Effect of ASEAN on SAARC: The Perspective of Trade

Effect of ASEAN on SAARC: The Perspective of Trade Imbulagodage Don Indra Kumari College of Government, Rangsit University, Thailand Email: indumi_luv@yahoo.com Witchayanee Ocha College of Government, Rangsit University, Thailand Abstract This paper aims to present the inter relation of trade between SAARC and ASEAN, and the factors that have effected for SAARC to move towards ASEAN. Many regional issues can be seen in SAARC and as a result, move towards ASEAN seeking advantages on Trade. The research is based on quantitative analysis and secondary data were gathered for 25 years. The findings reveal that SAARC trade is very high with ASEAN comparing intra-regional trade. Political stability, infrastructure, market size, trade agreements and trade openness were identified as variables which effect for the movement of SAARC. These insights can be taken for the future improvements of SAARC and implement new strategies to move as a successful region. Keywords: Regional Organizations, SAARC, ASEAN, Trade Introduction Regionalism creates a new platform to achieve economic benefits. Trade liberalization and economic integration increase the inter-intra trade expanding the market across borders. The open agreements of regional organizations cause for trade diversion. Enlargements of markets provide efficiency for industries and expand competition in production (Wilson, Mann, & Otsuki, 2005). Today, regional organizations open their trade transactions to the neighboring countries and seek more connection with the other regional organizations. As a result, it provides more benefits to non-member countries in trade to strengthen the relationships between countries. The open regional economic policies encourage non-member countries of other regional organizations to move towards the successful regional organizations to achieve more economic benefits (Bond & Syropoulos, 1996). As a result, weaker regional organizations are highly influenced by successful regional organizations. The main objective of this research is to find out the effect of ASEAN (Association of Southeast Asian Nations) towards SAARC (The South Asian Association for Regional Cooperation) on trade. It is to identify present inter relation between SAARC and ASEAN on trade and find out the factors that led for the two regions to get closer in the aim of trade. The findings will support SAARC countries to see their activities done within the region itself and ASEAN and to decide how their interests to be polished and to develop their policies. Literature Review SAARC implemented in 1985 and emphasized welfare of people in the region. SAARC introduced SAPTA (SAARC Preferential Trading Arrangement), but was not succeeded with weak tariff classification and limited product coverage. Then, SAFTA (South Asian Free Trade Area) came to reduce tariff to 0-5% within ten years. However, all countries have a long list of sensitive products and introduced many non-tariff barriers. (Pursell, 2011). Tariff [47]

concessions were not impacted much as set up on the products which are not even traded among the member countries (Dubey, 2010). ASEAN introduced in 1967 and provide ample opportunities for member countries in trade. A favorable foundation was created for the imports, exports, manufacturing, distribution and services. Through ASEAN Economic Community (AEC), a single market and a production base is focused which is highly competitive, stable, economically integrated with free flow of goods, services, skilled labors and capital (Siddika, 2013). SAARC comparing to ASEAN Comparing the historical approach, major difference can be identified. ASEAN had a common-interest to work together to minimize the issues through politically, economically and socially. However in SAARC, cooperation was enhanced through territorial integrity, sovereign equality, noninterference, political independence and mutual benefit. It is difficult to find strong desire and common-interest in SAARC (Husain, 2014). Power asymmetry, the biggest challenge in SAARC was based on economic and military aspects. India represents the largest population and tremendous military power. The region experience geographical dependency. Countries have separated from borders and do not share mutual borders except India. Without cooperation or support of India, it is impossible for countries to trade, cross borders, make agreements and implement other initiatives (Delinić, 2011). Some member countries fear in de-industrialization of market access. For instance, textile is a major driving force in economy and countries afraid that Indian imports can be harmed for their textile industry. ASEAN set up a good relationship with their neighbors. The master plan of ASEAN provides a broad concept on connectivity such as physical, people to people, institutions to institution and knowledge. Connect low income countries to high income countries to narrow the development gap. Member states accept ASEAN as the regional central point. The leadership given by Suharto, second President of Indonesia was the major strength of ASEAN to keep together until today. However, SAARC also received a great leadership under Indian Prime Minister Gujral and after that there was no identified character (Kelegama, 2002). Aravind (2003) explained that trade diversion can be avoided following non-discriminatory basis. In SAARC, trade liberalization is very low. South Asia ranked poor in doing trading across borders. Results show that cost, procedure and time are the major negative impacts (Rahman, Khatri, & Brunner, 2012). In ASEAN, all liberalization is based on nondiscriminatory basis. Encourage member countries for liberalization (Panagariya, 2003). As the political achievements of ASEAN was remarkable, economic cooperation brought countries together and provided experience on trade liberalization business. However, trade liberalization is a challenge for ASEAN too. Preferential Trade Agreements are covered many products which is not traded among countries (Zimmermann, 1996). In SAARC, long historical problems are remained between India and Pakistan since independence and four wars occurred in 1947, 1965, 1971 and 1999. Even SAARC summit had to cancel for 3 years. Tensions were aroused on nuclear competition, terrorism, and territorial disputes (Rahman, 2004). India and Bangladesh dispute for water issues, maritime boundary issues and cross border terrorism and interrupted for two SAARC summits in 1992 and 2005. India and Sri Lanka relationship was disputed with the civil war in Sri Lanka and SAARC summit was cancelled in 1989. India and Nepal have border disputes and a disagreement with Mahakali river treaty. Bangladesh and Pakistan have disputes over historical event in 1971. However, ASEAN engages with external powers following dialog mechanism. The noninterference policy introduced sovereignty, mutual respect, national identity and similar territories. Another key principle was nonintervention policy in internal affairs. ASEAN built up a good friendship with all the countries. Policy implementations [48]

