South Asia Monitor: Regional Trade Integration: Modest Progress - May 1, 1999
May 1, 1999
South Asian exports face a challenging external environment. World growth and demand have weakened, commodity prices are expected to decline further, and the phasing out of the textile quota system in 2005 will leave many of these countries' exports more vulnerable to competition from other developing countries. Export growth in the region has slowed; yet reviving export growth will be crucial to boosting the region's sagging GDP growth rates, which have fallen from about 7 percent in 1996, to 5 percent in 1997-1998, and are widely expected to fall further in 1999.
Greater regional trade integration, initially under the aegis of bilateral preferential agreements, followed by the establishment of a free trade area, has been proposed by many as a panacea for sagging export growth. Preferential trade agreements are expected to have rather modest an economic impact, with some benefits for consumers and some increased competition for domestic producers. Overall, integration among the South Asian countries is unlikely to yield big trade gains, whereas integration with the developed economies could lead to significant trade creation. Moreover, a preferential agreement is likely to accentuate current trade imbalances in the region. Aside from trade agreements, there is potential for economic cooperation in specific sectors, most notably energy. Politically, preferential trade can help sustain the improved political relations the region's leaders all say they want. The following discussion focuses on the four largest South Asian economies: India, Pakistan, Sri Lanka, and Bangladesh.