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Cover photo: Avigator Fortuner; Hananeko_Studio and Lina Mo/Shutterstock Cover design: Cybil Maradza DEEPENING LINKAGES BETWEEN SOUTH ASIA AND SOUTH EAST ASIA SYNTHESIS REPORT 4 TABLE OF CONTENTS Acknowledgements vi Executive Summary viii Introduction xi 1. TRENDS IN REGIONAL TRADE, FOREIGN DIRECT INVESTMENT, AND MIGRATION 1 Dynamic Regional Trade in Goods 1 Unexplored Potential of Regional Trade in Services 3 Cross-Border Trade in Services 5 Trends in Investment 9 Migration Trends 11 2. WHAT EXPLAINS THE LIMITED INTEGRATION BETWEEN SOUTH ASIA AND SOUTHEAST ASIA? 14 Higher Tariffs in South Asia Than in Southeast Asia 15 NTBs Remain More Important Than Tariffs 16 Trade Facilitation Needs to Improve 20 Significant Barriers Hamper Trade in Services 23 Investment Policy Barriers and Domestic Factors Result in Significant “Missing” Interregional FDIs 26 FDI and Migration Policies: Regional Snapshots 28 3. WHAT ARE THE EXPECTED GAINS FROM DEEPENING LINKAGES BETWEEN SOUTH ASIA AND SOUTHEAST ASIA? 34 Estimating the Economywide Gains from Deeper Integration between South Asia and Southeast Asia 34 Impacts on South Asia 35 Impacts on Southeast Asia 38 Estimating Potential Gains from Services Trade Liberalization in South Asia and Southeast Asia 41 4. ADVANCING REGIONAL INTEGRATION BETWEEN SOUTH ASIA AND SOUTHEAST ASIA – SELECTED ISSUES 46 Addressing Non-Tariff Measures – The Case of Sanitary and Phytosanitary Reforms 47 Service Sectors and Regulatory Approaches – The Case of Digital Services 50 Leveraging the Untapped Potential of FDI and Its Complementarity with Labor Migration 53 Making Regional Trade Sustainable – The Role of Environmental Goods and Services 54 References 58 Annexes 74 5 DEEPENING LINKAGES BETWEEN SOUTH ASIA AND SOUTHEAST ASIA SUMMARY CHAPTER ACKNOWLEDGEMENTS This report is a product of the Macroeconomics, Kee, Lead Economist in the Development Trade and Investment (MTI) Global Practice. Economics Vice Presidency, Alejandro Forero, The preparation was led by Nora Dihel, Senior Consultant in the Development Economics Economist in the Macroeconomics, Trade and Vice Presidency, and Ana Fernandes, Lead Investment Global Practice, with a core team Economist in the Development Economics consisting of Caroline Nogueira, Extended Term Vice Presidency. Consultant in the Finance, Competitiveness and Innovation Global Practice, and Nadeem • The Untapped Potential of FDI in South Asia: Rizwan, Consultant in the Macroeconomics, The Case for Improving South-East Asian Trade and Investment Global Practice. The report Investment Ties, prepared by Csilla Lakatos, was prepared under the oversight of Manuela Senior Economist in the Macroeconomics, Francisco, Director Country Credit Risk in the Trade and Investment Global Practice, and Chief Risk Officer Vice Presidency of the World peer reviewed by Valerie Mercer-Blackman, Bank, and Zoubida Allaoua, South Asia Regional Senior Economist in the Office of the Chief Director in the Equitable Growth, Finance and Economist, South Asia Region. Institutions Vice Presidency of the World Bank, in close collaboration with Yutaka Yoshino, Lead • Foreign Direct Investment and Labor Country Economist, in the Equitable Growth, Migration Complementarity for Regional Finance, and Institutions Vice Presidency of the Integration and Development in South World Bank. and Southeast Asia (including the annex with country profiles), prepared by Stewart The synthesis report draws on the following Nixon, Consultant in the Macroeconomics, background papers and internal notes: Trade and Investment Global Practice, and peer reviewed by Siddharth Sharma, • Trade Potential in Environmental Goods and Senior Economist in the Office of the Chief Services in South Asia and South East Asia, Economist, South Asia Region. prepared by Aleksandar Stojanov, Junior Professional Officer in the Global Trade and • South Asian Migration during a Pandemic: Regional Integration Unit. Adapting to Changes and Gearing Up for New Opportunities, prepared by Dama Yarcia, • Regulatory Challenges for Trade in Consultant in the Macroeconomics, Trade Environmental Goods and Services in South and Investment Global Practice, with input Asia and South East Asia, prepared by Vicky from Maja Vezmar, Consultant in the Social Chemutai, Young Professional, in the Global Protection and Jobs Global Practice, and Trade and Regional Integration Unit. Supriyo De, the Economic Advisory Council to the Prime Minister of India and former World • An Analysis of South Asia Region’s Trade Bank Senior Economist. Research support was Profile, 2000-2020, prepared by Hiau-Looi provided by Sadia Sarwar, Consultant in the 6 ACKNOWLEDGEMENTS Social Protection and Jobs Global Practice. Sanitary and Phytosanitary (SPS) Regimes Additional comments and input were received in South Asia and Southeast Asia, prepared from Dilip Ratha, Lead Economist in the Social by Eric Allen, Consultant in the Global Trade Protection and Jobs Global Practice; Sonia and Regional Integration Unit, with feedback Plaza, Senior Economist in the Finance, and input from Shane Sela, Senior Trade Competitiveness and Innovation Global Facilitation Specialist in the Global Trade and Practice; Eung Ju Kim, Analyst in the Social Regional Integration Unit, and John Keyser, Protection and Jobs Global Practice; and Senior Economist in the Macroeconomics, Ganesh Kumar Seshan, Senior Economist in Trade and Investment Global Practice. the Poverty and Equity Global Practice. Useful comments and suggestions on earlier • The Untapped Benefits of Deeper South– drafts were provided by Cecile Fruman, Director, East Asia Economic Integration, prepared South Asia Regional Integration and Engagement; by Csilla Lakatos, Senior Economist in the Yutaka Yoshino, Lead Country Economist in the Macroeconomics, Trade and Investment Equitable Growth, Finance, and Institutions Vice Global Practice, and peer reviewed by Michael Presidency; Gonzalo Varela, Senior Economist in Ferrantino, Lead Economist in the Global the Macroeconomics, Trade and Investment Global Trade and Regional Integration Unit. Practice; Nazmus Sadat Khan, Economist in the Macroeconomics, Trade and Investment Global • Facilitating Services Trade in South Asia and Practice; Mandakini Kaul, Regional Coordinator in Southeast Asia, prepared by Ben Shepherd, the South Asia Regional Integration and Engagement Principal, Developing Trade Consultants and Unit; and Sanjay Gupta, Consultant in the South Asia Consultant in the Macroeconomics, Trade Regional Integration and Engagement Unit. and Investment Global Practice. The peer reviewers were Massimiliano Cali, Senior • IT and IT Enabled Services in Southern Asia: Economist in the Macroeconomics, Trade and Analysis of Regional Dynamics Using a Trade in Investment Global Practice; Roberti Echandi, Tasks Approach, prepared by Pritam Banerjee, Senior Trade Specialist in the Global Trade and Consultant in the Macroeconomics, Trade and Regional Integration Unit; and Mia Mikic, former Investment Global Practice, and peer reviewed Director, The Economic and Social Commission by Sebastian Saez, Lead Country Economist in for Asia and the Pacific (ESCAP) Trade, Investment the Equitable Growth, Finance, and Institutions and Innovation Division, Advisor at Large, ARTNeT, Vice Presidency of the World Bank. and Visiting Fellow, Institute for Euro-Asian Studies. Sandra Gain, Consultant in the Macroeconomics, • E-Trade in Services in South and Southeast Trade and Investment Global Practice, provided Asia, prepared by Hook Tangaza, Consultant, editing support. Rondromalala Raharimahefa, in the Macroeconomics, Trade and Investment Program Assistant, and Bibhuti Chakma, Team Global Practice ESAMU, and reviewed Assistant, provided valuable administrative support. internally (Virtual Decision Review E-trade reports: “E-Trade in Services in South Asia and The project was funded by the Program for South East Asia” and “Ramping up E-Trade in Asia Connectivity and Trade (PACT), a trust fund Bhutan,” October 2020). administered by the World Bank and supported by the United Kingdom’s Foreign, Commonwealth, • Comparative Analysis on the Impact of and Development Office. 7 EXECUTIVE SUMMARY Although economic linkages between South Asia1 learning to estimate the restrictiveness of services and Southeast Asia2 have been strengthened over the barriers and an economywide general equilibrium past decade, integration between these two regions model that explicitly incorporates services and remains limited. Can new approaches to regional investments to provide a more complete picture integration help revitalize trade and economic links of regional integration that goes beyond trade between South Asia and Southeast Asia? in goods. Finally, the assessments consider the rising global trade tensions and challenges related This report looks at new approaches to strengthen to the COVID-19 pandemic. trade and revitalize economic links between South Asia and Southeast Asia. It documents the LIMITED INTEGRATION emerging trade, investment, and migration trends BETWEEN SOUTH ASIA between the two regions. The report explores the AND SOUTHEAST ASIA current constraints that limit the links between South Asia and Southeast Asia, discusses the There has been limited integration between South expected gains from their removal, and provides Asia and Southeast Asia despite progress over the recommendations on advancing regional past decade. Although trade linkages have grown integration to policy makers in both regions. by more than ninefold over the past two decades – from US$38 billion in 2000 to US$349 billion The analysis adds value to previous studies by in 2018 – significant untapped potential for trade focusing on less explored areas, such as digital integration between South Asia and Southeast issues and environmental goods and services . It Asia remains. At US$260 billion, Southeast Asian employs novel data sets on services, investments, exports to South Asia are almost three times and migration to better understand the higher than South Asian exports to Southeast Asia, intraregional complementarities. The report also amounting to 4.2 and 25.6 percent of total exports applies innovative techniques, such as machine in Southeast Asia and South Asia, respectively. 1 South Asia includes Bangladesh, Bhutan, India, Maldives, Nepal, Pakistan, and Sri Lanka. 2 Southeast Asia includes Brunei, Cambodia, China, Indonesia, the Lao People’s Democratic Republic, Malaysia, the Philippines, Singapore, Thailand, and Vietnam. 3 Environmental goods and services are those whose main function is to address or contribute to an environmental issue or challenge. However, this has proven difficult to translate into the standard goods and services classifications used to analyse trade. The simplest and widest used list for goods is that of the Asia-Pacific Economic Cooperation, but other broader lists have been proposed by the Organisation for Economic Co-operation and Development, among others (see annex A). 8 EXECUTIVE SUMMARY Foreign direct investment (FDI) linkages are even EXPECTED GAINS FROM more underdeveloped. Interregional FDI stocks DEEPENING LINKAGES amounted to a total of US$15 billion in 2019, up from BETWEEN SOUTH ASIA US$4.6 billion in 2009. Southeast Asian FDI stocks AND SOUTHEAST ASIA in South Asia have steadily increased over the years to a total of US$13.4 billion in 2019, compared with Deepening integration with Southeast Asia can stagnating South Asian FDI stocks in Southeast Asia, expand trade, generate greater inflow of FDI, and at only US$1.3 billion in 2019. Finally, the importance promote digitization and environmental protection of intraregional migration in South Asia has declined, in South Asia. Greater access to goods and with migration flows shifting toward the Middle services markets in Southeast Asia provides much- East and North Africa and those to Southeast Asia needed diversification for South Asian exports. exhibiting the fastest growth. The ongoing pandemic highlights the benefits of rapid technological progress and digitization Despite their growth over the past 20 years, trade in connecting countries. Digitization has also and investment linkages between South Asia expedited information exchange between border and Southeast Asia are still constrained by high agencies and traders within countries, reducing tariffs, non-tariff barriers (NTBs) and burdensome person-to-person interactions and addressing and costly customs processes. South Asian trade-related issues in a more expedient manner. tariffs applied on imports from Southeast Asia The pandemic also calls for trade to play a bigger (amounting to 6.9 percent) are nearly three times role in climate action while fostering development. higher than Southeast Asian tariffs on imports These issues are particularly important for South from South Asia (at 2.8 percent). Asia as it remains the most disconnected region, with intraregional trade between its nations at While tariffs remain important obstacles to only 5.6 percent (compared with 25 percent regional integration, the restrictiveness of NTBs, in the Association of Southeast Asian Nations at an average interregional ad valorem equivalent (ASEAN) or 22 percent in Sub-Saharan Africa). As of 225 percent, towers over that of tariffs. Non- international cooperation is under growing strain tariff measures (NTMs) cover a wide range of because of the COVID-19 pandemic and trade measures, such as sanitary and phytosanitary tensions between the United States and China, (SPS) requirements, technical barriers to trade, South Asian and Southeast Asian countries may pre-shipment inspection, nonautomatic licensing consider new regional cooperation opportunities requirements, and price controls. While some to stimulate economic growth, poverty reduction, NTMs are justified and aim to protect human and inclusiveness in a post-pandemic world. health and safety of plant or animal life, there are many that serve protectionist purposes and are a The results show that a South Asia–Southeast significant deterrent to trade and an impediment Asia regional integration agenda that combines to the competitiveness of firms. the liberalization of tariffs, NTBs, trade facilitation, and FDI barriers could boost gross Significant barriers hamper trade in services, with domestic product (GDP) by 0.4 to10.6 percent high services ad valorem equivalents relative to for South Asia and by 0.1 to 0.4 percent for tariff rates for goods, more than 10 percent in all Southeast Asia. If the trade and investment cases, and as high as 70 percent in some sectors. reforms pursued within the interregional There is significant room to improve the efficiency integration are extended in a multilateral of trade processes and that of control agencies, integration track to third countries and intra customs, and border authorities in both regions. regionally within South Asia and Southeast Asia, the gains for participating countries would be 9 DEEPENING LINKAGES BETWEEN SOUTH ASIA AND SOUTHEAST ASIA SUMMARY CHAPTER significant, increasing GDP by 17.6 and 15.7 realization of their importance in the regional percent in the two regions, respectively. The trading landscape. costs of no integration between the two regions are significant, cutting the GDP gains by half • The second implication comes in the form for South Asia and by a third for Southeast of a partial exception to this finding: South Asia. Finally, the results also show that given Asia. Given historical political tensions there, a sustained trade dispute between the United the degree of regional integration is very States and China, Southeast Asian countries low compared with Southeast Asia and