Why South Asia Trades So Little With Itself

Why trade between South Asian countries is among the lowest of any region, the costs of this, and the barriers that keep it low.

South Asia is one of the least economically integrated regions in the world. According to the World Bank, trade between South Asian countries makes up only around 5 percent of their total trade, compared with around a quarter in East Asia and the Pacific and far more within the European Union.

Barriers

High tariffs and non-tariff barriers: complex rules, lists of restricted products and slow customs.
Poor transport links: border crossings with long delays and limited road, rail and port connections.
Political tensions, especially between India and Pakistan, which have severely limited direct trade.
Lack of trust and security concerns at borders.
Similar products: many countries produce similar goods.

The cost

A World Bank study, “A Glass Half Full” published in 2018, estimated that trade within South Asia could be worth around 67 billion dollars a year, about three times its actual level of around 23 billion dollars. It found that it was sometimes cheaper for an Indian company to trade with Brazil than with Pakistan.

Agreements

The South Asian Free Trade Area, or SAFTA, came into force in 2006, aiming to reduce tariffs among members. But long lists of excluded products and political tensions limited its impact. Bilateral agreements, such as the India-Sri Lanka free trade agreement of 2000 and India’s trade arrangements with Nepal and Bhutan, have been more effective.

Signs of progress

India has improved some connections, including rail and road links with Bangladesh and Nepal, integrated check posts at borders, and electricity trade. Trade between India and Bangladesh has grown substantially.

The long way around

A trader in India wants to send goods to Pakistan. Because direct trade is heavily restricted, goods may be shipped through Dubai and re-exported, adding transport costs, middlemen and delays. Consumers on both sides pay more than they would with direct trade across the nearby border.

Thinking distance explains low trade

South Asian countries are close neighbours, which should encourage trade. Low trade is mainly due to policy barriers, poor border infrastructure and political tensions, not geography.

Key takeaways

Trade within South Asia is only around 5 percent of its countries' total trade.
Tariffs, non-tariff barriers, poor links and political tensions keep it low.
The World Bank estimated regional trade could be about three times its actual level.
SAFTA had limited impact, while bilateral links, like India-Bangladesh trade, have grown.