Informal trade in the South Asian region
Quest for a viable solution

The South Asian countries have made several attempts at enhancing trade in the region. Despite such efforts, trade within the countries continues to be abysmally low. Clearly there would be other mechanisms that would inject vitality into trade flows in the region. One way would be to focus on the large and vibrant informal trade in the South Asian region. Available evidence suggests that informal trade is rampant and if such trade is brought within the ambit of official trade, a significant increase could be witnessed.

Magnitude of informal trade
Total informal trade, according to a recent report, exceeds US$ 3 billion, which is almost double the formal trade in the region. India's informal trade with Pakistan is almost ten times that of formal trade and that with Nepal and Bangladesh is almost as large as formal trade, with Sri Lanka it is almost one-third of formal trade and that with Bhutan is three times as much as formal trade (Table 1 and Table2).
 

 

Since India is the only country which shares its borders with almost all the South Asian countries and at the same time no country shares its border with countries other than India within South Asia, the central actor in informal trade has been India. India shares a long and porous border with Bangladesh, Nepal and Pakistan. Informal trade with these countries largely takes place across the land borders. Informal trade with Sri Lanka takes place largely through air passengers, with small proportion being carried out by sea through country boats.

India has a trade surplus with Bangladesh, Pakistan, Sri Lanka and Bhutan on the unofficial trade account, while with Nepal it has a trade deficit. Interestingly, a similar pattern can be observed on the official trade account (see Table 1 and 2). Of the US$2 billion informal trade with Pakistan almost half is traded through third countries (technically official trade) such as Dubai, CIS countries and Afghanistan, while remainder is cross-border informal trade.

As Bangladesh is sandwiched between the northeastern region of India and West Bengal, informal trade between India and Bangladesh takes place both along the borders between West Bengal and Bangladesh and between the northeastern regions and Bangladesh. Commodities exported informally from India to Bangladesh through West Bengal comprise of cattle, sugar, kerosene oil, sarees, bicycles, automobile components and parts and other consumer goods like plastic items, razor blades, medicines etc. Items imported from Bangladesh into India through West Bengal comprise of synthetic fabrics, spices, and Hilsa fish. Informal exports from the northeastern region to Bangladesh comprise fruits, fish, sugar, cattle, raw cotton, spices, medicines, sarees and coal. Imports on the other hand consist of polythene, palm oil, plastic shoes and a range of miscellaneous consumer items.

Causes of skewed pattern
Of course, high tariffs and the presence of non-tariff barriers in the form of quantitative and other restrictions create a strong incentive to avoid formal channel of trade in the region. The unweighted tariff average was highest in India at 39 percent, followed by Pakistan (25 percent), Bangladesh (20 percent) and Sri Lanka (15 percent). In the early 1990s, India and Bangladesh had the highest non-tariff barrier coverage ratio for primary and manufactured goods. India has a non-tariff barriers (NTBs) coverage ratio of 66 percent and Bangladesh had a NTBs coverage ratio of 52 percent.

Close ethnic ties between trading markets also encourage informal trade across countries. This is particularly important where the same ethnic community is divided into two national boundaries: for example, in the case of India, Bangladesh, Pakistan and Nepal. It has been observed that in Indo-Nepal, Indo-Bangladesh and Indo-Sri Lanka informal trading ethnic ties are stronger in the informal channel than in the formal channel.

The lack of education deters from using the formal channel. Also lack of education would preclude traders from having information on trade policy. Most informal traders are not aware of the details of different trading arrangements. Informal traders in Sri Lanka have pointed out that the terms and conditions of trade agreements are available only in English and not in any local language spoken in the two countries. This fact is also supported by many past studies, that is, in Indo-Nepal, Indo-Bangladesh and Indo-Pakistan trading, level of education for formal traders are significantly higher than those of informal traders.
Transaction costs and transacting environment are also responsible for bulk informal trading in the region. The inadequate transport and transit systems have led to high transportation costs. Particularly in the case of perishable commodities, port congestion, excessive documentation, delays, slow movement of goods, non-availability of equipment and railway wagons, transshipment and other indirect costs increase transportation costs. Thus as long as transport costs are higher in the formal channel than in the informal channel, unofficial trade will continue to take place.