could capitalize on the opportunities provided other world regions. The gains from regional by US-China trade diversion, with GDP gains integration in South Asia are therefore very that could add up to 0.5 and 0.8 percent for high in relative terms, that is, starting from a South Asia and Southeast Asia (excluding the baseline of low intraregional trade. Of course, losses experienced by China), respectively. regional integration is not straightforward given the political landscape. The size of the POLICY RECOMMENDATIONS gains from preferential integration should FOR ADVANCING not overshadow the more general finding INTEGRATION BETWEEN that multilateral liberalization, including SOUTH ASIA AND when undertaken autonomously, can bring SOUTHEAST ASIA significant economic gains to South Asia just as it can to Southeast Asia. The evidence in this report has three key implications for policy makers: • The third implication is that an ambitious regional integration agenda that covers • First, as a general proposition, the goods, services, and investments can boost largest economic gains come from gains for both South Asia and Southeast nondiscriminatory policy reforms. While Asia. An agenda that covers services and these reforms – covering goods, services, and investment reforms and improvements investment – are consistent with the aims of in trade facilitation, in addition to the the multilateral trading system, they do not liberalization of tariffs and NTBs, produces strictly require multilateral negotiations to be the largest benefits for both regions. feasible: individual countries are always free to liberalize autonomously, on a de facto most Regional integration can be pursued through favored nation basis. This path forward has free trade agreements (FTAs). South Asian policy much to recommend, as it allows countries makers can join existing regional groupings to achieve significant economic gains but such as ASEAN or the Regional Comprehensive does not require complex coordination with Economic Partnership. A case can be made policy makers in other countries. Given the for signing bilateral agreements with individual difficulty of moving forward on multilateral Southeast Asian countries. Hub-and-spoke FTAs4 negotiations, this path is one that should tend to marginalize the spoke economies, since seem increasingly appealing to policy makers factories in the spokes have artificially lower market in South Asia and Southeast Asia, especially access than factories in the hub. Consequently, in investment in services, with the growing hub-and-spoke FTAs can become an artificial 4 Hub-and-spoke FTAs may produce an inferior outcome for a region and could prove divisive as they tend to marginalize the spoke economies both economically and politically while at the same time granting leverage to the hub economy (Baldwin, 2004). 10 EXECUTIVE SUMMARY deterrent to investment in the outer economies. attempting to scale up their business from the Filling in the gaps with spoke-spoke FTAs may national level to trading at the regional level. To remove this policy-induced investment deterrent address regulatory challenges and heterogeneity and avoid self-induced peripherality for spoke issues and prepare for the digital developments nations although political economy constraints over the coming decades, policy makers in South may restrain such liberalization. Asia and Southeast Asia can focus on developing supporting policies for digital services, pursuing Deeper regulatory cooperation can be pursued sectoral legislative and regulatory reforms in as part of FTAs or other regional mechanisms. services, and harmonizing or encouraging mutual Regulatory cooperation in the selected areas recognition of qualifications and regulations. examined in this report, ranging from protection at the border, such as SPS measures, to new Leveraging the Untapped Potential of FDI and Its elements, such as digital trade, complementarity Complementarity with Labor Migration of factors, and environmental goods and services, is explored in more depth in this report as a means Mounting evidence of FDI and migration of providing options for deepening economic complementarity suggests that developing linkages between South Asia and Southeast Asia: countries could better leverage factor movements to support national and regional economic Addressing Non-Tariff Measures: The Case of development. Potentially large gains are achievable SPS Reforms at minor cost by simply improving information accessibility for investors and migrants. Increasingly, SPS measures are impacting trade in agricultural goods and exporters must meet Making Regional Trade Sustainable: The Role of progressively more complex requirements. Environmental Goods and Services Numerous SPS-related procedural roadblocks exist in Asia. To address outdated legislation, Buyers of products manufactured in South Asia overlapping bureaucracies, and insufficient and Southeast Asia are increasingly pressuring their capacity, policy makers in South Asia and suppliers to demonstrate a range of environmental Southeast Asia can focus on national and regional attributes and outcomes. To move toward more reforms such as implementing trade facilitation sustainable trade growth, policy makers in South Asia measures, and improving regional cooperation and Southeast Asia can focus on reducing the tariffs on developing SPS capacity, mutual recognition, on environmental goods to boost domestic uptake and harmonization of SPS processes. of cleaner technologies and spur green growth; upgrading of existing trade agreements to allow Service Sectors and Regulatory Approaches: The for the inclusion of more environmentally friendly Case of Digital Services provisions; liberalizing trade in services to promote the free movement of environmental experts Governments in South Asia and Southeast Asia and services; facilitating trade in environmental must adapt to the rapidly evolving realities of the goods and services to help countries commit to digital services market. As technological disruption and implement more ambitious climate-related reaches highly regulated sectors, adequate targets; and investing in trade facilitation and regulation becomes pressing. Regulatory reducing NTBs on environmental goods and heterogeneity is particularly challenging for services to help domestic firms maintain their many small and medium-size enterprises when comparative advantages. 11 12 INTRODUCTION Although economic linkages between South self-sufficiency that have been apparent since the Asia and Southeast Asia have been strengthened global financial crisis. In Asia, the pandemic may over the past two decades, integration between reshape trade, investment, and migration flows, these two regions remains limited. Studies point accelerating the trends toward shortening supply to numerous challenges of integration, such as chains and reshoring by multinationals, with lack of adequate “hard” and “soft” infrastructure implications for regional integration strategies. connectivity between economies, tariff barriers and non-tariff barriers (NTBs), closed services Deepening integration with Southeast Asia markets, and limited participation of lower-income can expand trade, generate greater inflow of economies in regional production networks and foreign direct investment (FDI), and promote supply chains.5 The lack of proper and effective digitization and environmental protection in implementation of regional agreements, such South Asia. Greater access to goods and services as the South Asian Association for Regional markets in Southeast Asia provides much- Cooperation or the Regional Comprehensive needed diversification for South Asian exports. Economic Partnership deal in 2019, further The ongoing pandemic highlights the benefits accentuates regional divisions. of rapid technological progress and digitization in connecting countries. Digitization has also The COVID-19 crisis has severely affected expedited information exchange between border the global economy, including Asia, through agencies and traders within countries, reducing disruptions to flows of goods and services in the person-to-person interactions and addressing region’s global value chains (GVCs). There is no trade-related issues in a more expedient manner. clear picture of how the pandemic and geopolitical The pandemic also calls for trade to play a bigger tensions will transform the global economy or role in climate action while fostering development. affect the interdependence between production These issues are particularly important for South networks, but there are expectations that they may Asia as it remains the most disconnected region, weaken globalization and accelerate demands for with intraregional trade between its nations at 5 ADB (2021a); ASEAN and World Bank (2013); Wignaraja (2014); Wignaraja et al. (2014); Sapkota et al. (2018). 13 DEEPENING LINKAGES BETWEEN SOUTH ASIA AND SOUTHEAST ASIA SUMMARY CHAPTER only 5.6 percent (compared with 25 percent and migration for better understanding the in the Association of Southeast Asian Nations interregional complementarities. The report also (ASEAN) or 22 percent in Sub-Saharan Africa). As applies innovative techniques, such as machine international cooperation is under growing strains learning to estimate the restrictiveness of services because of the COVID-19 pandemic and trade barriers and an economywide general equilibrium tensions between the United States and China, model that explicitly incorporates services and South Asian and Southeast Asian countries may investment to provide a more complete picture consider new regional cooperation opportunities of regional integration that goes beyond trade in to stimulate economic growth, poverty reduction, goods. Finally, the assessments take into account and inclusiveness in a post-pandemic world. the rising global trade tensions and challenges related to the COVID-19 pandemic. The main objective of this report is to look at new approaches to strengthen trade and revitalize economic links between South Asia and Southeast Asia. Section 1 documents the emerging trade, investment, and migration trends between South Asia and Southeast Asia, with particular focus on digital and environmental goods and services.6 Section 2 explores the current constraints that limit the links between the two regions, and section 3 discusses the expected gains from their removal. Section 4 concludes with recommendations on advancing regional integration between South Asia and Southeast Asia. The analysis adds value to previous studies by focusing on less explored areas, such as digital and environmental issues, in a regional context and employing novel data sets on services, investment, 6 Environmental goods and services are those whose main function is to address or contribute to an environmental issue or challenge. However, this has proven difficult to translate into the standard goods and services classifications used to analyze trade. The simplest and widest used list for goods is that of the Asia-Pacific Economic Cooperation, but other broader lists have been proposed by the Organisation for Economic Co-operation and Development, among others (see annex A). 14 1. TRENDS IN REGIONAL TRADE, FOREIGN DIRECT INVESTMENT, AND MIGRATION DYNAMIC REGIONAL TRADE IN GOODS South Asian trade with Southeast Asia has grown As a result, the share of trade with Southeast Asia significantly over the past 20 years. Trade with grew from 13.8 percent of total South Asian trade Southeast Asia grew on average by 14.3 percent in 2000 to 23.2 percent in 2019, while trade with between 2000 and 2019 to reach US$241.2 billion the rest of the world declined from 82.1 to 71.2 in 2019. It outpaced the growth in intraregional percent. At the same time, intraregional trade in trade (13.2 percent) as well as trade with the rest South Asia grew marginally from 4 percent in of the world (11.9 percent) over the same period. 2000 to 5.6 percent in 2019 (figure 1).7 FIGURE 1 | SOUTH ASIA’S TRADE WITH DIFFERENT REGIONS (percent of total South Asian trade) 100 80 77 77 77 77 76 75 76 76 74 72 71 71 71 71 60 82 81 80 79 78 76 40 6 6 6 6 6 5 5 4 5 6 20 4 4 5 6 6 6 5 5 5 4 12 15 15 17 18 18 18 18 18 19 20 20 19 20 20 22 23 24 23 23 0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 Trade with Southeast Asia Intraregional trade Trade with rest of the world Source: Calculations using BACI data. 7 The analysis uses the BACI database developed by the Centre d’Études Prospectives et d’Informations Internationales (CEPII). The BACI database provides disaggregated data on bilateral trade flows for more than 5,000 products and 200 countries. The database is built from data directly reported by each country to the United Nations Statistical Division (Comtrade). The CEPII developed a procedure that reconciles the declarations of the exporter and the importer, which may be different in the original data. Products are defined as items from the Harmonized System nomenclature, at the 6-digit level. The figures are based on the share of intraregional trade in total trade. Intraregional trade as a share of regional gross domestic product hovers around only 1.0 percent in South Asia, versus 2.6 percent in Sub-Saharan Africa and about 11.0 percent in East Asia and Pacific, reflecting low levels of trade within the region (Kathuria 2018). 15 DEEPENING LINKAGES BETWEEN SOUTH ASIA AND SOUTHEAST ASIA SUMMARY CHAPTER South Asian exports to Southeast Asia are driven comes from intraregional trade. Overall, the growth primarily by India. In 2019, South Asia’s exports to of environmental goods exports has intensified in Southeast Asia stood at around US$57.1 billion. India’s Southeast Asia over the past decades, increasing exports to Southeast Asia increased at a higher rate from 5.2 percent in 2002 to 13.7 percent in 2020. than those of other South Asian economies and By contrast, South Asia’s performance is relatively accounted for almost 89 percent of exports from modest, with the environmental goods share South Asia to Southeast Asia in 2019. of total exports remaining on average around 4 percent (Stojanov 2021). Manufacturing products dominate South Asia’s trade with Southeast Asia but trade in high-tech Southeast Asian economies are more integrated products such as information and communications into GVCs compared with South Asia, in both technology (ICT) is declining. Although clothing downstream and upstream economic activities is the region’s main manufacturing export to the (table 1). Regardless of the stagnating growth world, South Asia mostly exports machinery and of GVCs in South Asia and the possibility of transport equipment and chemical products to retrenchment due to automation and trade Southeast Asia. conflicts, participation in value chains still provides opportunities to boost growth through adaptive Trade in environmental goods remains limited policies, deeper reforms, and expansion of digital between South Asia and Southeast Asia, yet there infrastructure. By deepening ties with Southeast is untapped trade potential. Less than 10 percent of Asia, South Asian nations can improve their linkages the regions’ environmental exports is destined for with GVCs, acquire knowledge, and grow. countries in South Asia or Southeast Asia. Similarly, less than 7 percent of total imports in both regions TABLE 1 | PARTICIPATION IN GVCS BY SOUTH ASIA AND SOUTHEAST ASIA Trade based Production based (% of gross exports) (% of domestic value added) 2000 2010 2020 2000 2010 2020 South Asia Bangladesh 22.2 25.6 24.0 2.5 4.6 1.5 Bhutan 27.2 34.5 30.4 10.6 20.2 14.7 India 30.9 38.6 33.4 6.4 9.7 9.0 Maldives 40.5 45.4 39.5 34.5 30.2 24.6 Nepal 28.7 31.6 38.3 9.6 3.7 3.8 Pakistan 26.2 28.6 23.3 6.6 6.2 3.5 Sri Lanka 35.1 34.4 26.2 16.7 7.2 4.4 Southeast Asia Brunei Darussalam 32.9 37.3 44.2 48.2 55.5 44.9 Cambodia 37.2 38.1 50.0 8.6 10.8 23.3 China 30.8 35.1 32.2 8.2 10.7 7.0 Indonesia 37.1 40.0 35.0 21.5 16.2 10.9 16 1. TRENDS IN REGIONAL TRADE, FOREIGN DIRECT INVESTMENT, AND MIGRATION Lao PDR 36.4 36.6 32.1 16.7 15.8 24.2 Malaysia 67.3 60.8 55.3 42.3 33.1 31.2 Philippines 43.1 42.4 45.4 14.5 14.2 10.2 Singapore 66.8 65.8 58.0 40.0 44.1 42.2 Thailand 43.7 48.7 41.7 19.7 20.1 19.8 Vietnam 36.6 54.5 56.7 19.6 21.7 22.5 Source: ADB 2021b. Note: For the methodology, see ADB (2021b). UNEXPLORED POTENTIAL OF REGIONAL TRADE IN SERVICES Services play a significant and growing role in than 20 percent in all cases. By comparison, South Asia and Southeast Asia. In all, Southeast the ratio of merchandise trade to GDP is Asian and South Asian services account for significantly higher, a multiple of five or six in at least 40 percent of total economic activity many cases. While output and employment (figure 2). Similarly, services account for over have a large role for services relative to goods, one-third of total employment in all countries including manufacturing, the same is not true and up to 60 percent in Malaysia and 80 percent of trade: these data suggest that economic in Singapore. With the exception of Singapore, activity still tends to skew heavily toward goods, however, services trade relative to gross although the measurement of services trade domestic product (GDP) is much smaller, at less faces numerous challenges (box 1). FIGURE 2 | CORE SERVICES INDICATORS, SELECTED ASIAN COUNTRIES, 2019 120 100 80 Percent 60 40 20 0 Bangladesh China India Indonesia Malaysia Myanmar Pakistan Philippines Singapore Thailand Vietnam Trade Value Added Employment Source: World Development Indicators. Note: Trade is total services trade relative to gross domestic product (GDP); value added is services sector value added as a percentage of GDP; and employment is service sector employment as a percentage of total employment. 