While apparel and textile exports show promise, Pakistan would be better served to trade more with its neighboring South Asia nations–Bangladesh, Sri Lanka and longtime political rival India–a new report from the World Bank recommends.
The report, “Glass Half Full: The Promise of Regional Trade in South Asia,” said regional trade can create jobs and benefit the country commercially if trade barriers with those countries are removed. Pakistan’s trade with South Asia accounts for only 8 percent of its global trade, even as the region is considered the world’s fastest growing.
Pakistan’s intraregional trade in South Asia is among the lowest at about 5 percent of total trade, compared with 50 percent in East Asia and the Pacific. However, the World Bank said nascent regional value chains do exist in some sectors, such as textiles and clothing. The textile and clothing sector accounts for 89 percent of merchandise export earnings in Bangladesh, 59 percent in Pakistan, 48 percent in Sri Lanka and 14 percent in India.
The textile and clothing sectors in all four countries import from each other. The share of imports from the other three countries in total imports from the world is about 26 percent in Sri Lanka, 22 percent in Bangladesh, 18 percent in Pakistan and 9 percent in India. With export shares of apparel at 86 percent and 44 percent of total exports, respectively, Bangladesh and Sri Lanka source many apparel inputs from India and Pakistan.
“Clearly, in South Asia, a regional value chain is emerging in apparel,” the report said.
Documenting areas that need improvement to realize the full trading potential in South Asia, the report identifies four critical barriers to regional trade: tariffs and para tariffs (extra fees on top of those stated in the country’s tariff schedule), real and perceived non-tariff barriers, connectivity costs and a broader trust deficit.
“Pakistan is sitting on huge trade potential that remains largely untapped,” said Illango Patchamuthu, World Bank Country Director for Pakistan. “A favorable trading regime that reduces the high costs and removes barriers could boost investment opportunities that is critically required for accelerating growth in the country.”
The report contends that the costs of trade are much higher within South Asia compared to other regions. The average tariff in South Asia is more than double the world average, and these countries impose high para tariffs. More than one-third of the intraregional trade falls under sensitive lists–goods that are not offered concessional tariffs under the South Asian Free Trade Area (SAFTA). In Pakistan, nearly 20 percent of its imports from South Asia and 39 percent of its exports to the region fall under the sensitive lists.
“Pakistan’s frequent use of tariffs to curb imports or protect local firms increase the prices of hundreds of consumer goods, such as eggs, paper and bicycles,” said Caroline Freund, director of macroeconomics, trade and investment at the World Bank. “They also raise the cost of production for firms, making it difficult for them to integrate in regional and global value chains.”
South Asian countries also don’t’ reap the benefits of shared land borders, the report notes. While Pakistan and India collectively represent 88 percent of South Asia’s gross domestic product, trade between the two countries is only valued at a little over $2 billion. But it could be as high as $37 billion.
“For example, it is cheaper for Pakistan to trade with Brazil than with India,” said Sanjay Kathuria, World Bank lead economist and lead author of the report. “Reducing policy barriers, such as eliminating the restrictions on trade at the Wagah-Attari border or aiming for seamless, electronic data interchange at border crossings will be major steps toward reducing the very high costs of trade between Pakistan and India.”
For Pakistan to improve its potential in trade, the report recommends ending sensitive lists and para tariffs to enable real progress on SAFTA and calls for a comprehensive effort to address non-tariff barriers, focusing on information flows, procedures and infrastructure.
“By reducing man-made trade barriers, trade within South Asia can grow roughly three times, from $23 billion to $67 billion,” Kathuria said.