South Asian Countries Overlook Regional Economic Integration at Their Own Risk

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From the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) to the Regional Comprehensive Economic Partnership (RCEP), the Asia-Pacific finds itself being remade by mega-regional free trade agreements. The former, which went into effect in December 2018, features 11 countries on both sides of the Pacific Ocean and represented the world’s third largest economic bloc when it was signed. The latter, RCEP, is still under negotiation and brings together the 10 members of the Association of Southeast Asian Nations (ASEAN) plus China, Japan, India, South Korea, Australia, and New Zealand and would be the world’s largest free trade area by GDP.

Although the CPTPP and RCEP promise to accelerate economic integration in the Asia-Pacific, not everyone in the region is participating in the trend. Three countries in particular – Bangladesh, Pakistan, and Sri Lanka – find themselves on the outside looking in. They were the 41st, 39th, and 64th largest economies in the world in 2018, according to the IMF. By declining to join either of these two trade pacts, these three countries not only limit their own growth but stand to be less competitive compared to similarly sized and similarly oriented export economies in ASEAN. 

Away from Regional Integration and Toward China

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This lack of participation by Bangladesh, Pakistan, and Sri Lanka in the broader trend toward economic integration in Asia is reflective of South Asia’s general ambivalence toward trade. In theory, the eight countries of the region are part of the South Asian Free Trade Area (SAFTA), which came into effect in 2006. In reality, however, intraregional trade has been stagnant despite SAFTA, whose potential is inhibited by the “sensitive list” of items that are not subject to tariff liberalization efforts. Instead of pursuing trade agreements or reworking existing deals to increase market access for their exports and lower the cost of imports, all three countries have sought to grow their economies in other ways.

Most notably, this has meant expanding economic ties with China. All three countries are signatories of China’s Belt and Road Initiative (BRI). More than $60 billion in funding has been earmarked for the China-Pakistan Economic Corridor (CPEC), which is seen as the initiative’s flagship plan. China has become Bangladesh’s largest investor and sees the country as an essential player in linking South and Southeast Asia. The world’s second largest economy is also Bangladesh and Pakistan’s primary source of good imports while Sri Lanka’s trade relationship with China has grown rapidly in recent years. China surpassed India as Sri Lanka’s biggest import partner in 2018, another sign of China’s growing influence in South Asia. 

On its surface, the influx of Chinese investment through BRI has the potential to address the continent’s critical infrastructure needs while access to Chinese imports can benefit consumers. But these factors reflect only part of what is required to ensure sustainable economic development. Sri Lanka is the poster child for debt-trap diplomacy while Pakistan agreed to its 13th IMF bailout in 30 years, calling into question CPEC’s ability to deliver on its ambitious development goals. From a trade perspective, goods that are produced and transported through new infrastructure projects will still face trade restrictions when they are exported. From an investment perspective, regional integration can also help attract FDI that will decrease reliance on China. 

Why Regional Integration Matters

Pakistan, the biggest economy in the group, ran a trade deficit of $30.9 billion in 2017, just one indicator of greater economic distress. GDP growth fell to 3.3 percent earlier this year – nearly half of the 6.2 percent target set last year – and is projected to fall to 2.4 percent in 2020. Debt servicing now makes up 30 percent of the federal budget. Boosting exports and attracting non-Chinese investment is not a panacea but it can help lessen Pakistan’s economic woes. 

The question of economic integration is even more pressing for Bangladesh, which stands to lose trade preferences under the Generalized System of Preferences (GSP) program once it graduates from Least Developed Country (LDC) status in 2024. Bangladesh has experienced unprecedented economic success in the past decade, largely due to the emergence of its textiles industry. If Southeast Asian competitors in this sector successfully parlay tariff reductions through RCEP and CPTPP into increased export market share, Bangladesh’s growth could face substantial roadblocks moving forward. 

As a small island nation, Sri Lanka faces inherent barriers to economic growth. Unlike Pakistan and Bangladesh, which are the sixth- and eighth-most populous countries in the world, Sri Lanka lacks a large domestic consumer base. Unsurprisingly, its share of exports and imports as a percentage of GDP are considerably higher than the other two countries. Sri Lanka has started to address this problem – it signed a trade deal with Singapore in 2018 – but it will take further efforts to ensure its economy is not hamstrung by a lack of trading relationships.  

On the Outside Looking In

A deeper analysis of the textiles industry – the largest export sector for all three countries – illustrates the problems that lie ahead. Take HS620342 (men’s and boys’ trousers and shorts, of cotton, not knit). In 2017, this category of goods was both Bangladesh and Pakistan’s most popular export and Sri Lanka’s sixth biggest export. Under CPTPP, Australia and Canada will eliminate tariffs on the product after four years while Japan will eliminate tariffs immediately. In 2017, CPTPP countries combined for around 10 percent of global imports of HS620342. Vietnam, a CPTPP member, accounted for 3.7 percent of global exports of HS620342. While Bangladesh, Pakistan, and Sri Lanka continue to face tariffs, Vietnamese non-knit cotton trousers will soon enjoy duty-free status. 

The story is the same for other goods as well. HS621210 (brassieres and parts thereof) is Sri Lanka’s second most popular export. Australia, Canada, and Japan will eliminate tariffs on the product immediately under CPTPP. The trade deal’s members imported 14 percent of all exports in 2017. Through CPTPP, Vietnam, the second biggest global exporter of HS621210, will expand its lead over Bangladesh and Sri Lanka, the third and fourth largest exporters of the good worldwide. 

When RCEP is completed, the three South Asian countries will have more than just Vietnam and Malaysia to compete with on similar goods. Indonesia, Cambodia, and Thailand will all pose a threat to carve out market share. Add Vietnam’s newly-signed trade deal with the European Union and their problems compound even further. Protectionism may be on the rise in the West, but regional economic integration is becoming a reality in the Asia-Pacific. A reticence to engage economically with the region and the rest of the world will hamper growth prospects for Bangladesh, Pakistan, and Sri Lanka. 

Mayaz Alam is currently pursuing a Master of Science in Foreign Service at Georgetown University, where he studies international political economy. He was previously a journalist with The Globe and Mail in Canada. He tweets at @mayazalam16

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