17 DEEPENING LINKAGES BETWEEN SOUTH ASIA AND SOUTHEAST ASIA SUMMARY CHAPTER BOX 1 | MEASURING TRADE IN SERVICES – CHALLENGES AND RECENT DEVELOPMENTS The data used to compute trade in services in figure 2 accountant works temporarily in Bangladesh and then are drawn from the balance of payments, but the General returns to Singapore. Agreement on Trade in Services (GATS) recognizes four modes of supply for international services trade that Figure B1.1 shows total services exports for the countries do not correspond to statistical concepts in standard of interest in 2017, the latest year for which data are balance of payments data. GATS Mode 1 is pure cross- available, broken down by GATS mode of supply. A clear border services trade, for instance when a lawyer in finding is that Mode 3 is an important way of selling Malaysia advises a client in the Philippines without services abroad, in particular for China and Singapore, either party moving. Mode 2 involves movement of while other modes that are only imperfectly captured the consumer, such as when an Indian tourist visits by the balance of payments are also significant. Mode Thailand. Mode 3 is sales by foreign affiliates, 1 accounts for no more than 60 percent of total services for instance when a Chinese distributor sets up a exports once the calculations account for all modes of subsidiary in Pakistan and uses it to sell services supply. As a result, the data on trade relative to gross there. Finally, Mode 4 involves temporary movements domestic product (GDP) in figure 2 tend to understate by service providers, such as when a Singaporean the true level of services trade. FIGURE B1.1 | SERVICES EXPORTS, BY MODE OF SUPPLY, SELECTED ASIAN COUNTRIES, 2017 (PERCENT) 100% 80% 60% 40% 20% 0% Bangladesh China Indonesia India Myanmar Malaysia Pakistan Philippines Singapore Thailand Vietnam Mode 1 Mode 2 Mode 3 Mode 4 Source: TISMOS. Table B1.1 presents dollar figures for total merchandise trade in TISMOS is more than double what is recorded trade as a point of comparison, then total services trade in the balance of payments, while a number of other (the sum of exports and imports) for the countries of countries see differences of 50 percent or more. interest based on TISMOS and the balance of payments. Although services trade relative to GDP is still lower The comparison makes the point clearly that services than for goods in all the countries considered here, trade is more widespread than standard data sources the difference is less pronounced once the calculation would suggest, often substantially so: China’s services accounts for all modes of supply. 18 1. TRENDS IN REGIONAL TRADE, FOREIGN DIRECT INVESTMENT, AND MIGRATION TABLE B1.1 | TOTAL SERVICES TRADE FROM DIFFERENT SOURCES, 2017 (US$, BILLIONS) Goods Services BOP Services TISMOS Bangladesh 88.790 12.382 24.519 China 4003.572 667.784 1957.469 India 762.510 299.913 405.423 Indonesia 320.727 57.142 103.272 Malaysia 414.698 79.780 121.509 Myanmar 33.158 6.705 10.431 Pakistan 78.126 17.799 26.963 Philippines 171.403 61.252 87.232 Singapore 697.547 348.024 659.877 Thailand 461.872 118.588 159.883 Vietnam 420.704 29.660 61.402 Source: World Development Indicators and TISMOS. Why does this disjuncture exist between goods and generally not true of services. The GATS, like the General services trade, in particular given the rapid development Agreement on Tariffs and Trade, established bindings for of information and communications technologies over most favored nation trade policies in services, but those recent years? An important part of the answer is likely bindings were for many countries restrictive compared to relate to trade policy: while tariffs have fallen with applied policies when the agreement was signed. to historically low levels in goods sectors through Since then, multilateral services negotiations have successive rounds of World Trade Organization faltered, with the result that large-scale liberalization negotiations, as well as regional initiatives, the same is has not taken place through multilateral agreements. Source: Shepherd (2020). CROSS-BORDER TRADE IN SERVICES South Asia’s share of cross-border services trade almost halved from 2005 to 2019, while the trade with Southeast Asia increased slightly from share of the remaining South Asian economies 10.9 percent in 2005 to 12.8 percent in 2019. remained mostly flat. At the same time, intraregional services trade remained mostly flat, at around 3 percent of total India and Singapore are major players in services trade, while the share of services trade computer and information technology (IT) with the rest of the world witnessed a marginal services, while most other South Asian and decrease. In 2019, India accounted for more Southeast Asian countries are lagging. Cost than three-quarters of services trade (exports competitiveness driven by a large pool of qualified plus imports) with Southeast Asia, growing by talent, coupled with investments in IT/science almost 4 percentage points from 2005. Pakistan’s education, as well as software technology parks for contribution to services trade with Southeast Asia better infrastructure and continuous innovation, 19 DEEPENING LINKAGES BETWEEN SOUTH ASIA AND SOUTHEAST ASIA SUMMARY CHAPTER are major sources of India’s ICT success. Gaps in tasks related to programming, data analytics, infrastructure and quality standards and concerns and database management, as well as the need about the regulatory and policy frameworks offset for local customization for their large domestic the cost arbitrage opportunity in several South markets, has led to the establishment of a tiered Asian and Southeast Asian countries. Malaysia, localization structure within the ITES industry. The the Philippines, Thailand, and Indonesia are critical nodes are served by global development also important players, with relatively significant centers. Smaller regional product clusters and exports, which is indicative of their linkages with regional delivery centers serve large national or global markets in IT and IT-enabled services (ITES) regional markets. The availability of certain types and their participation in production networks of skills leads to specialization in certain types of with India, Singapore, or both as important tasks in certain economies, and these locations nodes in that network. Relatively significant have become an important part of the production imports indicate that India, Thailand, Malaysia, chain serving global clients directly or through and Indonesia are also significant consuming the global development centers, mediating economies for IT and ITES. Given the relative their overall service delivery by combining their size of the Sri Lankan economy, trade in IT and task outputs with others. For example, the ITES is quite significant; however, neither Sri Lanka Philippines, with its large pool of English-speaking nor Bangladesh represents a significant domestic professionals, is an important global location market. Vietnam is a relatively modest player in for the performance of certain back-office and IT and ITES, but the sector is growing rapidly in analytical tasks. Sri Lanka is another example, that country. where the country has developed a niche for the performance of certain accounting services There is significant potential for intraregional tasks (Banerjee 2021). Some sectors in Southeast IT and ITES trade. The presence of economies Asia and South Asia are already demonstrating with dynamic IT and ITES sectors, such as India, the transformative power of technology and Singapore, Malaysia, the Philippines, Thailand, digitization of services (box 2). Vietnam, Indonesia, Sri Lanka, and Bangladesh, indicates strong potential for trade and investment A brave new world? Looking ahead, there are in this sector. The availability of niche skills in already signs that in at least some of the more developed South Asian and Southeast Asian economies, fifth generation (5G) wireless technology will open up exciting new possibilities for the development of new and innovative service solutions. Furthermore, automation and additive manufacturing (3D printing) are already impacting manufacturing sectors (for instance, the textiles and garments industry) by changing production processes and the relative importance of inputs. The key implication for textile exporters such as Bangladesh is that they need to adopt these technologies to improve productivity and retain production. Future technologies, including improved artificial intelligence and deep learning technology, as well as increased uptake of the use of blockchain, are technological developments that governments must consider when looking at the digital economy. 20 1. TRENDS IN REGIONAL TRADE, FOREIGN DIRECT INVESTMENT, AND MIGRATION BOX 2 | LEADING E-SERVICE SECTORS IN SOUTH ASIA AND SOUTHEAST ASIA A joint Temasek and Google report identifies the demand services based in Malaysia and Thailand, following sectors as early contributors to an e-services respectively. revolution in the region: • E-commerce platforms. Online marketplaces • Travel and tourism. Travel and tourism was one of have sprung up across the region, using a variety the first sectors to be disrupted worldwide, through of business models, from business-to-business direct digital flight sales by airlines, comparison e-commerce platforms like IndiaMartf to business- and booking sites, and sharing economy sites to-consumer sites like India’s Snapdeal, which has allowing the listing of private accommodations for attracted investment from the likes of AliBaba rental. An example in South Asia is a Sri Lankan and Softbank.g Other examples include Llazada,h app, CityGuide, while in Southeast Asia, digital a Southeast Asia–based e-commerce group, or sales represent a significant and growing part of Shopee,i a Southeast Asia–focused full-service the tourism market through companies such as e-commerce platform. AirAsia, the regional airline headquartered in Malaysia,a and Triip.me,b a travel service based • Education. The education sector has recently been in Singapore and Vietnam. disrupted by technology, but, as the experience of COVID-19 has illustrated, the sector has enormous • Media (advertising, gaming, subscription music, potential for future development. Online tutoring and video on demand). Online media covers a and educational apps are perhaps the most vast range of different forms of media and profit developed areas of digital education; however, generation models, with platforms using search many schools and universities are looking for ways data to generate targeted advertising services, to move more teaching and examinations online. multiple services selling subscription models for Given the demand for education, there are already digital access to media, as well as digital media several successful online education providers companies that provide an on-demand marketplace in the region, such as Topica,j a Vietnamese for gaming, video content, or e-books. An example edtech service that provides digital university in South Asia is ALT Balaji, a subscription-based courses from several global institutions; Cialfo,k video service in India. In Southeast Asia, Garneac a Singaporean service designed to help students is a digital gaming platform that combines online track applications to international universities; and gaming and social networking across various Ruangguru,l an Indonesian tutoring platform with territories, and Iflixd and TrueIde provide video on- more than 7 million users. a https://www.airasia.com/en/gb. b https://www.triip.me/. c https://www.seagroup.com/products/garena. d https://blog.iflix.com/about/. e https://home.trueid.net/about. f https://www.indiamart.com/. g https://www.snapdeal.com/page/about-us. h https://www.lazada.com/en/about/. i https://careers.shopee.sg/about/. j https://topica.asia/aboutus.html. k https://cialfo.co/intl/en-US/home. l https://bimbel.ruangguru.com/. 21 DEEPENING LINKAGES BETWEEN SOUTH ASIA AND SOUTHEAST ASIA SUMMARY CHAPTER • Financial services. The rollout of digital financial health care, regulation limits the extent to which services and fintech has begun to snowball in these services can be supplied cross-border. Southeast Asia, with US$12.49 billion invested across 547 deals in 2019.m The range of fintech products • Information technology (IT) support and and financial services that are now available online consultancy. The significant supply of IT skills in the is enormous, including investment advisory services, region presents a valuable growth opportunity for digital insurance providers, and digital wallets and exports. There are many examples of South Asian and bank accounts, to name just a few. Notable examples Southeast Asian IT consultancy and freelancing sites, include Paytmn an Indian payment services website, enabling individual IT providers or small companies as well as Mobikwik, in India. Codapayments,o which to offer their services more widely, such as the is headquartered in Singapore, allows for the creation Malaysian skills marketplace Freelancing.v There are of digital wallets in 20 countries, thus enabling so many IT skills marketplaces in India that they merit consumers without access to any formal banking their own comparison listing of the top 25 freelance to buy goods and services online and via mobile websites.w Fast growth and international expansion technology. Capbayp and Modalku,q respectively, offer are also characteristic in this area of business, with Malaysian and Indonesian peer-to-peer financing. software companies, such as CO-WELL Asia in Indonesia-based Dokur was one of the first digital Vietnam, opening new offices and providing services payment services in the region. Kash in Bangladesh to international customers, involving business allows for mobile transfers and is interoperable with solutions, e-commerce, augmented reality–virtual traditional payment systems. reality, and software testing. • Health care. Like education, e-health care has great potential in South Asia and Southeast Asia, as a mechanism to increase access to basic services and as a potential generator of export earnings. Notable examples include online consultations, prescription delivery, and test sample collection as provided by Praava Health in Bangladesh, Samitivej hospitals in Thailand, and Haldoct in Indonesia. In the Philippines, Lifetracku is a radiology scan-sharing service aimed at doctors operating in remote areas that has recently started to include machine learning on scans. Although there is great unmet need for m https://www.dashdevs.com/blog/a-complete-overview-of-the-southeast-asia-s-fintech-market/. n https://paytm.com/. o https://www.codapayments.com/company. p https://capbay.com. q https://modalku.co.id/. r https://www.doku.com/en/. s https://www.samitivejhospitals.com/. t https://www.halodoc.com/. u https://lifetrackmed.com/en/radiology/. v https://www.freelancing.my/. w https://www.flop2hit.com/startup/best-freelance-websites-india/. 