Intrinsic to the activity of trading is the issue of transacting environment. Studies have shown that formal trading procedures are extremely complex in the South Asian region. For instance, the number of documents that need to be filled up for formal trade is 29 for India, 83 for Nepal, 25 for Pakistan, 22 for Bangladesh and 15 for Sri Lanka. Also clearances have to be obtained from multiple agencies at various stages of trading that include obtaining licences and getting clearances from banks. Apart from incurring costs, such procedures also lead to rent seeking activities. Traders are known to pay hefty bribes at various stages of trading before their destination.

Way forward
Because of strong ethnic ties and historical linkages among the traders in the region, informal trade cannot be ignored and that is why it would be difficult to eliminate totally from the region. The involvement of law enforcement agencies to detect and obstruct informal transit of goods across borders is not a viable solution. Enforcement mechanisms could only lead to increase in rent collections and thereby act as added incentive to carry on informal trade. What would be more effective is to reduce the impediments to trade in the formal channels.
Further reduction of tariffs, improvements in the transacting environment of formal trade, simplification of existing complicated procedures, improving information dissemination, improving awareness and education levels etc. would lead to a decline in informal trade flows. Many scholars may think of a focus on free trade agreement among the member countries as a solution to the problem. India and Nepal have a long history of bilateral free trade agreements signed since 1961, but the results are frustrating. The south Asian countries formed SAARC, SAPTA and SAFTA.
SAARC is well reputed for limited achievements on core issues. Studies have shown that the SAPTA process contributed very little in stimulating intra-regional trade. The framework agreement for SAFTA signed at the 12th SAARC summit does not address the issue of informal trade. Due to the slow progress of the regional initiatives of promoting trade, a number of SAARC member countries decided to embark on bilateral free trade agreements. These sub-regional initiatives however, were not considered for preferential trading but for sectoral cooperation. Thus further reduction and harmonisation of tariffs and improvement of institutional mechanism for trade may be the viable solution in arresting the large informal trade of the region.

-Dr Haripada Bhattacharjee is Professor (Marketing), Dhaka University.

SAFTA in turbulent waters but not far from the shore

The South Asian Association for Regional Cooperation (SAARC) is still seen as a talking shop despite the fact that the regional forum is now about 20 years old. Most other regional forums, including those formed in the 90s have done much better than SAARC, particularly in mutually beneficial trade cooperation.

The SAARC member countries after prolonged negotiations agreed to put into effect the South Asia Free Trade Area (SAFTA) from January 01, 2006. But the prospect of SAFTA becoming a reality on that day remains clouded. For the member nations are yet to iron out their differences on some issues including the sensitive lists, the mechanism to compensate the poorer members for possible revenue loss due to reduction in tariff and the rules of origin (ROO).

Despite the fact that the acceleration of economic growth through regional cooperation was incorporated as one of the goals of the SAARC charter adopted in the first summit meeting held in Dhaka, it was not until 1987 that an explicit commitment to economic cooperation was adopted. The South Asian leaders in the seventh SAARC summit held in Dhaka in 1993 signed the South Asian Preferential Trading Arrangements (SAPTA). The agreement provided a framework and institutional base for trade liberalization and economic cooperation between the SAARC member countries.

The agreement included four basic approaches--- product-by-product, across-the-board sectoral and direct trade--- to the exchange of trade preferences. The main features of the agreement included special and favourable treatment to LDC members by the non-LDC members of the regional grouping, application of a regional ‘most-favoured nation’ (MFN) principle with regard to SAARC members and rules of origin.

However, SAPTA could produce minimal impact on inter-regional trade in earlier years mainly because of the extreme reluctance to make any tangible concessions to each other in the maters of trade, protectionist attitude and political problems and hostilities between two major member countries--- India and Pakistan.

While negotiations on SAPTA progressed amidst intermittent hiccups, the SAARC Council of Ministers at its first meeting in 1995 decided to form SAFTA by the year 2001, but not later than year 2005. But the reasons that impeded progress in the negotiations under the SAPTA were found to be very much active in the case of SAFTA. However, the seven member countries signed a free trade agreement at the Twelfth SAARC summit held in Islamabad on January 06, 2004 and decided to put the SAFTA into effect from January 01, 2006.

