Outline the reasons of low volume of trade in the SAARC region. (2020, 10 Marks)
Jan Tinbergen’s gravity model predicts heavy trade between large, adjacent economies. South Asia is the standing anomaly: intra-regional trade is barely 5% of the region’s total, and the World Bank (2018) valued it at US$23 billion against a potential of at least US$67 billion. The causes are partly structural but mostly made by policy and politics.
Structural reasons
- Similar endowments: on Heckscher–Ohlin logic, gains grow with difference, yet all members are labour-abundant exporters of similar goods, so they trade more with the US, the EU and the Gulf.
- Inward-looking legacy: decades of import substitution, and post-1991 liberalisation that faced the world, not the region.
- Thin value chains: little intra-industry trade, the engine of ASEAN’s regional trade.
Policy barriers
- Sensitive lists: almost 35% of the value of intra-regional trade falls under them, and over 39% of India’s regional exports meet partners’ lists.
- Para-tariffs outside SAFTA’s schedule: Bangladesh’s regulatory duty covers 45% of tariff lines, Sri Lanka’s port levy about 84%, and Pakistan’s additional duty almost all.
- Non-tariff measures: testing, certification and port-of-entry restrictions.
- Services and investment left out, though complementarity is strongest there.
- Overlapping agreements: SAFTA beside bilateral regimes, a small Jagdish Bhagwati “spaghetti bowl”.
Trade costs
- No transit regime: Afghan goods cannot cross Pakistan to India; Nepal and Bhutan depend on Indian corridors.
- Congested land ports and slow customs: trading with Brazil is about a fifth cheaper for an Indian firm than trading with a neighbour.
- Restrictive visas and few direct flights choke services trade.
Political reasons
- India–Pakistan rivalry: Pakistan never reciprocated India’s 1996 MFN grant; trade was suspended in 2019, and after Pahalgam Pakistan halted all trade (24 April 2025) and India barred all imports (2 May 2025). A World Bank potential of US$37 billion lies idle. Amita Batra (Trapped in Conflict?, 2013) finds that conflict, not endowments, explains the gap.
- Asymmetry: India’s surplus with almost every neighbour makes liberalisation read as dependence.
- Trade as leverage: India’s April–May 2025 curbs on Bangladeshi transhipment and land-port entry slowed a roughly US$13 billion trade until the 24 August 2026 talks on reopening land ports and border haats.
The informal channel
Recorded figures understate demand. The World Bank found informal India–Nepal trade about as large as formal trade, and India–Pakistan informal trade at 91% of the formal level, much of it via Dubai.
Conclusion
Trade is low because crossing a South Asian border costs more than crossing an ocean. The binding constraints are administration, transit and a trust deficit, not tariffs, so reform must target those rather than another tariff round.