22 1. TRENDS IN REGIONAL TRADE, FOREIGN DIRECT INVESTMENT, AND MIGRATION TRENDS IN INVESTMENT Even before the COVID-19 crisis, South Asia did than 1 percent of the total over the past decade. not fully benefit from its FDI potential. Overall, South Asia performs poorly on attracting FDI, The three largest intraregional FDI corridors with total inward FDI stocks amounting to only 14 account for total intra–South Asia FDI. Among percent of regional GDP, significantly lower than South Asian countries, India is by far the largest the global average at 41 percent of GDP (figure investor in the region, accounting for three- 3, panel A). A poor business environment, the quarters of regional inward FDI or US$3 billion dominant role of the state, little competition, and in 2019 (figure 3, panel D). The three largest high informality hinder the development of a more FDI corridors in the region are also dominated dynamic private sector and attraction of more by India, with important FDI stocks in Sri Lanka investment. In addition, pronounced trade and (US$1.7 billion), Bangladesh (US$0.7 billion), and investment barriers, combined with weak logistics Nepal (US$0.5 billion). There are also notable and infrastructure systems, fragility, and insecurity, investment stocks from Sri Lanka in Bangladesh hamper South Asia’s investment potential. and from Pakistan in Bangladesh. Intraregional FDI in South Asia is estimated to be one-fifth of its Although total inward FDI stocks in South Asia potential, with an annual gap of US$13.7 billion in have more than doubled since 2010, their growth 2019. FDI has been consistently below potential, has tapered off recently. Total inward FDI in the and in absolute terms the gap has risen from region more than doubled from US$239 billion US$6.4 billion in 2010 (Lakatos 2021).8 to US$524 billion between 2010 and 2019 (figure 3 panel B), benefitting from high growth, FDI could be key for diversification into services improvements in the business environment, and in South Asia. Two-thirds of global services liberalization measures. By contrast, global FDI trade flows are delivered through FDI, including stocks grew by only 60 percent over the same establishing a commercial presence abroad, period, expanding from US$22.8 trillion in 2010 compared with only 30 percent through to US$36.4 trillion in 2019. Most of the growth in direct cross-border supply (Maurer, Lanz, and the region’s inward FDI stocks occurred between Magdeleine 2016). Moreover, services are 2013 and 2017; however, since 2017, FDI stocks predominant sectors in FDI, accounting for have declined slightly. almost two-thirds of global FDI stocks (UNCTAD 2016). Although trade in services via commercial Intraregional FDI accounts for only a small fraction presence is less prominent in South Asia, services of the South Asian total, amounting to 0.8 percent account for most of the FDI in the region. For or US$3.9 billion in 2019 (figure 3, panel C). More example, over the past two decades, FDI in India than 96 percent of FDI in the region originates went largely to services, with 16.5 percent of the from high-income countries. At 0.8 percent of cumulative inflows in financial, business, ICT, and the total, intraregional investment ties are thus research and development services, followed by significantly weaker than regional trade ties, which computer software and hardware (13.3 percent), stood at 5.6 percent in 2019. Despite the increase telecommunications (7.2 percent), trading (5.7 in the overall level of investment in the region, the percent), and construction (5.0 percent) (DPIIT share of intraregional FDI has been hovering at less 2021). In Bangladesh, banking and power were in 8 FDI potential is estimated using a standard gravity model from the literature (Bergstrand and Egger 2007) that is estimated using Poisson pseudo maximum likelihood for a sample of 244 countries and 32,262 country pairs for 2009–19. 23 DEEPENING LINKAGES BETWEEN SOUTH ASIA AND SOUTHEAST ASIA SUMMARY CHAPTER the top four FDI sectors in fiscal year 2020, with service sectors such as energy (39 percent), 12.5 and 11.1 percent, respectively (Bangladesh services (20 percent), and tourism (16 percent) Bank 2020). In 2019, about 19.3 percent of FDI (Department of Industry 2020). Hence, policy stocks in Pakistan were registered in financial measures that boost the attractiveness of FDI in services, 14.5 percent in power, and 8 percent in South Asia could help countries in the region to oil and gas (State Bank of Pakistan 2020). In fiscal diversify into services and upgrade into higher year 2020, the main FDI sectors in Nepal included value-added manufacturing and service sectors. FIGURE 3 | RECENT FDI TRENDS IN SOUTH ASIA A. FDI-to-GDP ratio B. South Asia: Total inward FDI stocks Percent of GDP US$ billions US$ trillions 35 800 40 30.2 35 30 700 25.2 600 527 523 524 30 25 25 19.6 500 420 20 366 378 20 400 284 14.6 263 15 300 239 239 15 10.9 200 10 10 5 100 5 0 0 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 EAP ECA LAC MNA SAR SSA C. South Asia intraregional inward FDI stocks D. South Asia inward FDI stocks, by country Percent of total US$million 3.0 600 2.6 2.5 500 2.0 400 1.5 300 1.0 0.8 200 0.5 100 0.0 0 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 Intra-SAR East Asia and Pacific Afghanistan Bangladesh Bhutan India Sri Lanka Maldives Nepal Pakistan Source: Lakatos 2021. Note: The data are from 2019. EAP = East Asia and Pacific; ECA= Europe and Central Asia; FDI = foreign direct investment; GDP = gross domestic product; LAC= Latin America and the Caribbean; MNA = Middle East and North Africa; SAR = South Asia; SSA= Sub-Saharan Africa. There is significant potential for improving Southeast Asia accounted for 2.6 percent of investment ties with Southeast Asian countries. South Asia’s total FDI stocks in 2019. The five At US$13.3 billion and more than four times the largest bilateral investment corridors exceeding rate of intra–South Asia investment, FDI from the US$1 billion mark add up to more than two- 24 1. TRENDS IN REGIONAL TRADE, FOREIGN DIRECT INVESTMENT, AND MIGRATION thirds of Southeast Asian investment in South Asia in 2019, the second largest region of origin Asia. Three of the largest bilateral FDI corridors next to Europe and Central Asia. According to are those pertaining to China into Sri Lanka, the United Nations Department of Economic Pakistan, and India, at US$2.2 billion, US$2.1 and Social Affairs, the number of emigrants from billion, and US$1.4 billion, respectively. Similarly, South Asia has grown by an average of 2 percent the Philippines’ FDI stocks in India stood at US$1.5 annually since 1990. They largely moved within billion and Malaysia’s FDI stocks in Sri Lanka at South Asia (60 percent) in the 1990s, but over US$1 billion. the following three decades, 13 million more South Asian migrants took residence in the Middle MIGRATION TRENDS East and North Africa, equivalent to a third of all South Asian migrants in 1990, increasing to half The importance of intraregional migration in South by 2019 (figure 4). Migration to Southeast Asia has Asia has declined, with migration flows shifting remained relatively low, but it has had the fastest toward the Middle East and North Africa and those annual growth (7.7 percent) compared with the to Southeast Asia exhibiting the fastest growth. A other regions, its share rising from 1 to 4 percent total of 41.2 million people migrated from South between 1990 and 2019. FIGURE 4 | SOUTH ASIAN MIGRATION, BY REGION OF DESTINATION, 1990–2019 (millions) 45 1,3 40 1,1 4,0 35 3,3 0,8 30 2,9 0,5 18,1 20,6 25 1,3 0,2 0,2 0,3 2,3 14,8 1,8 20 1,5 7,6 7,8 9,7 7,0 15 0,8 3,3 4,3 4,8 1,4 2,0 2,6 10 13,8 11,0 11,1 9,6 9,9 9,4 8,8 5 1,7 1,7 0 1990 1995 2000 2005 2010 2015 2019 East Asia & Pacific Europe & Central Asia Latin America & Caribbean Middle East & North Africa North America South Asia Southeast Asia Sub Saharan Africa Source: UNDESA database on Migrant Stock (accessed October 2021), https://www.un.org/en/development/desa/population/migration/data/estimates2/ estimates19.asp. South Asian migrants are largely concentrated percent), the United States (8.6 percent), Pakistan in Saudi Arabia and the United Arab Emirates, (7.7 percent), and the United Kingdom (5 percent). followed by the United Kingdom, the United So, while pandemics like COVID-19 affect all States, Malaysia, and Singapore. As of 2019, half countries, the effects will likely be exacerbated of the South Asian migrants were in six major by trade tensions, migration policies, fluctuations destinations, namely, Saudi Arabia (16 percent), in commodity prices, and the economic outlook the United Arab Emirates (13.7 percent), India (11.9 in these six countries. 25 DEEPENING LINKAGES BETWEEN SOUTH ASIA AND SOUTHEAST ASIA SUMMARY CHAPTER FIGURE 5 | SOUTH ASIAN MIGRATION, TOP CORRIDORS (share of total) 29.8% 25.9% Saudi Arabia, 16.0% United Arab Emirates, 13.7% India, 11.9% 10.4% United States, 8.6% Pakistan, 7.7% United Kingdom, 4.9% 3.4% Canada, 2.9% 3.2% Malaysia, 3.0% 2.5% Australia, 2.4% 0.5%0.9% Italy, 1.2% 0.2% Singapore, 0.8% 0.2% 0.2% 1990 1995 2000 2005 2010 2015 2019 Source: UNDESA database on Migrant Stock (accessed June 2020), https://www.un.org/en/development/desa/population/migration/data/estimates2/estimates19.asp. Remittances have increasingly become a significant source of income in South Asia, largely originating from the Middle East. South Asian migrants have proved to be resilient during the COVID-19 crisis and were able to continue sending funds home. Inflows to South Asia rose to 20 percent of the global total in 2019, up from 10 percent in 1990, with India being the largest recipient of remittances since 2008. The share of intraregional remittances, while still substantial, has been on a decline, replaced by inflows from the Middle East and North Africa, specifically the United Arab Emirates and Saudi Arabia (figure 6). According to 2020 estimates, remittances amounted to about 23.5 percent of GDP in Nepal, followed by 9.9 percent in Pakistan, 8.8 percent in Sri Lanka, and 6.6 percent in Bangladesh. Remittances have increasingly become an important countercyclical source of income in South Asia. 26 1. TRENDS IN REGIONAL TRADE, FOREIGN DIRECT INVESTMENT, AND MIGRATION FIGURE 6 | REMITTANCES TO SOUTH ASIA, BY SOURCE REGION/COUNTRY, 2010–18 (US$, BILLIONS) (US$, billions) 80 75 Southeast Asia East Asia & Pacific ECA South Asia North America MENA 70 65 60 55 50 Qatar 45 40 35 30 Saudi Arabia 25 20 15 10 India United Arab Emirates 5 0 United Kingdom United States 2010 2018-2010 2018-2010 2018-2010 2018-2010 2018-2010 2018 Source: World Bank Migration and Remittances Database (accessed June 5, 2020). Note: Sub-Saharan Africa and Latin America and the Caribbean were excluded due to low figures. ECA = Europe and Central Asia; MENA = Middle East and North Africa. For some countries, inward remittances represent and inward FDI of -0.33 (-0.28 if Singapore is a much larger inflow than FDI. Only Vietnam and excluded), although this alone is not evidence of Cambodia receive significant inflows of both, emigration deterring FDI through an exodus of which suggests greater potential to leverage relatively capable workers and the exchange rate the diaspora for investment. It also evidences a and competition effects of remittances (Yarcia et slight negative correlation between remittances al. 2021). 27 2. WHAT EXPLAINS THE LIMITED INTEGRATION BETWEEN SOUTH ASIA AND SOUTHEAST ASIA? Despite their growth over the past 20 years, trade than South Asian exports to Southeast Asia (figure and investment linkages between South Asia 7, panel A), amounting to 4.2 and 25.6 percent of and Southeast Asia are still constrained by high total exports in Southeast Asia and South Asia, tariff barriers and NTBs, burdensome and costly respectively. By contrast, FDI linkages are even customs processes, and other barriers to trade more underdeveloped. Interregional FDI stocks and FDI. Although trade linkages have grown by amounted to a total of US$15 billion in 2019, up more than ninefold over the past two decades – from US$4.6 billion in 2009. Southeast Asian FDI from US$38 billion in 2000 to US$349 billion in stocks in South Asia have steadily increased over 2018 – significant untapped potential for trade the years to a total of US$13.4 billion in 2019, integration between South Asia and Southeast compared with stagnating South Asian FDI stocks Asia remains. At US$260 billion, Southeast Asian in Southeast Asia, at only US$1.3 billion in 2019 exports to South Asia are almost three times higher (figure 7, panel B). FIGURE 7 | TRADE AND FDI LINKAGES BETWEEN SOUTH ASIA AND SOUTHEAST ASIA A. Trade flows B. FDI stocks (US$, billions) (US$, billions) 300 16 14 250 12 200 10 150 8 6 100 4 50 2 0 0 2000 2002 2004 2006 2008 2010 2021 2014 2016 2018 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 Southeast Asia exports to SAR Southeast Asia FDI stocks in SAR SAR exports to Southeast Asia SAR FDI stocks in Southeast Asia Sources: World Bank WITS database, goods trade only; Bekkers et al. 2021. Note: EAP = Southeast Asia; FDI = foreign direct investment; SAR = South Asia. 28 2. WHAT EXPLAINS THE LIMITED INTEGRATION BETWEEN SOUTH ASIA AND SOUTHEAST ASIA? Gravity model estimates indicate that the Asia by US$52.4 billion per year. During the same untapped export potential to Southeast Asia is period, average under-exports from Pakistan, substantial.9 Gravity model estimates show that Bangladesh, and Sri Lanka were US$9.4 billion South Asia has been consistently under-exporting US$8.4 billion, and US$3.1 billion, respectively. to Southeast Asia. The gap was estimated at Export potential for smaller economies varies around US$186.2 billion in 2018 (figure 8). India’s between US$0.2 billion and US$1.6 billion. For export potential to Southeast Asia is the largest all South Asian economies, the proportion of by far. On average, from 2000 to 2019, India is under-exports to China is greater compared with estimated to have under-exported to Southeast all the ASEAN economies combined. FIGURE 8 | ACTUAL AND POTENTIAL EXPORTS TO SOUTHEAST ASIA ( US$, billions) 300 250 200 150 100 50 0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 Actual exports Potential exports Source: Calculations from CEPII gravity data. HIGHER TARIFFS IN SOUTH ASIA THAN IN SOUTHEAST ASIA South Asian tariffs applied on imports from are highest in the Philippines and Cambodia (at Southeast Asia (6.9 percent) are nearly three 6.8 and 5.3 percent, respectively). times higher than Southeast Asian tariffs on imports from South Asia (2.8 percent) (figure High interregional tariffs lead to efficiency and 9, panels A and B). Within South Asia, Bhutan, productivity losses and have wide-ranging Maldives, and Pakistan stand out as the most consequences, affecting not only trade flows, protectionist countries, with average tariffs of but also firms, consumers, and investment 28, 13, and 12 percent, respectively. In Southeast decisions. First, tariffs increase the price of Asia, tariffs on imports from South Asia are imported inputs, which forces firms to source significantly lower, but in relative terms they their inputs from other sources and potentially 9 The gravity model specification and methodology used for this estimation were drawn from Kathuria (2018) and the data are from CEPII (for details, see Conte et al. 2021), which can be accessed at: http://www.cepii.fr/CEPII/en/bdd_modele/ presentation.asp?id=8. 