Trade is never impossible

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The case for a South Asian trade regime

 

Going with the international trade theory, countries having similar factor endowments or similar comparative advantages or trade non-complementarities are less likely to have a healthy trading relationship among them.

Trade complementarity between the two countries is a direct relationship between the demand of a particular product consumed in one country and the supply of a similar product produced in the other. For instance, raw cotton produced in one country can only be sent to the other, if the latter is not at all producing it or producing it in a quantity lower than the local demand.

Similarly, if the two countries are abundantly endowed with the land or labour, two main factors of production, it is highly unlikely that they would have an interdependent trading relationship. For example, two countries using labour as a main factor of production would most probably end up making similar products, and hence no or low trade will be a case between them.

Comparative advantage is the ability of a country to produce a particular product at a lower cost and by consuming less time than its counterpart in the region or the globe. Comparative advantage, more or less, takes its strength from the factors a country is naturally endowed with. For instance, two countries, naturally endowed with abundant labour, would have comparative advantage in producing the labour-intensive goods at the same time. Resultantly, low or no trade would be likely between these countries in such goods.

These theories, among other factors, are considered to be the main reasons for abysmally low percentage of South Asian intra-regional trade, which presently stands at 4-5% out of the region’s total trade with the world.

The trade economists are of the view that owing to the excessive availability of land and labour in almost all the South Asian countries, there are no or very low trade complementarities between them.

However, this view is not always right and the trade dynamics have changed over time. This change can be observed by using trade complementarity index (TCI). This index tries to measure how well the export profile of a country or a group of countries matches with the import profile of others.

In a research study, four South Asian countries Pakistan, Sri-Lanka, Bangladesh and India were taken into consideration. It has been revealed that the value of TCIs at two different point of times for the export complementarities of Bangladesh, Pakistan and Sri-Lanka vis a vis each other have increased over the past two decades, though not very significantly. For example Bangladesh’s complementarity in terms of its exports was 15% and 14.3% for Pakistan and Sri-Lanka.

The export complementarity between India and Bangladesh rose to 35.3% in 2008 from 23.4% in 1990. However, the trade complementarity between India and Pakistan rose from 20% in 1990 to 44.4% in 2008- more than the double. Similarly, this value was 27.6% in 1990 and 46% in 2008 in case of India and Sri-Lanka, which is the highest in the region.

Talking about India and Pakistan, it has been seen in the study that import complementarity of Pakistan (Pakistan importing from India) was 20% and 44.4% in 1990 and 2008. Conversely, import complementarity of India decreased from 12.5% in 1990 to 12.3% in 2008. Indian import complementarity values (India importing) for Pakistan mentioned above are better than Bangladesh, which are 10% and 9.4% in 1990 and 2008 but fairly lower than Sri-Lanka’s, which are 20.3% and 16.3% for the same period. The last case may be a result of India-Sri-Lanka Free Trade Agreement (FTA).

The overall increasing ratio of trade complementarities over time suggests that there is a potential for intra-regional trade in South Asia to grow. It has also been observed that Indian exports would be at a much better position to make their way to the other regional countries, especially Pakistan and Sri-Lanka, which is not a surprise given the biggest size of the Indian economy within the region and its consistent growth rate of 6% for the last 15 years.

Summing up, one may say no-trade-complementarities argument given for the South Asian trade is not entirely right. There are trade complementarities within the region and they are growing with time. The real reason of the lower percentage of South Asian trade is the existence of mistrust, especially between Pakistan and India, and a number of non-tariff barriers prevalent in the region in general and between India and Pakistan in particular. Then, there is a perception in Pakistan that higher values of Indian export complementarities against Pakistan would destroy the local market and the latter is not in a position to reciprocate with the same ratio. In fact the cheap Indian exports would be highly beneficial for the consumers and they would be in a better position to choose a commodity from a number of options available to them.