promote security and political issues between countries (Siddika, 2013). However, ASEAN also suffer with maritime border issues in South China Sea. In SAARC, lack of infrastructure is one of the major reasons for limited trade. Delays in transit with custom procedures, roads and ports congestions increase the costs and waste time of the exporters. These occur even with physical infrastructures with lack of cargo, ship handling equipment and non-physical infrastructures such as excessive border procedures (De, 2005). Infrastructure development is a key challenge for ASEAN too. ASEAN has implemented ASEAN Infrastructure Fund to finance infrastructure projects. Still, the poverty gap is high with least developed states. Economic structure of countries shows a huge difference. Cambodia, Myanmar and Laos represent heavy agricultural economies. Rapid industrialization is experienced only several economies (Pooittiwong, 2016). SAARC move with civil violence and religious conflicts. India has such movements in many states. Political system in Nepal is very unstable and Sri Lanka failed in economic reforms in past years due to the civil war. Pakistan suffers with ethnic clashes. Afghanistan also faces many conflicts. In ASEAN also, intra-state conflicts are difficult issues. Ethnic conflicts of Myanmar and South Thailand insurgency are still unsolvable. The mechanisms and noninterference has mentioned in 8 ASEAN documents to reduce intra-state conflicts and involve as third party mediator. ASEAN urge member states to provide peaceful solutions for the disputes (Kher, 2012). Relevant Theories Regionalism came into the arena after the end of II World War. In classic regionalism, the economic integrations as well as security alliances such as NATO, and SEATO came into the field. Later, NAFTA and ASEAN were under new regionalism. Here, it was considered a theory which emphasizes movement of regional member countries to different directions due to the imbalance of regional connection. Interdependency theory: In 1970 s, Keohane and Nye reveals that international relations has been characterized as the expansion of interconnection between the domestic market and international affairs. This explains the components of human relationships. Individuals expect advantages and minimize cost using relationships. Further, idea has been modified as increasing interstate relations outside the formal channels seeking low cost and more benefits. Evidence from previous studies Many scholars examined negative aspects of South Asia in order to move as a regional organization (Pattanaik, 2010; Rajan, 2005). Primary purpose of ASEAN was to create a region which survives each state with stability and less competition. This was limited in SAARC. Many scholars argued that when two countries trade more with each other, they become natural trading partners. Trade diversion for preferences in tariff is not a serious concern between them (Krugman, 1991). There were many arguments for what will happen when the first bloc let other countries to join as open regionalism. Many scholars emphasized that nonmember countries join one by one according to their interests and affected to shift the trade outside their region (Stein, 1994). Political instability creates unfavorable background for business climate. Alesina and Perotti (1993) examined 70 countries for 25 years and reveal that social political instability decrease economic climate. Economic openness expand the market size for trade opportunities (Bruno & Campos, 2013). Hellvin and Nilsson (2000) examined the bias of trade between major regional blocks and found that inter-regional trade is increasing between EU and NAFTA. Infrastructure has a great impact on intra-regional and international trade. Many studies revealed that poor infrastructure in ports reduce the potential of international trade. Insufficient infrastructure has a great impact in Africa for intra-regional trade and international trade (Bouet, Mishra, & Roy, 2008). ADB (2009) examined that infrastructure in a country such as quality of transportation and IT has a great impact on trade. Trade [49]