29 DEEPENING LINKAGES BETWEEN SOUTH ASIA AND SOUTHEAST ASIA SUMMARY CHAPTER pass the increases in costs to consumers. This also increase the prices of imported goods for in turn will impact firms’ hiring decisions and consumers, reducing their purchasing power potentially spill over to changes in wages. Given and limiting the availability of imported goods. the international fragmentation of production Finally, tariffs increase the prices of imported and complex value chains, tariffs result in capital goods, which likely weighs on investment cascading trade costs as intermediate goods and disproportionately impacts low-income cross borders multiple times through the stages countries, which rely heavily on imports of of production (Diakantoni et al. 2017). Tariffs machinery and capital goods. FIGURE 9 | SOUTH ASIA–SOUTHEAST ASIA TARIFFS A. South Asia’s import tariffs on exports from Southeast Asia B. Southeast Asia’s import tariffs on exports from South Asia (percent) (percent) 30 8 35 7 6 20 5 15 4 3 10 2 5 1 0 0 Afghanistan Bangladesh Bhutan India Maldives Nepal Pakistan Sri Lanka Brunei Cambodia China Indonesia Lao PDR Malaysia Philippines Singapore Thailand Vietnam Source: World Bank WITS database. Note: Values are trade-weighted averages for 2019. Where 2019 data are not available, the closest available yearly data were used. NTBS REMAIN MORE IMPORTANT THAN TARIFFS Although tariffs remain important obstacles to protectionist purposes and are a significant regional integration, the restrictiveness of NTBs, deterrent to trade and an impediment to the at an average interregional ad valorem equivalent competitiveness of firms. South Asia’s NTBs (AVE) of 225 percent, towers over that of tariffs applied on imports from Southeast Asia are (figure 10). Non-tariff measures (NTMs) cover a the highest in Nepal, estimated at an AVE of wide range of measures, such as sanitary and 353 percent, and Sri Lanka, at 230 percent. phytosanitary (SPS) requirements, technical Conversely, Southeast Asian NTBs applied on barriers to trade, pre-shipment inspection, imports from South Asia are the highest in Brunei nonautomatic licensing requirements, and price (457 percent) and the Lao People’s Democratic control measures (see box 3 for examples of Republic (345 percent) and significantly lower in SPS challenges). While some NTMs are justified China (127 percent) and Malaysia (123 percent). A and aim to protect human health and safety or case study on environmental goods is provided plant or animal life, there are many that serve in box 4. 30 2. WHAT EXPLAINS THE LIMITED INTEGRATION BETWEEN SOUTH ASIA AND SOUTHEAST ASIA? FIGURE 10 | INTERREGIONAL NON-TARIFF BARRIERS A. AVEs of South Asia’s NTBs on Southeast Asia’s exports B. AVEs of Southeast Asia’s NTBs on South Asia’s exports (percent) (percent) 350 450 300 400 350 250 300 200 250 150 200 150 100 100 50 50 0 0 Bangladesh India Nepal Pakistan Sri Lanka Brunei Cambodia china Indonesia Lao PDR Malaysia Philippines Singapore Thailand Source: UNESCAP-World Bank Trade Costs Database. Note: Values are averages for 2015–19. AVEs = ad valorem tariff equivalents; NTBs = non-tariff barriers. BOX 3 | SPSs CHALLENGES AND SOLUTIONS – EXAMPLES IN BANGLADESH AND NEPAL In some cases, countries implement non-tariff measures related infrastructure have been suggested, including (NTMs) as protectionist measures restricting trade, but private sector accredited laboratories, review of more often the procedures related to both protectionist mandatory standards, and the use of trade facilitation and legitimate sanitary and phytosanitary (SPS) tools such as harmonization, equivalence, and mutual measures and the application of the measures are the recognition, particularly with India (Kathuria and real impediments to trade. In many cases, geographical Malouche 2016). access to certification services, lack of capacities to provide required services, or inefficient, redundant, or Bangladesh has taken steps to respond to SPS trade duplicative procedures and processes hamper trade, constraints. Following EU bans on fishery products, increasing time and costs and particularly impacting Hazard Analysis and Critical Control Points (HACCP) perishable agricultural products. management of prawn processing was implemented, and accredited testing laboratories were established Bangladesh relies on many different government to ensure that products could meet EU SPS standards agencies to address SPS issues. Coordination among (Naureen et al. 2006). Advancements have been agencies has been identified as a challenge and documented; a US report (USDA/FAS 2020) stated contributes to customs and border inefficiencies. that “Bangladesh is a role model of acceptance and Evaluations of Bangladesh’s SPS capacity have led to advancement of modern agricultural biotechnology.” training programs, advice, and technical assistance Improvements to the laboratory system in Bangladesh from countries and international aid agencies. SPS have resulted from internal evaluations (Hossain capacity reviews highlight deficiencies, including lack 2013) and evaluations by external agencies. A Purdue of risk management and risk assessment expertise, University assessment of the food safety system in inadequately trained personnel, poor communication Bangladesh noted that although shrimp processing with producers, inadequate equipment and training for is a well-developed export-oriented sector, there analytical technicians, and outdated SPS policies and were limitations in lab accreditation for some testing regulations. Opportunities for improvements in SPS- parameters and underutilization of testing equipment 31 DEEPENING LINKAGES BETWEEN SOUTH ASIA AND SOUTHEAST ASIA SUMMARY CHAPTER due to shortages in human resources and lack of range of food products including ginger, cardamom, and leadership (Suman et al. 2021). The prawn experience tea and lessen procedural obstacles at the border. Some in Bangladesh has demonstrated that making the earlier reviews identified outdated procedures, extensive necessary changes to meet stringent SPS requirements documentation requirements, and lack of coordination results in net economic gain (Yunus 2009). and cooperation among various government bodies as procedural challenges to SPS compliance. Recent evaluations of Nepal’s SPS capacity have identified serious gaps (ITC 2017; ADB 2019). Nepal has undertaken major legislative reforms to meet Problem areas include SPS-related standards that lag World Trade Organization obligations since its accession international norms in traceability and poor HACCP in 2003 (STDF 2010). Key areas for further improvement implementation, labeling, and recognition of genetically include implementing systems approach procedures modified organisms. Institutional constraints include such as Good Agricultural Practices and HACCP, the lack of a national accreditation agency, lack of a incorporating a risk-based approach to food safety legislative framework for HACCP, limitations within regulation, updating SPS-relevant legislation to meet the Food Act for export certification, capacity to international standards, and improving risk analysis and undertake pest risk assessment, and a lack of trained accredited laboratory testing capacity. Establishing an personnel to implement SPS measures. Resolving an internationally recognized accreditation body to certify infrastructure gap with respect to accredited laboratory testing laboratories is a high priority. The International testing, the Nepal National Food and Feed Reference Plant Protection Convention’s Phytosanitary Capacity Laboratory received accreditation from India’s National Evaluation tool was applied prior to 2011; the update Accreditation Board for Testing and Calibration that was planned for 2021 could provide valuable Laboratories in 2019. This will provide testing for a wide insights into gaps in phytosanitary capacity. BOX 4 | TARIFFS AND NTBS AFFECTING ENVIRONMENTAL GOODS IN SOUTH ASIA AND SOUTHEAST ASIA Average tariffs on environmental goods and resins; fertilizers, colorants, and wood products; wool, environmentally preferrable products (EPPs) are cotton, and silk; and vegetable fibers. As such, high tariffs lower in Southeast Asian countries than in South on these products imposed by developed countries can Asia. Environmental goods cover air pollution control; constrain developing country competitiveness. renewable energy; water and waste management; environmental monitoring, assessment, and analysis; Accessibility to these EPPs and environmental goods environmental consulting; remediation and cleanup is important because they can fuel the production, services; cleaner technologies; and carbon capture and transportation, and consumption decisions needed for storage. EPPs have less adverse impacts on human the low-carbon transition. High barriers also limit entry health and the environment compared with competing of firms into the market. Pakistan and India top the South products that are designed to achieve the same purpose. Asian list, with tariffs of 7.2 and 5.3 percent, respectively, These environmental benefits can arise in production, on environmental goods. For EPPs, India, Nepal, and consumption, and disposal. EPPs are of particular Afghanistan have high rates. In contrast, the Southeast interest to developing countries and include a range of Asian countries generally have lower tariffs, notably agricultural and natural products, such as lac, gum, and Singapore with a zero tariff (figures B4.1 and B4.2). 32 2. WHAT EXPLAINS THE LIMITED INTEGRATION BETWEEN SOUTH ASIA AND SOUTHEAST ASIA? FIGURE B4.2 | SIMPLE AVERAGE MFN FIGURE B4.1 | SIMPLE MFN AVERAGE TARIFFS ON ENVIRONMENTALLY TARIFFS ON ENVIRONMENTAL GOODS PREFERRABLE PRODUCTS 8,0 7,2 14,0 12,7 7,0 12,0 11,0 11,0 6,0 5,3 10,0 5,0 7,7 7,4 7,8 3,7 3,8 8,0 4,0 % % 6,0 4,9 5,5 3,0 4,5 2,0 1,6 1,4 4,0 0,7 2,0 1,0 0,3 0,0 0,0 0,0 0,0 Indonesia Lao PDR Philippines Vietnam Singapore Pakistan India Nepal Sri Lanka Indonesia Vietnam Lao PDR Philippines Singapore India Nepal Pakistan Sri Lanka Afghanistan South East Asia South Asia South East Asia South Asia Source: WITS Comtrade. As opposed to tariffs on environmental goods and EPPs, storage, and disposal facility permit. Additionally, licensees non-tariff measures (NTMs) in Southeast Asian countries involved in exporting must determine that the importing are significantly higher than those in South Asian country has the appropriate technical and administrative countries. The Philippines tops this list in Southeast Asia capability, resources, and regulatory infrastructure (figure B4.3), with several regulations and standards on needed for the management of radioactive sources in a hazardous waste management. Specifically, importers, manner consistent with the stipulated guidance. Vietnam manufacturers, distributors, and dealers need to comply comes second, with 50 recorded NTMs. The renewable with the Philippine Energy Standards and Labelling energy sector experiences the most NTMs, especially by Program. Authorities also require testing and sampling at importers of generator sets. Renewables also have the the expense of the importer, who must comply with storage highest import value in Vietnam, led by photosensitive and packaging requirements, for example, a transport, semiconductor devices. FIGURE B4.3 | NUMBER OF NTMS APPLIED ON SELECTED ENVIRONMENTAL GOODS 60 52 50 50 40 33 Number 29 30 20 14 12 10 6 6 3 4 0 Cambodia Indonesia Malaysia Philippines Singapore Thailand Vietnam Pakistan Sri Lanka Lao PDR Southeast Asia South Asia Data sources: UNCTAD-TRAINS; ITC MACMAP (for Vietnam). Note: These goods include renewable energy, monitoring equipment, and air pollution and waste management products. 33 DEEPENING LINKAGES BETWEEN SOUTH ASIA AND SOUTHEAST ASIA SUMMARY CHAPTER The main non-tariff issues in environmental goods Divergent standards across the region lead to poor trade include non-categorization of these types of coordination and communication among the neighboring goods and services, anti-dumping duties, excessive countries, thereby increasing the reluctance to export documentation required by partner countries, lack of environmental goods. adequate infrastructure for quality checks, inadequate implementation of modern customs procedures, Moreover, access to environmental services, such as limited application of information and communications environmental monitoring and training of personnel technology, lack of transparency in import-export for water and renewable energy technologies, is requirements, lack of compliance with technical constrained by the restrictions imposed on commercial international standards, lack of adequate border presence for service providers and regulations on the facilities, and lack of through-transport arrangements. movement of labor with skills in this sector. It has been The development of harmonized standards for observed that although companies are willing to provide environmental goods across South Asia remains services such as installation and maintenance on-site, nascent, and there are considerable asymmetries in companies still prefer providing this as a one-time testing procedures across countries in the region. service because of increases in costs. Source: Chemutai (2021). TRADE FACILITATION NEEDS TO IMPROVE Organization (WTO) Trade Facilitation Agreement (TFA) commitments. Overall, close to 40 percent of the TFA commitments have been implemented in South Asia, significantly lower than Southeast Asia’s average at 83 percent. Across countries, the rate of implementation of commitments varies significantly, with China and Malaysia having implemented all their TFA commitments, Pakistan and India close to 79 percent, and the lowest in Nepal at 2 percent and Maldives at 16 percent (figure 11, panel C). There is significant room to improve the efficiency of trade processes and that of control agencies, With the exception of Singapore, all Southeast customs, and border authorities in the region. The Asian countries perform below the international time and costs associated with the process of best practice on trade facilitation indicators trading are significant. On average, documentary (figure 11, panel D). In South Asia, the average and border compliance is estimated to add up to trade facilitation index reaches 12.2 and much 96 hours and US$384 in Southeast Asia compared lower in the case of Nepal (7.6) and Bangladesh with 127 hours and US$468 in South Asia (figure (9.3). Conversely, Southeast Asian countries 11, panels A and B). perform close to the best practice (18.2), with an average trade facilitation index of 15.1. Additional While the time and costs of trading goods in information is available from the trade profile of Southeast Asia remain high, some countries have the South Asia region based on the World Bank’s made progress in implementing their World Trade Exporter Dynamics Database for 2000–20 (box 5). 