What Greater Trade Liberalization in South Asia Would Mean for Consumers

February 8, 2012

By Katherine Loh, Mandakini Devasher Surie, Véronique Salze-Lozac'h

Global economic recovery in 2012 remains tenuous, with the World Bank recently downgrading its forecast for this year’s global growth from 3.6 percent to 2.5 percent. This slide in expectations and persistently high unemployment rates in many countries has sparked a resurgence of protectionist tendencies toward trade. These tendencies are couched in the language of “bringing jobs back,” while tariffs are euphemistically coined as “flexibility” needed to protect domestic producers.

In addition to significant consumer gains from increased trade in South Asia, these countries would benefit from enhanced export opportunities, more jobs, and greater competition. Photo by Kristin Kelly Colombano.

South Asia has suffered for decades from a low level of intraregional cooperation, both politically and economically. Despite efforts at regional integration through the South Asia Association for Regional Cooperation (SAARC) and the South Asia Free Trade Agreement (SAFTA), trade in the region as a percentage of global trade volume has stagnated at an estimated 5 percent since the 1950s, lagging far behind other trading blocs, like the Association of Southeast Asian Nations (ASEAN) Free Trade Area or South America’s Southern Common Market (MERCOSUR). At the SAARC Business Summit held in New Delhi recently, India’s Minister for Commerce, Industry and Textiles, Anand Sharma said: “SAFTA had a vision of creating a common market where tariff and non-tariff barriers will be revised, and we had expected that the peak tariff rates should be no more than 5 percent for most of the tradable commodities between member countries in SAARC.” Sadly, this has not been the case.

While this low level of trade among South Asian nations is often presented as a constraint to the economic competitiveness of the region, its negative impact on consumers is rarely acknowledged. Consumers are often neglected in trade analyses and debates about the benefits to trade, as the focus is primarily on producer gains (or losses).

Against this backdrop, nearly 40 representatives from the government, civil society, media, regional consumer associations, and private sectors of SAARC nations (Bangladesh, India, Nepal, Pakistan, and Sri Lanka), as well as senior representatives from the SAARC and Commonwealth Secretariats, gathered in Kathmandu last week to discuss the findings of a study commissioned by The Asia Foundation on the “Cost of Economic Non-Cooperation to Consumers in South Asia.” Conducted by the Consumer Unity Trust Society, International (CUTS), India,* the study analyzes the benefits that citizens as consumers could gain through greater trade liberalization in South Asia.

The findings shed light on just how much consumers stand to gain by reducing tariff barriers (hence, reduced prices) on certain products that are on the sensitive lists (products that do not benefit from reduced tariffs and are thus excluded from the trade agreement) of the five countries. By focusing on consumer welfare, the findings also inject a new energy into circular discussions on how to enhance trade among South Asian neighbors.

The results point to the tremendous potential for intraregional trade in the region. The study identified 355 product categories currently included on the sensitive lists of the five countries that have high regional trade potential and promise high welfare gains to consumers. By reducing tariff barriers on these products, the study estimates that, at the minimum, there would be a consumer welfare gain of approximately $2 billion per year to the region.

These gains have an important potential for the economies of these developing nations, and for the region as a whole. For example, in India, the removal of 161 product lines from the sensitive list would bring consumer gains of almost $600 million. Interestingly, 90 percent of the gains would be from imports of plastic-based goods from Pakistan. While Sri Lanka stands to gain comparatively less than its neighbors, at $288.61 million, per capita gains would be the highest due its population and size. The removal of 27 product lines would save over 31 percent on current import expenditure.

In addition to significant consumer gains, these countries would also benefit from enhanced export opportunities, more jobs, and greater competition. Interviews conducted during the survey with 250 stakeholders in 12 cities across the five countries suggest a wide range of views on the potential for regional trade in South Asia. Respondents highlighted the importance of separating trade and non-trade issues from trade negotiations. At the national level, respondents felt that building consumer awareness about the potential benefits of regional integration is necessary to balance discussions on regional trade.

At the meeting in Kathmandu, participants discussed constraints to intraregional trade and agreed on several key points:

• While increased intraregional trade has overall welfare-improving outcomes, it remains highly politicized, and most agreed that the lack of SAFTA’s success has been due to political rather than economic reasons. (Ninety-six percent of study respondents said that political priorities influence trade talks far more than economic arguments.)
• An emphasis on consumer welfare gains is critical to any discussion on renewing trade liberalization the region. The definition of consumers has to be taken in its broader sense, including final consumers but also enterprises buying raw material, intermediary goods, or services. The media in South Asia have a key role to play in disseminating this message to improve public perceptions about intraregional trade.
• As Nepal’s Minister of Commerce and Supplies, Lekh Raj Bhatta, pointed out, consumer welfare gains to tariff liberalization must be weighed against losses of government direct revenue.
• While the study was limited to analyzing tariffs, non-tariff barriers (e.g., customs and port fees, connectivity, hard and soft infrastructure) are also major impediments to trade that need to be addressed.
• Many participants discussed the importance of considering the implications for the growth of Chinese exports to the region.

The workshop emphasized and reinforced the importance of better networking, continued research, and closer alignment of both consumer and producer interests. The next steps will be incremental, but participants insisted that bringing the right voices around the table, ones that includes consumer groups, as well as businesses, leaders, and authorities, is critical to getting closer to a regionally integrated South Asia.

*The CUTS study was conducted in partnership with the Institute for Policy, Advocacy and Governance (IPAG) Bangladesh; Sustainable Development Policy Institute of Pakistan (SDPI); Institute of Policy Studies (IPS) Sri Lanka; and South Asia Watch on Trade, Economics and Environment (SAWTEE).

Mandakini Devasher Surie is The Asia Foundation’s program officer in India, Katherine Loh is a program fellow for the Foundation’s Economic Development Programs, and Véronique Salze-Lozac’h is the director for Economic Development Programs. They can be reached at [email protected], [email protected], and [email protected], respectively. The views and opinions expressed here are those of the individual authors and not those of The Asia Foundation.

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