Deglobalisation Essay Series 4October 2022

South Asia Cannot Afford to Deglobalize
By Sanjay Kathuria
Is globalization really dying?
The death of globalization has been greatly exaggerated (apologies to Mark Twain). 1 It istrue that global trade in goods and services peaked in 2008, at 61% of global GDP—it
was 52% in 2020 and 56% in the pre-COVID year of 2019. However, this broad statistic
obscures many important trends (see Wolf, 2022).
One, many major trading countries/groups have not yet peaked in terms of trade
openness. The European Union, the largest trading group, saw its trade ratio at an alltime high of 93% of GDP in 2021. Vietnam, a rising star in global trade, continues to see
exponential trade growth. Brazil’s trade ratio was at a record high of 39% GDP in 2021.
On the other hand, China, the United States, and Japan—the three largest economies in
the world—have peaked.

1. This note refers only to trade, the most frequently used dimension of globalization. It does
not discuss, for example, foreign direct investment or other cross-border capital flows. However,since FDI is highly correlated with trade, FDI issues do come up in the discussion

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Two, trade in services continues to rise because services are growing from a small baseand are very diverse, with many capable of being delivered online. In the pre-COVID
year of 2019, services trade was at an all-time high of 13.6% of world GDP.
Thus, even though some major trading nations have reduced their exposure to world
trade, there are continued and growing opportunities in goods and services for othercountries that seek to deepen their trade integration.

South Asia is at an early stage of globalization
Given the size of their economies, stage of development, and a lukewarm approach toopenness, South Asian countries are at an early stage of globalization. This is supportedby the following facts.
South Asia has been very hesitant to embrace globalization. Average applied tariffs inSouth Asia were 12.8% in 2019, the highest of any region, against a world average of
5.7% and an East Asia and the Pacific average of 4.38% (WITS, n.d.). This is despite thewidespread evidence that trade has been a key factor in global poverty reduction.
Indeed, in South Asia, Bangladesh and India are two prime examples of countries thathave witnessed the power of trade in stimulating demand, creating better quality jobs,and improving living standards.
If anything, South Asia’s regional embrace is even more hesitant than its global embrace.
The world’s most prosperous regions—Europe, North America, and East Asia—enjoy thebenefits of proximity through trade in goods and services and interlinked supply chains.
By contrast, South Asia is the least integrated region in the world, with regional goods
trade forming only 5.8% of total trade in 2020, compared with 21.1% for ASEAN and35.9% for East Asia. 2
Barring India, none of the other South Asian economies are large enough to justify their
low trade penetrations. Indeed, in most cases, their trade to GDP ratios have been
declining; trade to GDP peaked in Pakistan in 1996 (38%), in Bangladesh in 2012 (48%),and even in the small island nation of Sri Lanka in 2000 (89%). This experience iscontrary to that of the larger middle-income countries in East Asia, whose development
path South Asian countries seek to learn from. As Table 1 shows, Thailand, Indonesia,Malaysia, and the Philippines peaked at high or very high trade ratios, ranging from 88–
220% of GDP. And despite peaking, their current trade ratios are much higher than theirSouth Asian counterparts. Vietnam has still not peaked.
Led by Bangladesh and especially India, South Asia has increased its share of world
exports of goods and services, from 0.8% in 1990 to 2.72 percent in 2021. Given their
incipient globalization relative to East Asian countries, countries of South Asia havesignificant room—with the right policy focus—to increase this share significantly.

2. This picture does not change even when Pakistan is excluded from a regional calculation.

Within the South Asia Subregional Economic Cooperation, or SASEC (Bangladesh, Bhutan, India,Maldives, Myanmar, Nepal, and Sri Lanka), for example, intraregional trade was only 5.6% in2020, and it was 6.3% in Bay of Bengal Initiative for Multi-Sectoral Technical and EconomicCooperation, or BIMSTEC (Bangladesh, Bhutan, India, Myanmar, Nepal, Sri Lanka, Thailand).
Data sourced from ARIC database (ADB, n.d.).

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Table 1.
Peak and current trade-to-GDP ratios: Selected South Asian and East Asian countries

Bangladesh
Pakistan
Sri Lanka
India

Current trade-to-GDPratio, 2021 (%)
2830
4344

Peak trade to GDP (%)
and year48 (2012)
38 (1996)
89 (2000)56 (2012)

Thailand
VietnamPhilippines
Indonesia
Malaysia

117
184
64
40
131

140 (2011)
184 (2021)*
88 (2003)
96 (1998)
220 (2000)

Note. Trade includes goods and services; for Vietnam it includes only goods. The peakindicates the year when the trade-to-GDP ratio was at its highest.
*Is not a peak but the highest to date.
Source: World Bank Open Data.