34 2. WHAT EXPLAINS THE LIMITED INTEGRATION BETWEEN SOUTH ASIA AND SOUTHEAST ASIA? FIGURE 11 | TRADE FACILITATION COMMITMENTS AND INDICATORS A. Time to export: Documentary and border compliance B. Cost to export: Documentary and border compliance (hours) (US$) 350 1,000 300 800 250 200 600 150 400 100 200 50 0 0 Afghanistan Bangladesh Bhutan India Maldives Nepal Pakistan Sri Lanka Brunei Cambodia China Indonesia Lao PDR Malaysia Philippines Singapore Thailand Vietnam Afghanistan Bangladesh Bhutan India Maldives Nepal Pakistan Sri Lanka Brunei Cambodia China Indonesia Lao PDR Malaysia Philippines Singapore Thailand Vietnam Time to export: Documentary compliance (hours) Cost to export: Documentary compliance (USD) Time to export: Border compliance (hours) Cost to export: Border compliance (USD) Regional average Regional average C. WTO trade facilitation agreement commitments: D. Trade facilitation indicators Implementation to date (index) (percent) 100 25 80 20 60 15 40 10 20 5 0 0 Afghanistan Bangladesh India Maldives Nepal Pakistan Sri Lanka Brunei Cambodia China Indonesia Lao PDR Malaysia Philippines Singapore Thailand Vietnam Bangladesh India Nepal Pakistan Sri Lanka Brunei Cambodia China Indonesia Lao PDR Malaysia Philippines Singapore Thailand Vietnam Implementation rate Regional average Index Best practice Sources: World Bank 2020 Doing Business indicators; Organisation for Economic Co-operation and Development trade facilitation indicators. Note: WTO = World Trade Organization. 35 DEEPENING LINKAGES BETWEEN SOUTH ASIA AND SOUTHEAST ASIA SUMMARY CHAPTER BOX 5 | TRADE PROFILE OF THE SOUTH ASIA REGION BASED ON THE WORLD BANK’S EXPORTER DYNAMICS DATABASE FOR 2000–20 South Asia’s inclusion in international markets during these successful exporting firms are competitive the past two decades has had positive results. Overall, internationally. In addition, the entry and exit rates by relative to other regions of similar size, stage of product category of South Asia’s exporters are higher development, and export basket, while South Asia relative to those of exporters in comparable countries has fewer exporters, they are larger and have more (figure B5.1), but their survival rates upon entry are lower diversified destination markets, suggesting that (figure B5.2). FIGURE B5.1 | EXPORTER ENTRY AND EXIT RATES, BY PRODUCT CATEGORY A. Entry Rates B. Exit Rates East Asia & Pacific 0.65 East Asia & Pacific 0.58 Europe & Central Asia 0.62 Europe & Central Asia 0.59 Latin America & Caribbean 0.61 Latin America & Caribbean 0.60 Middle East & North Africa 0.76 Middle East & North Africa 0.76 South Asia 0.73 South Asia 0.73 Sub-Saharan Africa 0.79 Sub-Saharan Africa 0.78 0 .2 .4 .6 .8 0 .2 .4 .6 .8 Exporter Entry Rate Exporter Exit Rate Source: Calculations based on data used for the Exporter Dynamics Database. FIGURE B5.2 | SURVIVAL RATES OF NEW EXPORTERS, BY PRODUCT CATEGORY A. One-year survival B. Three-year survival East Asia & Pacific 0.31 East Asia & Pacific 0.13 Europe & Central Asia 0.27 Europe & Central Asia 0.09 Latin America & Caribbean 0.25 Latin America & Caribbean 0.08 Middle East & North Africa 0.18 Middle East & North Africa 0.05 South Asia 0.18 South Asia 0.05 Sub-Saharan Africa 0.15 Sub-Saharan Africa 0.04 0 .1 .2 .3 0 .05 .1 .15 1 Year Survival Rate of 3-Year Survival Rate of Entrants into Exports Entrants into Exports Source: Calculations based on data used for the Exporter Dynamics Database. Note: All countries in the Exporter Dynamics Database with available indicators at the country-year level in 2000–20 enter the averages shown in panels A and B. 36 2. WHAT EXPLAINS THE LIMITED INTEGRATION BETWEEN SOUTH ASIA AND SOUTHEAST ASIA? To improve South Asia’s exporter performance, productivity of domestic firms. governments could consider relaxing restrictive import licensing requirements for intermediate inputs that Along the same line of reasoning, any other policies that are necessary for exporting firms. This will enable may help exporting firms access imported intermediates smaller exporting firms to expand and have access will help promote exporter performance. Such policies to cheaper and higher quality imported inputs, which may include tariff/value-added tax reductions or duty may enhance their competitiveness. The success of drawbacks on imported materials, improvements in these smaller exporters will increase the number of financing, and reduction in credit constraints for small exporters in South Asia and reduce the concentration exporting firms. Customs reforms to enhance efficiency in exporting sectors. Empirical evidence based on at the borders may also encourage firms to rely more Bangladesh, India, and China suggests that access to on the imported inputs that are necessary for them to imported inputs helps promote the product scope and compete in export markets. Source: Kee, Forero, and Fernandes (2021). SIGNIFICANT BARRIERS HAMPER TRADE IN SERVICES The AVEs of services barriers are high relative to relative pattern of restrictiveness is more complex. tariff rates for goods, in excess of 10 percent in all But Indonesia and India generally have relatively cases, and as high as 70 percent in some sectors. restrictive services policies compared with the The AVEs were quantified using machine learning other countries in the sample. techniques and a gravity model estimation (box 6). In sectoral terms, AVEs are highest in the Cross-cutting policy measures also play an telecom sector, at 52 percent on average. For the important role in determining overall Services other sectors, the average is lower: 18 percent in Policy Index scores. The main horizontal finance, 22 percent in transport, and 26 percent restrictions are visa processing restrictions in in distribution. But in all cases, the average degree Bangladesh, Indonesia, Myanmar, Pakistan, the of market insulation brought about by services Philippines, and Vietnam. Thailand has a restrictive trade restrictions is high relative to what is visa processing regime for business arrivals. seen in goods markets. Singapore provides the Bangladesh, Indonesia, Myanmar, and Malaysia clearest demonstration of this point: it has zero have policy restrictions related to land acquisition, tariffs in goods markets but maintains significant while India, Pakistan, and Singapore retain some restrictions on trade in services (figure 12). data transfer restrictions. Bangladesh, Malaysia, Pakistan, Singapore, Thailand, and Vietnam have less restrictive In sectoral terms, AVEs are highest policies. China is taken as a comparator. The in the telecom sector, at 52 percent other countries have more restrictive policies than on average. For the other sectors, China. The overall results obscure heterogeneity the average is lower: 18 percent in at a detailed level. For instance, China is quite finance, 22 percent in transport, and restricted in distribution services relative to all 26 percent in distribution. countries except Indonesia. For other sectors, the 37 DEEPENING LINKAGES BETWEEN SOUTH ASIA AND SOUTHEAST ASIA SUMMARY CHAPTER FIGURE 12 | AD VALOREM TARIFF EQUIVALENTS OF THE SERVICES TRADE POLICIES INDEX, SELECTED ASIAN COUNTRIES (percent) 80 70 60 Percent 50 40 30 20 10 0 Bangladesh China India Indonesia Malaysia Myanmar Pakistan Philippines Singapore Thailand Vietnam Distribution Finance Telecom Transport Source: Estimates based on data from Hoekman and Shepherd 2020. Note: The ad valorem tariff equivalent is the equivalent ad valorem tariff that would restrict trade to the same degree as the bundle of regulatory measures captured by the Services Trade Restrictiveness Index. The figure combines estimates for horizontal measures with sector-specific ones, which are numerous in the database and so cannot be presented individually. BOX 6 | QUANTIFYING BARRIERS TO TRADE IN SERVICES USING MACHINE LEARNING AND GRAVITY MODEL ANALYSIS The first major effort to look systematically at applied restrictiveness, or STRIs. From a technical perspective, services policies was undertaken by the Australian the problem is one of weighting and aggregation: Productivity Commission (APC) in the early 2000s. The analysts need to choose a set of weights applied to APC’s framework is still the reference point for work individual policy measures in producing summaries in this area, but the exercise itself was more in the and must select a mathematical function by which the nature of a proof of concept, as the project undertook weighted methods are aggregated into a single number. exploratory work for a variety of countries and sectors but was not developed into an ongoing project to track The construction of STRIs is extremely labor intensive services trade restrictiveness. The APC coined the term and therefore costly. It also requires considerable “Services Trade Restrictiveness Index” (STRI) as the analytical capacity. Finally, there is a clear interest name for its summary index of policy restrictiveness in in standardizing approaches across countries, so that each sector, and the term has been used extensively by results can easily be compared. These considerations subsequent researchers. favor the production of STRIs by international agencies, and two major initiatives are currently in operation. The APC’s basic framework still informs STRI projects The Organisation for Economic Co-operation and today. The first stage is to produce regulatory Development (OECD) publishes STRIs in 22 sectors for questionnaires in the sectors of interest. Once the its member countries, which are mostly in the high- regulatory questionnaires have been designed, they income group, along with major emerging markets. need to be filled in, one sector in one country at a time. In all, the OECD data cover 45 countries from 2014 to Once the responses to the individual questions in the 2019, with data updated annually. The second effort was regulatory questionnaire have been systematically launched by the World Bank. It has resulted in STRIs for coded by country-sector pair, the next step is to use 105 countries for 2008 (released in 2012), and jointly that coded database to produce summary measures of with the World Trade Organization (WTO), a database 38 2. WHAT EXPLAINS THE LIMITED INTEGRATION BETWEEN SOUTH ASIA AND SOUTHEAST ASIA? covering 68 countries for 2016 (STRIs released in 2020). to show that the measures are indeed associated with The current WTO–World Bank database and World Bank observed bilateral trade in services, although the results STRIs cover 68 countries, of which 45 use data taken are only statistically significant in some sectors. directly, with permission, from the OECD database. The WTO–World Bank database has expanded country Hoekman and Shepherd (2020) use a machine learning coverage by 23 countries. procedure to produce a Services Policies Index (SPI). It can be understood as a good approximation of the OECD While similar in overall structure, the OECD and WTO STRI—for which the aggregation algorithm has not STRIs have important differences in the ways in which been made public—based on the policy data available the indexes are constructed. But it is also important to in the WTO–World Bank data set for 2016. It covers address quantification of impacts. OECD work has used 68 countries and eight sectors, including the countries a standard economic model to show that a country’s identified above as of particular interest in the South STRI score is negatively associated with both its Asian and Southeast Asian context, in addition to China imports and exports of services, and that differences as a comparator. The SPI correlates with the OECD STRIs in regulations within the STRI database, referred for those countries in both data sets at just under 0.9, to as regulatory heterogeneity, also have a negative where a correlation coefficient of one indicates a perfect association with observed bilateral trade (Nordas and fit.a The index therefore offers a good approximation Rouzet 2017). Subsequent work has looked at estimation of the OECD data, and the authors consider it to be of ad valorem equivalents (AVEs) based on observed effectively an extension of the methodology developed STRI scores (Benz 2017). There is thus an important body by the OECD, with the variation that new countries are of evidence showing that the OECD STRI is correlated added to the data even without observing the weighting with bilateral trade flows, and that it can be used to and aggregation algorithm used by the OECD in the produce estimates of economic impact in standard AVE original exercise. form. For the World Bank STRI, Jafari and Tarr (2014) produced estimated AVEs from the original (2008) STRI Subsequently, the SPIs were converted to AVEs using data; there are no such estimates for the 2016 data, nor a gravity model.b While the SPI covers eight sectors, for the revised version of the 2008 data using the 2016 lack of availability of trade data means that AVEs can methodology. The World Bank itself has never produced only be calculated for four more aggregated sectors. a model of the economic impact of its STRIs, but van Nonetheless, the results cover an important part of the der Marel and Shepherd (2013) use the 2008 version services economy from a policy perspective. a The World Bank issued its STRI after the working paper version of Hoekman and Shepherd (2020) was first circulated. The published version of that paper shows that the SPI is also correlated with the World Bank STRI with a coefficient of 0.8, which is similarly very high. b Conversion to AVE terms is standard for non-tariff measures in the goods literature. However, it involves the simplifying assumption that policies can accurately be summarized through their impacts on trade costs in percentage of value terms. Services policies also have effects on the fixed costs of foreign market entry, which means that the true restrictiveness of the measures captured in the SPI may be higher than figure 12 suggests. Source: Shepherd (2021). 39 DEEPENING LINKAGES BETWEEN SOUTH ASIA AND SOUTHEAST ASIA SUMMARY CHAPTER INVESTMENT POLICY BARRIERS AND DOMESTIC FACTORS RESULT IN SIGNIFICANT “MISSING” INTERREGIONAL FDI Investment policy barriers combined with Asia is estimated to be one-fifth of its potential, with domestic factors, such as the lack of an enabling an annual gap of US$13.7 billion in 2019 (figure 13, business environment, result in significant panel A). It is estimated that South Asia–Southeast “missing” interregional FDI (see the estimation Asia FDI stocks stand at half their potential, with methodology in box 7). Intraregional FDI in South a gap of up to US$12.3 billion (figure 13, panel B). FIGURE 13 | MISSING FDI IN SOUTH ASIA A. Missing intra-regional FDI B. Missing FDI from East Asia and Pacific US$ billion US$ billion 20 30 17.7 25.8 16 25 20 12 15 13.4 8 10 4 4.0 5 0 0 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 Actual Potential Actual Potential Source: Lakatos 2020. Note: FDI = foreign direct investment. The significant gap between actual and potential systematic gaps found in terms of investment in intraregional FDI can be mostly attributed to India by China (US$6.1 billion), Indonesia (US$1.6 underinvestment between India and Pakistan and billion), Vietnam (US$1 billion), and the Philippines India and Bangladesh. FDI stocks from Pakistan (US$0.9 billion). There is also an estimated gap of and Bangladesh in India stood at zero in 2019, with US$0.9 billion from China in Bangladesh. There is estimated gaps of US$6.1 billion and US$1.7 billion, overinvestment by China in Sri Lanka and Pakistan respectively. Similarly, total investment from India and by Malaysia in Bangladesh and Pakistan. in Pakistan amounted to US$26 million in 2019, US$3.8 billion below its estimated potential. Empirical estimations also show that corporate Estimates also suggest that investment from income taxes, tariffs, and a weak business India in Sri Lanka and Nepal exceeded potential environment have significant and negative impacts by US$1.3 billion and US$0.2 billion, respectively. on inward FDI. A 1 percent decline in corporate income taxes could boost inward FDI by 3.8 Improving investment ties with Southeast Asia percent. Similarly, a 1 percent reduction in import could close the annual gap of US$12.3 billion tariffs could increase FDI by up to 3.5 percent. in missing FDI in South Asia. Estimates based Finally, a weak enabling business environment on a gravity model suggest that a large share characterized by procedural and time delays of the missing FDI from Southeast Asia can be also contributes – a 1 percent decline in the index explained by underinvestment in India. There are could boost FDI by up to 0.3 percent. 