This policy letter reflects trends in Indian trade with its neighbors in order to determine the current status of trade connectivity. A comparison was also made with China, given its growing presence in the neighborhood since 2005. Based on the analysis, the letter concludes with policy recommendations to promote better intra-regional trade.  D. R. Kanth, “Global Trade Declines 13% to $16.5 trillion in 2015,” LiveMint, April 7, 2016, www.livemint.com/Politics/t5GR5PqKbFLGt7K404LQ8L/In-2015-global-trade-declined-13-to-165-trillion-in-valu.html. The idea of trade liberalization among SAARC countries was first discussed by Sri Lanka at the sixth summit of the South Asian Association for Regional Cooperation (SAARC) held in Colombo in December 1991. India`s trade with its neighborhood was between 1.7% and 3.8% of its world trade. In total, about 36% of trade in South Asia is outside the preferential regime.
In contrast, ASEAN countries have no import duties on 96% of products on average, which stimulates intra-regional trade. Second, the region has been very adept at creating a proliferation of “para-customs”, which are tariffs that are only aimed at imports and not domestic production: in fact, tariffs with a different name. In South Asia, these para-duties have become ubiquitous in Bangladesh (additional duty, regulatory customs duty), Sri Lanka (port and airport development tax, Cess) and Pakistan (regulatory duty, additional duty). These para-tariffs reinforce the general protection, lack of transparency and dispersion of customs duties, as well as the general anti-export bias of the trade regimes where they prevail. This para-customs phenomenon is not observed in most countries of the world, including ASEAN countries. Due to their lack of transparency, large countries have so far generally been able to keep para-tariffs outside the framework of free trade negotiations. In South Asia, SAFTA is, for several countries, the main free trade agreement in which they participate. Since para-tariff reductions are not part of the SAFTA negotiations, this undermines the free trade agreement. If SAFTA is to be more effective, the two problems mentioned above must be addressed. The reduced lists of sensitive countries will have to be reduced in due course. This can be carefully calibrated, taking into account the impact on revenues and jobs in the short term, and exceptional interest can be deterred from liberalizing tariffs (subject to a cap, say 5% of tariff lines). However, for the process to be credible, the timetable for tariff liberalization by each country must be clearly expressed and respected, unlike the current SAFTA process.
Secondly, the issue of para-tariffs must be addressed directly. One of the starting points could be to reduce and accelerate the removal of para-tariffs on items that are not on sensitive lists and to include para-tariffs in the SAFTA negotiations. . . .