Agreements increase trade between countries. A positive environment is built between countries to lift up the trade relations (Baier & Bergstrand, 2007). Openness of economy is a key factor in country s development. The openness of trade regime and highly economic integration was highlighted by the economists since past. Also, it facilitates human capital, technology and entrepreneurial potential to bring economies of scale (Guru-Gharana, 2000). Research Methodology The quantitative method was followed and utilized the secondary data. The regional movement of SAARC towards ASEAN measured through trade, theories on integration and previous writings. The trade is analyzed from the statistics taken from ASEAN and SAARC. The findings categorized in two ways to identify the clear flow of SAARC import/export to ASEAN countries and intra-regional trade share in SAARC countries. Data was taken for 25 years. Independent variables: political stability, market size, infrastructure development, trade agreements and economic openness were analyzed using graphics to show the path of different variables in two regions. The aim was to identify the difference of these two regions which effect for SAARC to move ASEAN. The graphical interpretations were used to examine the difference of the variables in SAARC and ASEAN. These variables are key factors in a region which effect for trade directly. Results and Interpretation The results of finding data has been examined and analyzed under difference topics to provide the clear idea of research outcome. As per Table 1, SAARC transactions of imports and exports with ASEAN have increased year by year. Same as in interdependency theory, the interstate relations is increasing outside their formal channels in a due time. The total trade from SAARC to ASEAN is nearly double within 5 years. Stable progress of trade share from SAARC to ASEAN shows that the gap will be reduced further. Further, the trade agreements that has not been signed yet can be increased the trade volume with ASEAN in future (Table 2). Hence, there is a potential to lift up the SAARC share with ASEAN. The basic factor is that, the interest of ASEAN trade towards SAARC also increases. A significant progress is shown after 2004. The reason is many trade agreements between SAARC and ASEAN are in effect after 2004. Comparing SAARC trade with ASEAN, the intra-regional trade in SAARC is very low. Intra-regional trade of SAARC is growing very slowly. Besides, it has not been increased much for last 25 years. Some fluctuations are shown in figures and have not increased. It shows a huge gap in political stability between SAARC and ASEAN (Figure 1). There is high political instability in SAARC and has reduced highly during 2007-2009. In 2007, Afghanistan joined with SAARC. Afghanistan faced suicide bomb attacks and conflicts in elections. In India there was huge train attack, Mumbai attack, Islamic group conflicts and bomb explosions. In Pakistan, assassination of ex-prime minister Benazir Bhutto occurred in 2007. Sri Lanka ended their civil war in 2009 (BBC, 2016). ASEAN also shows a bit fluctuation in political stability last 25 years. Then after 2010, the situation is changed. However, there is a huge difference in political stability between SAARC and ASEAN. Figure 2 shows the market size which represents GDP per capita of SAARC and ASEAN. Although SAARC is extremely high in population with 1.7 billion while ASEAN represents about 600 million, a huge gap shown in market size. Even with high population, the progress of SAARC is very low. SAARC is not been able to achieve at least half of the GDP per capita of ASEAN (Table 1). [50]

Table 1 Total trade and investment between SAARC and ASEAN (1990-2015) Year SAARC with ASEAN ASEAN with SAARC Intra SAARC 1990 14,149.57 5,622.21 1799.02 1991 14,208.70 6,064.56 2010.07 1992 16,246.72 5,996.97 2629.88 1993 17,535.77 6,719.24 2590.32 1994 20,141.48 8,176.30 3076.09 1995 25,243.39 10,584.18 4421.75 1996 26,774.06 12,751.59 5107.92 1997 27,355.37 12,230.47 4896.26 1998 26,817.08 12,099.67 5814.32 1999 29,051.68 12,600.14 5188.15 2000 30,551.79 14,852.89 6299.93 2001 29,965.92 14,364.17 6949.16 2002 34,936.91 15,358.76 7836.88 2003 44,881.52 18,499.28 11108.45 2004 56,444.41 24,516.13 13539.13 2005 74,956.98 30,998.79 17695.11 2006 99,374.29 38,877.42 20702.48 2007 128,558.19 48,483.12 27169.57 2008 152,228.58 64,113.01 30003.62 2009 141,904.25 52,389.30 23173.28 2010 196,889.92 71,689.31 32755.04 2011 263,246.95 94,045.65 40711.51 2012 250,303.98 87,470.92 41394.38 2013 255,422.08 86,033.02 44051.32 2014 263,703.24 86,961.55 51339.96 2015 255,790.63 81,726.32 49097.99 Figure 1 Political stability Figure 2 Market size [51]

