Broadly defined, trade cost includes all costs incurred in getting a good from the producer to final consumer, excluding the marginal cost of producing the good.
Trade costs basically include transportation costs (both freight and time), policy barriers (tariff and non-tariff), information cost, contract enforcement costs, costs associated with the use of different currencies, legal and regulatory costs and local distribution costs. Such costs impede the flow of goods and services and pose as a significant barrier to international trade. [break]
South Asia as an economic bloc is touted as one of the least integrated regions of the globe, with intra-regional trade hovering around five percent for the last several years. This not only indicates the low level of economic engagement among SAARC member countries, but also reflects the abundance of tariff and non-tariff barriers that hinder the trade between them.
The commitment of SAARC leaders to transform South Asia to customs union by 2015 and an Economic Union by 2020 is an ambitious goal as the full tariff liberalization has not yet been achieved despite SAFTA implementation.
The existence of a plethora of non-tariff barriers, mostly related to Sanitary and Phytosanitray (SPS) and Technical Barriers to Trade (TBT) measures, combined with the tariff measures as evidenced by the large number of sensitive items maintained by member countries, demonstrate lack of political will and vigor to achieve economic integration. South Asia does not have a regional or sub-regional transit agreement the need for which was underscored in the SAARC Regional Multi-modal Transport Study conducted in 2006-07 as a part of trade facilitation measures.
The SAARC summit held in New Delhi in April 2007 endorsed the recommendation of concluding regional transit transport agreement that was supposed to bring about efficiency in trade by reducing the cost of moving goods across the borders. Other regions and sub-regions like Greater Mekong Sub-region (GMS), Southern African Development Community (SADC) and Central Asian Regional Economic Cooperation (CAREC) have introduced the cross-border transit agreement (CBTA) that allows for the movement of transport vehicles under simplified procedures. Such agreements basically adhere to the concept of disintegrated production and integrated transport and are highly valued in order to achieve economic integration at the regional or sub-regional level.
The facts drawn from various empirical studies show there is an inverse relationship between trade costs and trade flow. The higher the trade costs between each pair of partners, the less they trade. A study by the Research and Information System (RIS), a New Delhi based think tank, shows that a 10 percent fall in transaction costs at the border increases a country’s exports by 2 percent.
Similarly, it suggests that one day saving in trade transaction at the border in South Asian Sub-regional Countries would lead to 1 percent rise in exports. Thus we see that saving time and cost will result in proportionate benefits to export promotion within and outside the region. Such savings on time and cost would ultimately enhance the reliability of the country to deliver the right kind of goods at the right time.
Customs facilitation through simplification, standardization and harmonization of procedures and documentation and customs automation is a very important step in bringing down overall transaction costs. The process of customs automation has started independently among the South Asian countries but these are neither harmonized nor at the same level of development.
For example, Nepal and Bangladesh have followed the Automated SYstem for CUstoms DAta (ASYCUDA) on a limited scale (they are yet to get to the level of ASYCUDA World) while Indian land customs stations operate under IceGate system. Thus, full-fledged automation of customs is yet to be achieved by national governments, let alone the harmonization of procedure and documentation which is an even more difficult for integrating the IT systems.
The transaction costs and time at border greatly affect trade flows, just the way the tariffs do. It could therefore be argued that the benefits of trade liberalization in South Asia have been limited, since the region has largely failed to reduce transaction costs and time at the border.
There are indeed sizable gains to be made if it is made simpler for goods to cross the borders. The introduction of e-customs is a major advantage for regional trade. An important means of promoting regional trade would be improved trade facilitation measures such as harmonized e-customs at the borders.
Developing cross-country transport system within continental South Asia or at least within the SASEC sub-region is critically important in view of enhancing intra-regional trade. The reduction or elimination of tariff and non-tariff barriers may be a lofty goal, but this can be complemented and reinvigorated through enhanced connectivity.
Regional trade integration cannot be achieved in absence of facilitation of transport and cross border movement of vehicles. In view of this, South Asian countries should undertake the task of negotiating a regional/sub-regional “Transit Transport Agreement” and “Motor Vehicle Agreement” sooner rather than later.
Different countries are creating some sort of trade facilitation bodies (like the National Trade and Transport Facilitation Committee in Nepal) within their national boundaries. But it is important to work at the sub-regional or regional level to create a collaboration and coordination mechanism among such entities.
Countries should consider advancing the corridor concept in order to enhance intra-regional trade through the integration of transport system. Attention should also be given on removing the physical and non-physical impediments along with performance monitoring of the corridors that is based on harmonization of efforts towards improving efficiency of total transit transport system.
The policy would thus require fomenting the concept of across the border transport corridors, defining the performance standards, and implementation of these standards at the national and sub-regional levels. The SAFTA agreement spells out the broader course of action in reining the trade cost for enhanced integration of South Asian economies. However, the problem is in getting the right minds to come together and extracting concerted effort to enhance the regional process rather than exclusively relying on bilateral dealing between the countries.
The author is former
commerce secretary
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