Integrating neighbouring economies to expand regional trade

India needs to acknowledge the fact that its future in international trade lies in the sub-continent. There is huge trade potential between India and its neighboring countries. If India provides sub-continental and Indian Ocean linkages, it can be in the connectivity business.

Source: https://bit.ly/36jsu0O

The easiest market access for most finished goods is in nearby countries; but history, political rivalry, colonial rules and a host of other reasons might have left this natural advantage unexploited. This needs to be nurtured with transport infrastructure and appropriate policies. Small and medium enterprises are more at ease if the market is closer from their own productive locations. A much wider business community can take profits from trade if cross-border trade is high on the agenda of trade decision-makers. Literature on international trade too corroborate this fact which is acknowledged as “Natural Trading Hypotheses”

India’s Present Situation
The current government expressed its desire to improve neighborhood ties by introducing “Connectivity” as its foreign policy theme in 2016. Integrating the South Asian economies through enhanced connectivity is logical, but complex primarily because of India’s poor ties with Pakistan. A remarkable aspect of the present PM’s foreign visits are his visits to key neighbors, the first in -17 years to Nepal, 28 years to Sri Lanka, 34 years to UAE and the first ever to Mongolia. His “neighborhood first” agenda was visible since he first took over the office.

In the recent times India has had conflicts with Nepal, Sri Lanka and Maldives, but the biggest failure relates to its ties with Pakistan and China.

In the past decade, China has emerged as the top exporter of goods to the neighboring regions, including to India, breaking into South Asian markets with its export-led growth strategy. China overtook India as Bangladesh’s top trading partner. It displaced many Indian goods in Bangladesh, offering cheaper Chinese products especially cotton and other fabrics central to the garment industry. Its trade with Sri Lanka and Nepal has also quadrupled in recent years.

The China-Pakistan nexus has become a huge challenge for India, with the China-Pakistan Economic Corridor set to improve trade relations of the countries with each other as well as its neighbors, increasing both China and Pakistan’s trade share in Asia.

Impact of NAFTA and EU
The North American Free Trade Agreement created the world’s largest free trade area of 450 million people. It’s an economic powerhouse of $20.08 trillion, as measured by gross domestic product. It links the economies of the United States ($18.5 trillion), Canada ($1.67 trillion), and Mexico ($2.3 trillion). That trade area is greater than the economic output of the 28 countries in the entire European Union. Trade between the three members quadrupled since its formation, from $297 billion to $1.14 trillion. This led to economic growth, profits, and jobs for all three countries. NAFTA boosted trade by eliminating all tariffs between the three countries. It created agreements on international rights for business investors that reduced the cost of commerce. It specially led to growth and investment for small businesses.

Another trading bloc, the European Union comprising of 28 neighbouring countries is one of the strongest economic areas in the world. It has 7.3% of the world’s population, but accounts for 23% of the nominal global GDP. Over 52% of UK exports are to the EU. Trade within the EU has increased 30% since 1992. Poorer countries, such as Ireland, Portugal and Spain have made significant improvement in trade since they joined the European Union which has led to their economic growth. Free trade and removal of non-tariff barriers have helped reduce costs and prices for consumers. Increased trade to the EU has created jobs and generated higher income.

Step Forward
India needs to acknowledge the fact that its future in international trade lies in the sub-continent. There is huge trade potential between India and its neighboring countries. It needs to establish clear and transparent Standard Operating Procedures (SOPs) and re-consider many Non-Tariff Barriers (NTBs) on imports to drastically improve trade relations with its neighbors. The trade policies need to take into account the fact that the neighboring countries do not find Indian products cheap anymore, neither can it afford to look down upon its neighbors since most of the neighboring countries have agricultural and manufacturing sectors that are equally or perhaps more efficient than their Indian counterparts.

A step taken by India towards integrating more with the subcontinent is the Chabahar project which would lead to a multi-modal link to Europe through Iran, the Caucasus and Russia. If India provides sub-continental and Indian Ocean linkages, it can be in the connectivity business. India should focus on its economy and observe the One Belt, One Road that is trying to shape the ‘Asian Century’.