Impact of rising economic nationalism
Economic nationalism has been rising globally, and Brexit and the U.S.–China trade war
are only two, albeit telling, examples of this. But it is hard to blame global economic
nationalism or the slowdown in global growth for the antiexport bias 3 in most, if not all,countries in South Asia. South Asian countries have been unable to address the political
economy of trade liberalization or to create a positive narrative for trade. This approach
has left them vulnerable to domestic protectionist pressures. Thus, at different points oftime over the last 15 years, Bangladesh, Pakistan, and Sri Lanka, among others, havereversed the course of trade liberalization and resorted to rising tariffs (and paratariffs)
and reducing the transparency of their trade regimes. In India, the share of its tariff lines
with duties in excess of 15% rose from 5.8% in 2015 to 10.6% in 2020. India has also
started in 2020 a “production-linked incentive scheme” to boost domestic production,
increase exports, and cut down on imports in key sectors such as electronics.

The globalization imperative for South Asia
Despite its size, and its growth, India’s domestic market is still not large enough for global
companies, across many sectors. Using a lower-middle-income poverty line of 3.65 USD
per day (2017 PPP), India’s poverty rate was, according to the World Bank’s poverty
calculator, 44.8% in 2019 (World Bank, 2022). One estimate of India’s middle-classmarket size put it at between 0.5–1.3 trillion USD in 2019. 4 Compare this with world
imports of 24.3 trillion USD in 2019. Moreover, exports have been a significant catalyst
for overall growth during the high growth years of the Indian economy, during the period
2002–2018 (Chatterjee & Subramanian, 2020). More generally, access to the world’s
deep and elastic market can help Indian companies to enhance scale, innovation, andproductivity.

3. See Kathuria (2018) for a detailed account of trade policies in South Asian countries.
4. See Chatterjee & Subramanian (2020).

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Another way of looking at this is to see some comparative numbers between India andChina, countries with a similar population. In 2021, China attracted 181 billion USD inFDI, compared with India’s 45 billion USD (UNCTAD, 2022). China’s domestic
consumption was 8.1 trillion USD in 2020, India’s was 2.2 trillion USD. And the relative
export numbers (goods and services) in 2021 were 3.55 trillion USD and 0.66 trillion
USD, respectively. In order to get closer to Chinese levels of innovation, productivity, andscale, India will need to reduce the gap on FDI and exports, among other things.
For the rest of South Asia, globalizing is an imperative. For one, three countries—
Bangladesh, Bhutan, and Nepal—are due to graduate from least-developed-country
status over the next one to four years and will need to make much more efforts to secure
global market access. Another imperative for globalization is that countries in the region
have barely begun to engage with the world, and reap the efficiency and welfare gains
from trade. There is a long way to go before they can declare that they have achieved
their peak globalization levels. Indeed, Sri Lanka and Pakistan, currently in the grip ofeconomic crises, have demonstrated the folly of neglecting—indeed, being averse to—international trade and commerce. 5South Asia’s opportunity
World trading patterns are going through ferment. 6 China has been at the heart of manyof these changes. Its wages have been rising for a while now. It is turning more inward,
reducing its participation in global value chains over the last three years. Its exports as ashare of its economy peaked in 2006, at 36% of GDP. For some time, many countries
have been seeking to diversify their supply chains away from overreliance on China, andthis pressure has intensified after the experience of COVID-19. On top of all this, there is
the ongoing U.S.–China trade war. 7
All of these factors provide trading opportunities for the rest of the world, including SouthAsia.
In addition to diversification, supply-chain resilience and sustainability concerns haveforced a discussion on shortening of supply chains. This provides additional impetus tothe case for greater regional economic integration in South Asia—including developing
regional supply chains—which, as seen earlier, is far short of potential.
Can India seize the moment and, in the process, also boost the economic fortunes of its
neighbors? At one level, it could be argued that India is the only country that can match
China for size and so should be the natural favored destination for a world that seeks aChina-diversification strategy—India cannot only provide scale but also lower wages andtechnological capacity in many different sectors. Moreover, the impact of digitalization,huge investments in renewable energy, and a favorable geopolitical environment pushes
the India case further. 8 Should India be able to capitalize on its opportunity, can adjacentcountries benefit from their giant neighbor’s dynamism?
Bangladesh, the second largest economy and exporter in South Asia, also hopes tobecome a favored investment destination for global diversification seekers. It has thebenefit of scale, at least in the apparel sector, but it needs to diversify beyond apparels
and also create a more hospitable environment for investments and level playing field forforeign investors. 9

5. See Kathuria (2022).
6. See Kathuria (2021a) for a discussion of these issues.
7. See also Nicita & Razo (2021).
8. See, for example, the Economist (2022).
9. See Kathuria (2021b).

