SAARC countries are low and middle income developing countries whose economies share

many similarities related to their geography as well as the common aspects of their culture,
history and economic and social development. South Asia has high potential for growth but is
much marginalized for world networks of value added trade. Thus, this paper tries to explain the
importance of industry specialization for trade integration in South Asia region.

Though the current pace of South Asian trade integration in global economy is rapid, it is
considered as a late comer in regionalism. The doctrine of regionalism in the South Asia came
into initiation after the establishment of SAARC Preferential Trade Agreement –SAPTA, the
predecessor of SAFTA. SAFTA aims to provide opportunity for trade integration through
custom union, common market and economic union. Thus SAFTA should not be considered as
isolation but rather as a platform for broader economic cooperation. Although the total trade
volume of South Asia region is in increasing trend, the LDCs of the region have witnessed rapid
increase in intraregional imports than exports (UNDP, 2011). Under the regime of WTO,
SAARC member countries have also tied knots with one another through bilateral trade
agreements. Since 2000, South Asian countries have proposed and signed bilateral treaties. Not
all the agreements that have been proposed or signed are in effect with other South Asian
nations. But those which have been in operation are in the manner of free trade agreements
(FTA). India being the powerful country of the region has been signatory of bilateral treaties
with all SAARC member countries. Many bilateral trade treaties like Indo-Nepal (1950), Indo-
Bhutan (1995), India-Afghanistan (2003), India-Sri Lanka (1998), Pakistan-Sri Lanka (2002) has
been signed in the region creating a bottleneck for the smooth operation of regional trade
agreements (RTA) like SAFTA, BIMSTEC, among others. Less opinion, easy decision making
process and more importantly, focus of the treaty in need based doctrine can also be considered
as main reason for the countries to show interest in bilateral trade treaties.

Many dimensions of South Asian regional dialogue is highly influenced by India. Nepal,
Bangladesh and Bhutan are highly dependent on India for its trade route with other countries.
Nepal depends on more than 60% of her import with India. Bhutan is no different; it depends on
80% of its import with India. Thus, India’s influence in regional platform is conspicuous. South
Asia region encompasses most of the developing countries. LDCs have infinite supply response
that enables them to capture market once the trade barriers are removed. However, even when
market access is guaranteed, LDCs of the region face many challenges to cope up with. Supply
side constraints can be understood as “constraints of domestic productivity capacity, that limit
the ability of a country to produce good and service for supplying the international market in
competitive manner (UNDP, 2011). Although this constraints are due to natural handicap most
of these are owing to government failure. Identifying critical constraints to Nepal’s growth which
are causing low social returns to investment and/or low private appropriability of returns to
investment: a) limited and low quality infrastructure (namely, electricity and transport network
and irrigation); b) weak governance (political instability and corruption), poor industrial relations
climate and labor market rigidities; and c) market failures (information and learning externalities
 and coordination failures) indicated by domestic manufacturing being low in technology quality
and not growing, and exports being low in volume and in technology quality. These factors
adversely affect Nepal’s export competitiveness also. The major binding competitiveness-related
supply-side constraints are inadequate infrastructure for efficient production and transportation
of goods; lack of human capital endowed with education and skills to process exportable; limited
access to credit due to conventional/conservative banking practices that rely more on collateral
than on the feasibility of business ventures; limited use of technology in the production
processes.

Nepal’s Trade flows: Evidence from Gravity Model, NRB, 2014

Nepal Rastriya Bank (NRB) carried out a study to estimate the trade potentiality of Nepal with
its trading partners using Gravity model. The gravity model simply explains that the volume of
trade between pairs of countries is a positive function of the size of two countries and negative
function of the distance between them. The study has used coefficients of the model to predict
Nepal’s foreign trade for the year 2009.The reviews highlighted above have more inclination
towards the issues pertaining to intra-regional bilateral over multilateral trade treaties within
south Asian countries. Three countries of the region namely: Nepal, Bhutan and Afghanistan
which rely on transit route with its neighboring countries (SAWTEE, 2013) which face many
hurdles in trade route while using the road of its neighboring countries. Thus bilateralism is
getting more popular with in the region.

The major reason behind establishment of South Asian Free Trade Association (SAFTA) was to
flourish and enhance trade integration in south Asian region. However, in the last two decades
many new bilateral FTA have been singed which have obviously increased the trade level of
both the parties but on the other hand has left the regional trade stagnant. Like mentioned in the
first chapter, easy decision making process, more focus on need based doctrine can be speculated
as a main reason for the increase in bilateral trade over regional trade. However, the table below
gives a clear view that, with the increase in bilateral trade, the regional trade has been largely
affected.

Country PartnerTrade Amt 2010 2011 2012 2013 2014

India World Exports, in 222921640671 307071284992 297261183579 315127167944 317733217527
US$
India World Imports, in 350782793921 465075994084 490413250967 467949944833 460512282940
US$
India
South Asia Exports, in 11148444357 13775660845 14849308210 16506000573 20486193325
US$
India
South Asia Imports, in 2069139048 2547887556 2715741689 2467717034 2685759127
US$
India China Exports, in 17518978474 19113149433 14903999253 14516979740 13251990617
US$
India China Imports, in 41332612478 55299336367 52407196764 51456479257 58279591482
US$
Source: Asian Regional Integration Centre

The global economy of the 21st century is one of global independence. It is difficult to
conceptualize a self-reliant or independent economy in absolute terms. Economic prosperity
cannot be achieved if all the goods are self produced or self consumed or if the technology
required is self manufactured or if the capital is self marshaled and employment is also self-
generated. Trade itself means interdependence. Thus, rather than producing anything that is
possible, a nation can give more priority in certain goods production. India is a large country
with huge market and thus has a potentiality in producing manufacturing goods; Bangladesh is
more efficient in production of clothing as well as fishery. Nepal and Maldives can however,
reap profound opportunity from tourism. The bottom line is that, a country can specialize in
certain product and thus trade among the reason. That way it makes every country independent in
certain sector and which will also create a foundation of bargain at the time of crisis. For
example, the unofficial border blockade from Indian side have triggered chaos in Nepal. Had
Nepal been able to export electricity to India, the situation could have changed. South Asia as a
region holds many benefits from embracing industrial specialization.
References

NRB. (2014). Foreign Trade Pattern of Nepal: Gravity Model Approach. NRB working Paper .

Shrestha, (2011, December 1). Kathmandu Post. Retrieved May 15, 2019, from
http://www.ekantipur.com/the-kathmandu-post/2011/01/11/money/transport-syndicates/217137/

UNDP. (2011). Integration of Least Development Countries into South Asian Free Trade
Agreement. UNDP.