There is a huge gap in infrastructure between two regions for last 30 years. SAARC shows a bit progress until 2005 and again it has decreased. In 2014, it is only 2.16 while ASEAN shows 10.68 (Figure 3). This can highly affect for the SAARC countries to attract trade volume. Figure 3 Infrastructure-Telephone lines per 100 people Many SAARC countries work individually for bilateral agreements with ASEAN (Table 2). After 2004, SAARC countries show high interest on bilateral relationship with ASEAN members specially India and Pakistan. Many agreements are now in effect and many are waiting to sign. Table 2 Trade agreements between SAARC and ASEAN Year Agreement Status 1992 India became dialog partner of ASEAN Signed-in effect 2004 Bay of Bengal Initiative for Multi-Sectoral Technical and Signed Economic Cooperation (BIMSTEC) Free Trade Area 2004 India-Thailand Free Trade Area (India-Thailand FTA) Signed 2005 India-Singapore Comprehensive Economic Cooperation Signed-in effect Agreement 2005 Pakistan-Singapore Free Trade Agreement Negotiations launched 2008 Malaysia-Pakistan Closer Economic Partnership Signed-in effect Agreement 2009 ASEAN-Pakistan Free Trade Agreement Proposed 2010 ASEAN-India Free Trade Area Signed-in effect 2011 India-Indonesia Comprehensive Economic Cooperation Negotiations launched Arrangement 2011 India-Malaysia In force 2013 Pakistan-Indonesia Free Trade Agreement Signed-in effect 2015 Pakistan-Thailand Free Trade Agreement Negotiations launched 2015 Bangladesh-Malaysia Free Trade Agreement Negotiations launched 2016 Singapore-Sri Lanka Negotiations launched Same as the other independent variables, progress of trade openness in ASEAN is higher than SAARC countries. A slow progress is shown in SAARC countries in trade openness and slight decrease even in ASEAN countries. However the gap is really high between two regions. ASEAN shows some fluctuation in trade openness since the end of 90 s (Figure 4). Finally, it can be concluded that all the variables are significantly high in ASEAN. It clearly reveals the success of ASEAN comparing to SAARC. At the same time, SAARC does not show much progress on improving those variables. Specially, border conflicts are running through the past and still do not show any path to solve them. Failure of achieving these facts has effected directly to the region. As a result, countries are moving towards ASEAN to gain more opportunities for trade and investment. [52]

Figure 4 Trade openness Conclusions and Recommendations Finally, from the research, the several key outcomes can be gained. SAARC is moving towards ASEAN mainly sharing trade, expanding imports and exports. Studies show that ASEAN plays a major role in trade transactions of SAARC. Nearly half of the trade share in SAARC is coming from ASEAN. SAARC is moving towards ASEAN because of their political stability, market size, infrastructure capacity and economic openness. Also, bilateral trade agreements between the regions have affected to get closer. Further, SAARC countries are trying to implement more bilateral trade agreements with ASEAN in searching more advances in trade. Providing recommendations, SAARC can benefit more from ASEAN. These two regions do not have any geo political conflicts. SAARC can work closely with ASEAN to minimize issues in the region. Further support can gain from ASEAN to uplift their economic relations to find solutions for the issues. SAARC should provide more economic freedom opening their borders for all member countries which share its borders to link with other countries. For instance, India should establish road networks between Bangladesh-Nepal and Bangladesh-Bhutan across its borders. Although, sub regional cooperation: BIMSTEC is formed still not shown any progress. At least could not finalize Free Trade Area since establishment. Further, SAARC should find a way to establish SAARC-ASEAN economic forum to find more benefits for regional trade. References Alesina, A. & Perotti, R. 1996. Income distribution, political instability, and investment. European economic review 40 (6): 1203-1228. Baier, S. & Bergstrand, J. 2007. "Do free trade agreements actually increase members' international trade?." Journal of international Economics 71 (1): 72-95. BBC. 2016. Profile-timeline. Retrieved from http://www.bbc.com/news. Bond, E. & Syropoulos, C. 1996. "Trading blocs and the sustainability of interregional cooperation." The new transatlantic economy: 118-141. Bouet, A., Mishra, S. & Roy, D. 2008. Does Africa trade less than it should, and if so, why? The role of market access and domestic factors. Washington, DC.: International Food Policy Research Institute. Bruno, R. & Campos, N. 2013. Reexamining the conditional effect of foreign direct investment. (IZA Discussion Paper No. 7458). De, P. 2005. "Cooperation in the regional transportation infrastructure sector in South Asia." Contemporary South Asia 14 (3): 267-287. Delinić, T. 2011. "SAARC-25 Years of Regional Integration in South Asia." Konrad- Adenauer-Stiftung International Reports, International Reports (2): 721. [53]

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