simplification of documentation at borders. The paper concluded that the rent-seeking informal economy is deep-rooted and makes trade transaction expensive at borders. Sharma (2007) observed that removing such inefficiencies in trade transactions would increase welfare in the region by about US $116 million per annum as compared to a gain in income of US$ 418 million from a preferential removal of regional trade tariffs. However, it is worth noting that some smaller countries in the region gained much more from removal of transaction inefficiencies than from trade liberalization. This underscores the importance of implementing reforms in border infrastructure and logistics in tandem with other policy reforms to enhance regional integration.

Nahar and Siriwardana (2009) examined, in a CGE framework, the contribution of trade liberalization policies to household welfare and poverty in Bangladesh. They found that complete removal of tariffs favors export-oriented, labor-intensive sectors, such as RMGs and the knitting industry in Bangladesh in both the short and long term. They argued that in rural areas trade liberalization has a positive impact on poverty in the short run, and in urban areas it has helped raise poor people to the non-poor category in the long run, despite a negative impact in the short run.

# **3. Market Access for Trade in Goods and Selected Services**

South Asia‘s ability to integrate successfully with the global economy is drawing increasing international interest. However, bilateral trade barriers present an impediment not only to access for trade in goods between countries but integration of the region as a whole. This section discusses market access issues in bilateral trade in goods, particularly for Bangladesh. It presents the pattern of Bangladesh‘s trade with other South Asian countries and applies a global general equilibrium model to explore the effects of an FTA between Bangladesh and India.

**Table 1:** **<u>Share of Bangladesh’s Exports with Neighbouring Countries*</u>**

|**Country**|||**Y**|**ear **|||
|---|---|---|---|---|---|---|
||**1995**|**2000**|**2005**|**2007**|**2008**|**2009**|
|**Bhutan**|0.00|0.00|0.02|0.00|0.00|0.00|
|**India**|0.79|0.35|1.90|2.31|2.20|1.53|
|**Nepal**|0.03|0.00|0.01|0.01|0.01|0.01|
|**Pakistan**|1.03|0.91|0.87|0.41|0.40|0.48|
|**Sri Lanka**|0.41|0.10|0.13|0.13|0.14|0.12|
|**South Asia total**|**2.26**|**1.36**|**2.93**|**2.86**|**2.75**|**2.14**|
|**Rest of the world**|97.74|98.64|97.07|97.14|97.25|97.86|

*As percentage of total export.

_Source_ : Calculated based on UN COMTRADE.

## **3.1. Bangladesh’s Trade with Neighboring Countries**

Intra-regional trade between South Asian countries has been low for decades. Prior to 1951, its share of the region‘s total trade was in double digits. By 1967, however, as South Asia became progressively more closed to the world market and political rivalry between India and Pakistan intensified, intra-regional trade fell to just 2 percent of the total. It rose through the 1990s and by 2002 had increased to 4.4 percent (Baysan _et al_ .). It peaked at 6.21 percent in 2004 and then fell back to 4.46 percent in 2010 (Figure 1a), though this decline in intensity is attributable more to South Asia‘s increased trade with the rest of the world than to intra-regional declines.<sup>15</sup> The region‘s outward trade may look healthy, but its internal activity, compared to other regions such as NAFTA, ASEAN, and EU, is very low (Figure 1b). South

> 15 During 2004 and 2008, South Asia‘s trade with the world more than doubled (from US$245 billion in 2004 to US$600 billion in 2008) and increased faster than intra-regional trade (based on IMF DOTS).

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