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The way forward
The average tariff in the European Union was 1.7% in 2020. South Asian countries, all ofwhom have high income aspirations, would do well to remember that high-income
countries, except for some small islands, do not levy high tariffs.
South Asian countries need to attract more FDI, especially of the efficiency-seeking kind,so that they can deepen participation in global value chains. Attracting such FDI would
require low tariffs, and an efficient trade-facilitation environment to speed up the trade inparts that is the hallmark of value chains. 10The rest of South Asia can also gain significantly from India’s dynamism and favorable
geopolitical situation. Regional value chains and intraregional FDI can play a big role inachieving this goal. In turn, this would require policy interventions to reduce the costs of
information flows among firms, ensure more efficient targeting of regional firms byinvestment-promotion authorities, and lower the very high costs of intraregional trade.
These and many other recommendations, based on a detailed study of regional
investment pioneer firms in South Asia, are discussed in Kathuria et al. (2021).
Of course, every policy decision has a tradeoff. Trade liberalization will always havewinners and losers, and the transition can be difficult and long for inefficient sectors. In
this case, it is important for countries to strengthen their social-protection mechanisms
and, if some sectors are particularly sensitive, to delay their liberalization, preferably witha sunset clause.

Conclusion
South Asia cannot afford to deglobalize. In fact, the countries of the region, including
India, need to deepen their engagements in global as well as regional commerce. Mostof them are too small, in terms of GDP, to call a halt to the rise in their trade-to-GDP
ratios. Even India, with its ambitions to become a 5-trillion-USD economy by 2026–27
and an upper-middle-income country by 2047, will need a huge boost from trade, FDI,
and global technologies to achieve that goal.
South Asia is still a relatively untapped market with a strong upside potential. With theright policy mix and vision, the region can capitalize on the very real opportunities thatthe global environment is now presenting.

10. See World Bank (2020).

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References
Asian Development Bank. (n.d.). Integration indicators. Asia Regional Integration Center.
Retrieved October 4, 2022, from https://aric.adb.org/database/integration.
Chatterjee, S., & Arvind Subramanian (2020, October). India’s inward (re)turn: Is it
warranted? Will it work? Ashoka University.
https://ashoka.edu.in/static/doc_uploads/file_1602585593.pdf
The Economist (2022, May 2014). India is likely to be the world’s fastest-growing big
economy this year. https://www.economist.com/briefing/2022/05/14/india-is-likelyto-be-the-worlds-fastest-growing-big-economy-this-year
Kathuria, S. (2022). In South Asia, a reminder that poor economics can be poor politics.
The Wire. https://thewire.in/political-economy/in-south-asia-a-reminder-that-pooreconomics-can-be-poor-politics
Kathuria, Sanjay (2021a), Editor’s Introduction, in Kathuria, Sanjay (edited), The Age ofFerment: Developments in Asian-European Trade Relations. KAS Regional
Economic Programme Asia (SOPAS), Tokyo.
Kathuria, S. (2021b, October 7). Bangladesh is clothes-minded. Foreign Policy.
https://foreignpolicy.com/2021/10/07/bangladesh-garment-industry-economydevelopment-exports-trade-growth/?tpcc=recirc_latest062921
Kathuria, S. (Ed.). (2018). A glass half full: The promise of regional trade in South Asia.
South Asia Development Forum, World Bank. https://doi.org/10.1596/978-1-46481294-1
Kathuria, S., Yatawara, R. A. & Zhu, X. (2021). Regional investment pioneers in SouthAsia: The payoff of knowing your neighbors. South Asia Development Forum,
World Bank. https://doi.org/10.1596/978-1-4648-1534-8
Nicita, A. & Razo, C. (2021, April 27). China: The rise of a trade titan. UNCTAD.
https://unctad.org/news/china-rise-trade-titan
United Nations Conference on Trade and Development (UNCTAD). (2022, June9). Global foreign direct investment flows over the last 30years. https://unctad.org/data-visualization/global-foreign-direct-investment-flowsover-last-30-years
Wolf, M. (2022, September 13). Globalization is not dying, it’s changing. Financial Times.
https://www.ft.com/content/f6fe91ab-39f9-44b0-bff6-505ff6c665a1
World Bank (2020). World development report 2020: Trading for development in the ageof global value chains. https://doi.org/10.1596/978-1-4648-1457-0
World Bank. (2022). Country profile: India. Poverty and Inequality Platform.
Retrieved October 4, 2022, from https://pip.worldbank.org/country-profiles/IND
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7World Integrated Trade Solution (WITS). (n.d.). AHS simple average by region productfrom world % 1988 - 2019. Retrieved October 4, 2022, fromhttps://wits.worldbank.org/CountryProfile/en/Country/BYREGION/StartYear/1988/EndYear/2019/TradeFlow/Import/Indicator/AHS-SMPLAVRG/Partner/WLD/Product/Total

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Regional Economic Programme Asia (SOPAS)
Coordination: Cristita Marie Perez, Senior Programme Manager
Sakuya Iwakawa, Programme Management Assistant
October 17, 2022

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