Bangladeshi import consumption, both as inputs to its growing manufacturing sector and as final goods. And Vasu is now part of India’s growing middle class, affording a comfortable house in Kolkata’s metropolitan area.

At the start of business, life was not easy. Back in 2012, Vasu wasn’t allowed to operate his truck within Bangladesh. He had to offload his cargo into a Bangladeshi-owned truck – a 10-hour affair on average – which took the cargo to the factory. Bangladeshi and Indian officials subjected his truck to, on average, 78 hours of queuing and customs.

80 per cent of each trip was spent idling his truck near the Bangladesh border. As a result, his truck was only able to make 1/5th as many trips in 2012 as in 2020.

Vasu is not the only beneficiary. Delhi native Lakshmi, an IT system designer, had previously been shut out of South Asian markets because of low internet penetration and expensive intra-regional calls. Connectivity also meant that clean energy from Central and South Asia is lighting the homes of Azinin Herat and Amir in Karachi. A decade ago, 40 per cent of the population was in the dark and most with grid connection suffered daily power cuts.

Presently, regional borders are hampering South Asia’s economic growth by penalising efficient trade routes. Only two borders – Afghanistan/Pakistan and India/Nepal – are open to trucks. And then there is the plethora of paperwork.

Complying with trade restrictions in South Asia takes an average of a month, compared to 20 days in Latin America and only 11 days in OECD countries. Container shipment within South Asia costs 25 per cent more than within Latin America and 50 per cent more than within OECD.

These border issues result in circuitous routes: trade from India to Pakistan goes via Dubai rather than making the short crossing over land borders or from Karachi to Mumbai. These barriers may have risen out of security concerns. But poor infrastructure, logistics and management systems have compounded their costs on trade competitiveness.

For instance, the rail network is largely inward-facing in South Asian countries with few links between countries. Track gauge differences mean that trains from one country cannot run on another. High logistics and regulatory costs must be factored into all cross-border shipping.

India and Pakistan have attempted to decrease wait times at their borders by implementing customs reform and system modernisation. These promising initiatives need to be complemented with broader systemic changes – infrastructure, capacity building, and autonomous monitoring and evaluation – to fully realise the efficiency potential.

Energy deficits take a heavy toll on South Asian economies. South Asia has large but unevenly distributed energy resource potential (across space and seasons) which suggests strong potential complementarities in their primary energy sources. For example, Nepal, Bhutan and Central Asia have ample hydropower resources, but developing this energy potential is only profitable if cross border trading occurs.  

The region’s telecommunications and electronic infrastructure also need integration. It costs more than twice as much to call from Bangladesh to India as it does to the United States. The region has exorbitant roaming rates. A Bhutanese in India pays over $ 1 per minute to make a roaming call, 56 times the cost with an Indian SIM card.

With some effort, South Asia can reap massive regional integration benefits. If intra-regional trade is facilitated, cheaper transport costs, wider markets, and broader supply chains will reduce production costs and expand jobs for the 1 to 1.2 million young South Asians entering the labour market each month.

By 2020, reducing regional trade barriers, rationalising transport cross-border regulations, simplifying customs procedures, and facilitating higher-tech and efficient border control systems, could result in a 17 per cent increase in GDP for Bangladesh and Sri Lanka, a 15 per cent increase for India, and a five per cent increase for Pakistan. Such gains would re-energise South Asia’s growth and allow a million Vasus to realise the true meaning of their names – wealth.

(The writer is the Vice President, South Asia Region, The World Bank.)