According to the provisions of the agreement, the member countries agreed to gradually harmonize and eventually bring down their import tariffs on trade with SAFTA to 0-05 range. In the first phase, the LDC members (Bangladesh, Bhutan, Nepal and the Maldives) will reduce their maximum tariff rates to 30 per cent within two years from the date of coming into force of the agreement. The non-LDC members will be required to bring down their maximum tariff rates to 20 per cent with in the same time period. In the second phase that comes into effect on January 01, 2008, the non-LDC members will have to reduce their import tariffs to the 0-05 range in 5 years while the LDC members will do the same in 8 years. However, the tariff reduction may not apply on items on the ‘sensitive lists’ that are to be negotiated among the signatories to the agreement. The SAFTA agreement has both positive and negative aspects.

The signing of the SAFTA itself proved the fact that the South Asian countries were willing to foster strong economic relations that would again leave a positive impact on their political relations. Besides, an effective SAFTA is expected to strengthen the region’s bargaining position in multilateral trade negotiations with regions and regional groupings.

The recent improvement in relations between two arch rivals---India and Pakistan--- would surely lend wind to the SAFTA sail. The long negative lists produced by the member countries have emerged as a major problem for the negotiators. The ROO and the compensation demanded by the LDC member states for revenue loss due to tariff reduction proved to be equally troublesome. But these problems are inevitable because of the traditional protectionist attitude of the member states and existence of poor and less-poor members in the same grouping.

South Asian Trading Scenario
South Asian countries could not make significant progress in trading among themselves. Trade among these countries is only 5% of the total. Performance of other trading blocks is much more encouraging. Regional trade of the European Union (EU) is
65%. It is 57% for NAFTA and 37% for ASEAN. Even after 20 years of its birth, no positive environment for trade and investment has been created. Lack of political will was mainly responsible for poor performance in business. There is uncertainty about the coming into effect of South Asian Free Trade Agreement (SAFTA) by next January.

There are many obstacles to expansion of trade and investment in South Asia. Absence of liberal trading regime, lack of mutual cooperation, political conflict particularly between India Pakistan, delay in customs clearance, protectionism and smuggling are some of the obstacles to expansion in business opportunities. It is estimated that there is more smuggling among SAARC countries than official trading. Because of this member countries are losing lot of revenue. Consumers are compelled to use sub-standard smuggled goods.

Bangladesh is the most affected country in trading relationship with other South Asian countries. The trade deficit stood at Taka 12, 000 crores during 2004/2005 out of which almost Tk11, 500 crores is against India. SAARC is one of the weakest trading blocks. Although setting up of SAARC was a landmark achievement, its gains are not encouraging. It is yet to attain its tremendous potential.

Among the SAARC countries, lion’s share of Bangladesh imports is from India. The rate at which Bangladesh imports from India is increasing is not matched by the growth of her exports to India. Because of this, trade imbalance between the two countries has taken a dangerous turn. World Bank has advised Bangladesh to enhance the number of exportable items. But export basket can not be expanded overnight. We have to see if the existing items can move to India. The experience is that exports can not move to India because of both tariff and non-tariff barriers.

During 2004/05, Bangladesh exported goods worth TK 388 crores to Pakistan and imports amounted to TK 852 crores. Bangladesh exported goods worth TK 67 crores to Sri Lanka and our imports from them stood at TK 63 crores. Exports to Bhutan was TK 52 crores as against the import of TK29 crores. Export to Nepal stood at TK 5 crores as against the import of TK 10 crores. Lowest trading was recorded between Bangladesh and Maldives. Goods worth TK 3 crores were imported from Maldives and our export was worth TK one lakh only.

There are a number of issues to be sorted out before SAFTA can be implemented. A committee of experts of SAFTA met in Katmandu. The committee could not agree on rules of origin, negative list of commodities and compensation mechanism for revenue loss of LDCs. Hence there is uncertainty whether SAFTA will be effective from first January,2006. Reducing the number of items in the negative list is the main problem. Items in the negative list will not come under lower tariff level. The LDCs in SAARC have taken a hard line on compensation mechanism. A decision was taken some years back to form South Asian Economic Union but no road map was presented for its implementation. ASEAN is also moving towards an economic union. If there is conflict among the member countries, it will be difficult to constitute a union. Because of India-Pakistan conflict a closer union of the South Asian countries may not be possible.

Bangladesh is now a huge market of Indian goods. Although dome Bangladeshi products have strong demand in India, tariff and non-tariff barriers are blocking those exports. India is asking Bangladesh to provide transit and allow use of Chittagong port so that the service charges earned can reduce the trade gap. This is a feeble argument. Unless goods from Bangladesh move to India in a big way, there is no chance of reducing the trade gap.