To explore the potential of an India–Bangladesh bilateral FTA, the World Bank (2006) provided a comparative assessment between Bangladesh and India with respect to cement, light bulbs, sugar, and readymade garments (RMGs). The partial equilibrium simulation suggested that for cement, lights bulbs, and sugar the likely effects of an FTA between Bangladesh and India were an expansion of Indian exports to Bangladesh, but no exports from Bangladesh to India. This is mainly because Indian export prices for these products are substantially lower than ex-factory, before-tax prices of the same or similar products in Bangladesh. The simulations for RMGs predicted increased Bangladeshi exports to India and also increased RMG exports from India to Bangladesh. The study found that an FTA would bring large welfare gains for consumers in Bangladesh provided there is adequate expansion of infrastructure and administrative capacity at custom borders. It, however, cautioned that the benefits of such an FTA for Bangladesh could be wiped out if it had the effect of keeping out cheaper, third-country imports (mainly from East Asia), and such trade diversion costs could be large. The study suggested that the only way to minimize trade diversion costs would be through further unilateral liberalization.

Studies based on CGE models<sup>12</sup> predict the effects of the trading arrangement on all variables including production, consumption, and trade flows in all sectors of the economy as well as on welfare. These studies employed the Global Trade Analysis Project (GTAP) database and model, though they differ in technicalities and assumptions because of the evolution of the GTAP itself. Pigato _et al._ found that regional integration in South Asia would produce benefits for member nations, though unilateral trade liberalization would yield larger gains. Bandara and Yu argued that, in terms of real income, such integration would lead to gains for India and Sri Lanka, while Bangladesh would stand to lose. Raihan and Razzaque found that Bangladesh would incur a net welfare loss from SAFTA because, despite a positive trade creation effect, the negative trade diversion effect would be large enough to offset the positive gain. However, all other South Asian countries would gain from SAFTA, and as far as any individual country is concerned, India would gain the maximum.

From a trade perspective, and to forge greater regional integration in South Asia, there is a need to reduce trade costs. Despite falling tariffs, trade in South Asia has suffered because of higher trade costs. Banik and Gilbert (2008) found that for a 100 percent increase in trade costs, exports from India to neighboring Asia are expected to fall between 42 percent and 73 percent. De (2009) found that trade transport costs across South Asia are very high and vary across goods and countries. The cost of trade transport increases for landlocked countries like Nepal. Land borders in South Asia are overcrowded and need special attention to reduce time delays and transaction costs. Higher trade costs not only restrict trade but can also reduce the political will for greater regional cooperation.

Other studies show that trade facilitation reforms significantly contribute to greater regional integration in South Asia‘s intra-regional trade.<sup>13</sup> Hertel and Mirza (2009) observed that trade facilitation plays an important role in determining patterns of global trade flows, where the relative effect on bilateral trade of improving exporters‘ border logistics is larger than improving importers‘ trade facilitation. The study also revealed that proportionate increases in intra-regional trade are larger in all countries for textile and clothing, automobiles and parts, and other manufactured goods.

South Asia is notoriously weak in facilitating trade at borders.<sup>14</sup> The region suffers from excessive direct costs and time taken at border crossings, and inefficiencies in cross-border transactions. Trade in this region is also constrained by poor infrastructure, congestion, high costs, and lengthy delays. These problems are particularly severe at border crossings, many of which pose significant barriers to trade. De and Ghosh (2008) argued that transaction costs of India‘s exports to Bangladesh have increased despite

> 12 Major studies that applied the CGE model to regional integration in South Asia are Pigato _et al._ (1997), Bandara and Yu (2003), and Raihan and Razzaque (2007).

> 13 Refer, for example, Asian Development Bank (ADB)-UNCTAD (2008)

> 14 See, for example, De (2008a, 2008b), and De (2011).

4