40 2. WHAT EXPLAINS THE LIMITED INTEGRATION BETWEEN SOUTH ASIA AND SOUTHEAST ASIA? BOX 7 | ESTIMATING FDI POTENTIAL: METHODOLOGICAL FRAMEWORK The determinants of foreign direct investment (FDI) decisions introduce a number of modifications to the identified in the literature can be classified into four standard gravity model and suggest that differences in major buckets: market-related determinants (market factor endowments, exchange rates, and technology are size, market growth, and market structure), resource- significant in explaining FDI decisions. Other analysis oriented determinants (availability of labor and natural of FDI patterns highlights the potential role of common resources and cost of factors of production), efficiency- culture and language between countries, especially seeking determinants (labor productivity), and policy when FDI is in the form of mergers and acquisitions determinants (investment barriers, trade openness, (Head and Ries 2008). business environment, and fiscal policies). In this report, FDI potential is estimated using the Empirical work on the determinants of FDI has relied gravity model that follows the standard specification heavily on a gravity-type framework that is well outlined in the literature (Bergstrand and Egger established in the applied trade literature, where market 2007). The gravity model is estimated using Poisson size and distance between trading countries account pseudo maximum likelihood (PPML) for a sample of for a large share of the explanatory power (Eaton and 244 countries and 32,262 country pairs for 2009–19. Tamura 1994; Wei 2000; Blonigen and Davies 2000; The PPML specification allows taking into account the Blonigen et al. 2007; Bergstrand and Egger 2007). large number of zero stocks reported in the data. The Theoretical models describing foreign investment specification of is as follows: FDIhst = α0 + α1 ln(GDPht ) + α2 ln(GDPst )+ α3 ln(disths ) + α4 ComLanghs + α5 ln(tarif fht + 1) + α6 ln(CITht + 1) + α7 ln(BusinessEnvht ) + γt + εhst where subscript h refers to the host country, s to countries, respectively. the source country, and t to years. FDIhst represents bilateral FDI stock in host country h from source The data sources are as follows: bilateral FDI stock country s in year t. GDPht and GDPst are the gross data come from the International Monetary Fund’s domestic product (GDP) of the host and source Coordinated Direct Investment Survey database; GDP, countries in year t, respectively. Disths stands for the distance, and common language data originate from distance between the host and source countries, h and the Gravity Database of the CEPII (Centre d’Etudes s; ComLanghs is a common language dummy; tariffht Prospectives et d’Informations Internationales) represents the average trade-weighted tariffs applied (Conte, Cotterlaz, and Mayer 2021); tariff data come by the host country in year t; CITht represents the from the World Bank World Integrated Trade Solution corporate income tax rate in the host country in year database; corporate income taxes originate from the t; and BusinessEnvht stands for an index representing Tax Foundation’s Corporate Tax database (Asen 2020); the time and procedures to start a business in the and data on the time and days to start a business come host country in year t. Additional dummy variables from the World Development Indicators. The detailed control for high-income status of the host and source results of the regression are presented in annex B. 41 DEEPENING LINKAGES BETWEEN SOUTH ASIA AND SOUTHEAST ASIA SUMMARY CHAPTER Despite past liberalization efforts, barriers to trade highest statutory corporate income tax rates, at in South Asia continue to be among the highest 30 percent, followed by Pakistan, at 29 percent, in the world, with average tariffs amounting and Sri Lanka, at 28 percent, and above the global to more than 10 percent in 2019. The average average of 24 percent. Evidence also shows that import tariffs applied by Maldives, Sri Lanka, and low corporate taxes do not compensate for the lack Nepal were all in excess of 10 percent in 2019. of an enabling business environment for attracting Although high tariffs in FDI host countries can FDI, such as a weak business environment, poor encourage “tariff-jumping” FDI and incentivize infrastructure, limited access to markets, or other firms to substitute away from trade and increase weak investment conditions. FDI, empirical evidence suggests that overall, tariffs have a negative impact on inward FDI. High FDI AND MIGRATION POLICIES: trade restrictions in host economies will also limit REGIONAL SNAPSHOTS the benefits of FDI and have an adverse impact on the development of backward linkages with domestic firms and technological spillovers. In Existing indicators of FDI and migration policies line with the literature, the gravity model estimated have limited coverage of South Asia and Southeast here shows a negative and significant relationship Asia. They are nonetheless worth highlighting as between FDI and import tariffs, indicating that a a starting point. The Organisation for Economic 1 percent decline in tariffs could lead to a 3.5 Co-operation and Development (OECD) FDI percent increase in FDI stocks. Regulatory Restrictiveness Index for 2019 captures all of Southeast Asia but only India in South Asia. FDI is becoming increasingly sensitive to corporate Cambodia and Singapore fall below the OECD taxation, reflecting the increasing mobility of average restrictiveness and Myanmar and Vietnam capital. Existing studies show that on average, a 1 are also quite competitive; however, the other percentage point increase in the tax rate results in a countries rate relatively poorly on this measure 3.7 percent decline in FDI. However, the sensitivity (figure 14). The coverage for the Migration of FDI to taxes depends on a wide range of Integration Policy Index is equally limited, with India characteristics of the host country and the degree and Indonesia being only countries in the region that of mobility of capital. Another interesting finding are included in the index (figure 15). They are by far in the literature is that while lower tax rates in host the worst performing countries on the index, well countries fail to attract FDI significantly, higher below other relatively less developed regions and taxes tend to discourage new investment. Among countries (Eastern Europe, Argentina, Brazil, Turkey, South Asian countries, India and Bhutan have the and Mexico). 42 2. WHAT EXPLAINS THE LIMITED INTEGRATION BETWEEN SOUTH ASIA AND SOUTHEAST ASIA? FIGURE 14 | OECD FDI REGULATORY FIGURE 15 | MIPEX, 2020 INDEX RESTRICTIVENESS 0,4 90 0,35 80 0,3 70 0,25 60 50 0,2 40 0,15 30 0,1 20 0,05 10 0 0 Japan Cambodia Singapore OECD avge Myanmar Vietnam Korea, Rep. Australia Brunei Non-OECD avge Lao PDR India New Zealand China Malaysia Thailand Indonesia Philippines New Zealand Australia OECD Korea, Rep. Japan Non-OECD China Indonesia India Source: OECD 2020. Source: MIPEX 2020. Note: Higher FDI index values correspond to higher restrictiveness. FDI = Note: Higher MIPIX values correspond to greater integration. MIPEX = foreign direct investment; OECD = Organisation for Economic Co-operation Migration Integration Policy Index. and Development. A regional snapshot developed by Nixon (2021) (table 2). The purpose is not to provide a scientific to gain a deeper understanding of South Asia and comparison between countries or a quantitative Southeast Asia summarizes a relatively extensive indicator but to illustrate areas of relative strength range of FDI, migration, and complementarity and weakness for individual countries and the region. policy features (207 in all). It largely follows Australia, China, Japan, the Republic of Korea, and established convention in categorizing policies. New Zealand are included alongside South Asian For FDI, the OECD’s FDI Restrictiveness Index and Southeast Asian countries to enable further provides inspiration with some tailoring, dividing comparison. Although it would be tempting to policies into framework/protections, equity and assign numerical values and sum across categories, ownership restrictions, approval and screening, this would provide a misleading overall assessment land ownership, other (additional restrictions of limited value. An aggregate summary snapshot is and incentives), and outward investment. For nonetheless provided for ease of comparison and migration, the Determinants of International grouping purposes in table 3. Some subjectivity in Migration database categorizations are similarly the color coding was unavoidable in the absence followed with some adjustments, separating of a formulaic quantitative approach, with every policies into framework/protections, legal entry effort made to provide a fair comparison between and stay, border control, integration, exit, and countries within each category. emigration. A complementarity category is added to capture overlapping policies that directly impact both FDI and migration, such as visa policies for foreign investors (companies and individuals) and policies encouraging migrant entrepreneurship, return migration for business development, and remittance investment facilitation. The information is correct as of the April 1, 2021, cut-off date. The individual country policies are summarized by category on a simple color-coded, five-point scale 43 44 TABLE 2 | REGIONAL INVESTMENT AND MIGRATION POLICY SNAPSHOT DEEPENING LINKAGES BETWEEN SOUTH ASIA AND SOUTHEAST ASIA SUMMARY CHAPTER Extensive shortcomings Major shortcomings Mix of pros and cons Some gaps Almost no gaps Note: The snapshot is for illustration purposes only, with more detailed policy information provided in Nixon (2021). Scores are not cumulative across categories for investment environment restrictiveness, as severe restrictions in one category or broader factors (for example, political instability or conflict) can make the environment more restrictive than the sum of its parts. Rather, the scores provide evidence of an accumulation of policy shortcomings of varying magnitudes. 2. WHAT EXPLAINS THE LIMITED INTEGRATION BETWEEN SOUTH ASIA AND SOUTHEAST ASIA? FDI and migration complementarity within the There is considerable potential to deepen and South Asia and Southeast Asia regions is not diversify FDI and migration movements between well leveraged. Formal immigration channels South Asia and Southeast Asia. The factor are severely restricted in many countries, and movement patterns reflect limited consideration although FDI is treated relatively favorably, of complementarity, which contributes to and is restrictions remain extensive in many countries. a product of prohibitive policies. TABLE 3 | AGGREGATE SUMMARY SNAPSHOT Country Foreign direct Migration Complementarity Total investment Australia 4.00 3.33 4.00 3.78 Singapore 3.50 3.00 4.00 3.50 Japan 4.50 3.00 3.00 3.50 New Zealand 3.83 3.67 3.00 3.50 Korea, Rep. 4.00 2.67 3.00 3.22 Philippines 2.50 3.00 4.00 3.17 Pakistan 3.67 2.50 3.00 3.06 Cambodia 3.50 2.50 3.00 3.00 Malaysia 3.00 2.67 3.00 2.89 India 3.33 2.17 3.00 2.83 Sri Lanka 2.33 2.67 3.00 2.67 Thailand 3.33 2.67 2.00 2.67 China 2.50 2.50 3.00 2.67 Vietnam 2.00 2.83 3.00 2.61 Indonesia 3.00 2.33 2.00 2.44 Bangladesh 2.33 1.83 3.00 2.39 Myanmar 3.17 2.00 2.00 2.39 Afghanistan 3.33 1.67 2.00 2.33 Brunei 2.67 2.17 2.00 2.28 Maldives 1.83 2.33 2.00 2.06 Lao PDR 2.17 1.67 2.00 1.94 Nepal 1.67 2.17 2.00 1.94 Bhutan 2.17 1.83 1.00 1.67 Average (region) 2.74 2.34 2.58 2.55 Average (all) 2.97 2.49 2.70 2.72 Source: Nixon 2021. Note: Numerical values were assigned as extensive shortcomings = 1, major shortcomings = 2, mix of pros and cons = 3, some gaps = 4, and almost no gaps = 5. Aggregate scores represent averages by category (FDI, migration, and complementarity). Scores are not provided as a numerical indicator representative of the investment policy environment, only to allow for a simplistic illustrative sorting. FDI = foreign direct investment. Extensive shortcomings Major shortcomings Mix of pros and cons Some gaps Almost no gaps 45 DEEPENING LINKAGES BETWEEN SOUTH ASIA AND SOUTHEAST ASIA SUMMARY CHAPTER Every country has its own unique combination almost completely liberalized outward FDI policies of FDI and migration policy settings; however, (and in some cases actively facilitate investment). there are several important cross-cutting themes. All the countries have major shortcomings in at FDI and migration complementarity is constrained least one policy area that would benefit from despite a general understanding of labor flexibility significant reform (table 3). Many countries lack as a basic investor need. Visa rules restrict basic protections (rights) for foreign investors and business continuity and limit opportunities for migrants and/or have systems that are difficult to labor migrants to make a longer-term contribution navigate without engaging expensive expertise. via business development, investment facilitation, or permanent residency. Policies seeking to Immigration barriers are significantly higher than channel diaspora and individual investor capital FDI barriers. Immigration is almost universally into productive investment are underdeveloped, viewed as filling temporary skills deficits and as are programs supporting emigrant return and not as a persistent contributor to labor markets reintegration. Formal remittance channels have and development. Entry and integration policies improved considerably, but there are vast cost are commensurately limited, imposing strict and accessibility differences across the region and conditions (employer sponsorship, short stays, informal channels retain a large share. minimum qualifications, cumbersome approvals, and non-transferability) and minimal support South Asia and Southeast Asia could strengthen (curtailed rights, limited access to essential collaboration as traditional migration corridors services, and no help integrating) or efforts to are being disturbed by the pandemic. Southeast tackle anti-immigrant sentiment. Emigration Asian countries encourage admission of migrant policies range in their efficacy, but they contain workers originating from South Asia, but mostly fewer gaps or detractions than immigration under temporary or seasonal labor schemes to policies in most countries. The outcomes do not ease labor shortages in industries that are less always match the objectives, however, as there are preferred by locals (for example, agriculture, limits to supporting citizens in other jurisdictions. manufacturing, construction, and domestic workers). Furthermore, only specific categories Most of the countries retain some combination of migrants have a clear regulatory pathway to of minimum investment requirements, local permanent immigrant status or naturalization, and directorship or content requirements, and those who are unable to integrate permanently market access restrictions (often discriminatory and, thereby, access health and social protection public procurement or state-owned enterprise on par with citizens, have been disproportionately concentration). Comparatively few countries exposed to adverse shocks associated with the limit profit/capital repatriation or impose business COVID-19 pandemic. structure requirements or foreign-specific taxes. Significant equity restrictions (particularly in key Complementarity is scarcely acknowledged service sectors) and burdensome investment across the region, with very few countries approval processes persist in most countries. Post- explicitly recognizing investors’ labor needs and establishment intervention powers are extensive migrants’ potential contributions to investment or unspecified, providing limited certainty to generation and entrepreneurship. Many investor investors. Land ownership rules remain highly visas are not tied to genuine business investment discriminatory against foreign entities and and seek wealth rather than skills. Visa inflexibility persons, erecting barriers to long-term business regularly places additional burdens on investors development and migrant integration. Approaches and migrants for simple matters such as renewals, to outward investment are polarized. Countries category transfers, and replacement personnel for prohibit or severely restrict investment or have an approved position. Quotas and time limits are 46 2. WHAT EXPLAINS THE LIMITED INTEGRATION BETWEEN SOUTH ASIA AND SOUTHEAST ASIA? generally inconsistent with long-term business is estimated to add up to 96 hours and US$384 needs and unnecessary from a regulatory in Southeast Asia compared with 127 hours and perspective (investors will hire less costly locals US$468 in South Asia. first anyway if they meet the skill requirements). A comprehensive review of migration and FDI Another key result is that patterns of services policies to reflect complementarity considerations policy restrictiveness vary substantially across should form part of broader policy framework countries and sectors. It is also likely that they vary enhancements. significantly within different regional integration arrangements, of which there are a number The absence of a long-term and comprehensive involving the countries studied. However, there migration policy is also a common concern. are as yet no systematic data on services policy Policies generally reflect ad hoc responses to liberalization in the context of regional agreements. emerging concerns, such as business needs, This area is one where future data collection and irregular migration, local unemployment, social research would have significant value added unrest, and national security. Clearer statements for policy researchers and governments, in of purpose and better integrated frameworks for particular given the difficulty of moving forward different policy arms (legal entry, border control, in multilateral services negotiations and the integration, and so forth) would provide an salience of regional integration in Southeast Asia essential reform building block. Border control in particular. Finally, there are significant barriers efforts would benefit from greater cooperation to FDI that contribute to a gap of US$12.3 billion between countries – to reinforce hard borders and in “missing” interregional FDI. develop more effective soft border approaches. There are significant gaps in efforts to reduce regional inequality, promote formal migration channels, and align incentives for migrants and employers to cooperate with regulators. Formal channels must offer better trade-offs of rights and costs to discourage irregular alternatives. In conclusion, interregional trade, investment, and integration between South Asia and Southeast Asia are currently stymied by high trade and transport costs, red tape, inefficient customs procedures, and infrastructural and logistical bottlenecks, with adverse effects on long-term productivity and growth. First, despite liberalization efforts, tariffs remain important obstacles to trade: South Asian countries’ tariffs on imports from Southeast Asia are nearly three times higher than Southeast Asia’s tariffs on imports from South Asia, at 6.9 and 2.8 percent, respectively. Second, NTBs are even more pronounced, at an average interregional AVE of 225 percent. Furthermore, inefficient customs procedures and burdensome documentary requirements lead to significant time delays and high costs associated with the process of trading: on average, documentary and border compliance 47 3. WHAT ARE THE EXPECTED GAINS FROM DEEPENING LINKAGES BETWEEN SOUTH ASIA AND SOUTHEAST ASIA? ESTIMATING THE ECONOMY-WIDE GAINS FROM DEEPER INTEGRATION BETWEEN SOUTH ASIA AND SOUTHEAST ASIA Recent World Bank analysis highlights the liberalization of NTBs, improvements in trade impacts of deeper integration between South facilitation, and the liberalization of FDI. The Asia and Southeast Asia using a computable next two scenarios aim to capture the impacts general equilibrium model that incorporates of integration in a multilateral context, namely services.10 The modeling framework and the the impacts of sustained and prolonged US- data are briefly described in box 8. The first four China trade tensions and the impact of an “open scenarios capture the impacts of interregional and regionalism” scenario. The last scenario implies preferential liberalization through a progressively that reforms considered in the interregional more ambitious integration agenda, starting integration track are extended not only to third with the reduction of South Asia–Southeast countries, but also intra-regionally within South Asia tariffs, which is then complemented by the Asia and Southeast Asia. 10 The model underlying the simulations is the Global Trade Analysis Project (GTAP)-FDI model – a multi-region, multi-sector, and multi-factor computable general equilibrium model (Lakatos and Fukui 2014; Hertel 1997). The model is calibrated using the GTAP 11 database representing the global economy in 2017 (Aguiar, Narayanan, and McDougall 2020) and endogenously updated to 2021 to capture the latest macroeconomic developments. To capture the FDI and multinational linkages of the GTAP-FDI model, the GTAP database has been complemented with an explicit breakdown of FDI stocks and cross-border operations of multinational companies. The model is ideal for measuring the impact of policies that have wide-ranging effects as it takes into consideration general equilibrium linkages. These include interactions between consumers, producers, and governments; inter- and intra-industry links; interactions between domestic and foreign markets; investment decisions; and resource constraints. 48 3. WHAT ARE THE EXPECTED GAINS FROM DEEPENING LINKAGES BETWEEN SOUTH ASIA AND SOUTHEAST ASIA? BOX 8 | MODELING FRAMEWORK AND DATA The model underlying the simulations is the Global and firms operating across national borders. As in the Trade Analysis Project–Foreign Direct Investment pioneering work of Petri (1997), the GTAP-FDI model (GTAP-FDI) model – a multi-region, multi-sector, and employs the Armington assumption of national product multi-factor computable general equilibrium model differentiation to distinguish between product varieties (Lakatos and Fukui 2014; Hertel 1997). The model is differentiated not only by firm location, but also by firm calibrated using the GTAP 11 database representing ownership. In comparison, the standard GTAP model the global economy in 2017 (Aguiar, Narayanan, and distinguishes product varieties by firm location only. In McDougall 2020) and endogenously updated to 2021 addition, as in Petri (1997), the model defines investor to capture the latest macroeconomic developments. To preferences as a nested imperfect transformation capture the FDI and multinational linkages of the GTAP- function that allocates a given investment budget across FDI model, the GTAP database has been complemented sectors and regions. On the supply side, compared with with an explicit breakdown of FDI stocks and cross- the standard GTAP model where in a given region and border operations of multinational companies. The sector there is one representative firm that produces model is ideal for measuring the impact of policies goods and services, the GTAP-FDI model differentiates that have wide-ranging effects as it takes into between domestic firms and foreign-owned affiliates consideration general equilibrium linkages. These of multinational companies that also produce goods include interactions between consumers, producers, and services. Further, each of these firms combines and governments; inter- and intra-industry links; value added and intermediate inputs using a Leontief interactions between domestic and foreign markets; technology as their production technology. The investment decisions; and resource constraints. specification implies that intermediate inputs (just as final demand) are differentiated not only by the region For the purpose of the simulations, the GTAP database of firm location, but also by the region of firm ownership. has been aggregated into 17 sectors and 31 countries/ regions. The 17 sectors are the following: vegetables Although the model is not a dynamic one, the closure and fruits, other agriculture, energy, meat, other food, has been adapted to capture the medium- to long-term beverages and tobacco, textiles, wearing apparel, motor effects of the considered policy reforms. In simple terms, vehicles, machinery, other manufactures, construction, this implies that investment adds to the existing capital trade, transportation, public administration, business stock and is available for production (Walmsley 1998). services, and other services. The 31 countries/regions are as follows: Australia; New Zealand; China; Hong Kong Data SAR, China; Japan; the Republic of Korea; Mongolia; Taiwan, China; Brunei; Cambodia; Indonesia; the Lao The modeling of FDI and foreign affiliates requires People’s Democratic Republic; Malaysia; the Philippines; the following data: capital stocks disaggregated by Singapore; Thailand; Vietnam; the rest of East Asia and region of ownership/location and sector, and cost Pacific; Bangladesh; India; Nepal; Pakistan; Sri Lanka; and sales structure of domestic firms and foreign the rest of South Asia; the United States; the rest of affiliates. The global FDI stock data documented in North America; Latin America and the Caribbean; the Bekkers et al. (2021) are used to disaggregate capital European Union; Europe and Central Asia; the Middle stocks by industry, host, and source country in the East and North Africa; and Sub-Saharan Africa. GTAP database. Using the foreign affiliates sales data described in Bekkers et al. (2021), the production side The important innovation in the GTAP-FDI model of the GTAP database is disaggregated. concerns the explicit treatment of FDI. In the model, FDI is associated with the international mobility of capital As in World Bank (2021), this analysis makes use of the 49 DEEPENING LINKAGES BETWEEN SOUTH ASIA AND SOUTHEAST ASIA SUMMARY CHAPTER World Bank–UNESCAP trade costs database (Arvis et this report. In the scenarios, it is assumed that 50 percent al. 2016). This database is the only one available that of the total non-tariff trade costs are actionable (possible provides estimates of non-tariff trade costs at the bilateral to be affected by policy measures), and 50 percent of level, which is essential for the analysis of deeper South these actionable barriers are liberalized – a conservative Asia–Southeast Asia regional integration described in assumption for potential integration scenarios. Source: Lakatos (2021). The scenarios and their assumptions are as follows: Southeast Asia FDI liberalization, closing half the gap in bilateral FDI as estimated in • Scenario 1. South Asia–Southeast Asia tariff section 2. liberalization: a uniform 90 percent cut in bilateral tariffs between South Asian and • Scenario 5. Sustained US-China trade Southeast Asian countries across all sectors. tensions – as specified in Petri and Plummer Tariff cuts are not applied to trade flows within (2020), this scenario assumes an increase South Asia or within Southeast Asia. in US-China tariffs in place by December 2019, 10 percent increase in agricultural and • Scenario 2. Scenario 1 plus a 50 percent manufacturing US-China NTBs, 50 percent reduction in bilateral NTBs between South increase in US-China services NTBs, and US- Asian and Southeast Asian countries. It is China FDI barriers double. assumed that 50 percent of the total non- tariff trade costs are actionable (possible to be • Scenario 6. Open regionalism – South Asia and affected by policy measures), and 50 percent Southeast Asia extend the same liberalization of these actionable barriers are liberalized to the rest of the world and regionally within – a conservative assumption for potential South Asia and Southeast Asia. integration scenarios. The assumption of 50 percent liberalization is aligned with • Scenario 7. Costs of no integration – South Wignaraja et al. (2014) and others in the Asia and Southeast Asia do not integrate intra- literature who assume that only about half regionally but engage in liberalization with the of the NTMs are actionable. rest of the world. • Scenario 3. Scenario 2 plus improvement IMPACTS ON SOUTH ASIA in trade facilitation implying a 15.5 percent reduction in trade costs between South Asia The results show that the South Asia region and Southeast Asia. According to Moïsé could reap important gains from interregional and Sorescu (2013), implementing the WTO South Asia–Southeast Asia tariff liberalization TFA could reduce trade costs by up to 15.5 (Scenario 1), with an estimated increase in South percent. Bilateral trade costs come from Asia’s GDP by 0.4 percent (table 4). Gains from the United Nations Economic and Social such tariff liberalization would be multifold. Commission for Asia and the Pacific–World Preferential tariff liberalization would translate into Bank trade costs database. “trade creation” effects in participating countries. Improved access to Southeast Asian markets • Scenario 4. Scenario 3 plus South Asia– for South Asian exporters will not only provide 50 South Asian firms new trading opportunities, but NTBs, could further boost gains for South Asia, also catalyze their participation in GVCs. Access increasing regional GDP by up to 4.5 percentage to Southeast Asian imported intermediates points or 9.2 percent (Scenario 3). Improvements would reduce input costs and translate into in trade facilitation through the reduction of South efficiency gains. The results show that with the Asia–Southeast Asia trade costs are expected to exception of Nepal, all South Asian countries boost South Asia–Southeast Asia trade, output, stand to benefit. The most pronounced gains and investment and also benefit consumers. are estimated to accrue to Sri Lanka (3 percent) Higher interregional export demand would have and Bangladesh (1.4 percent). Interestingly, the several implications for domestic markets in results also reveal that an important portion of South Asia. To satisfy increased demand for their the gains are due to the expansion of exports. export products, South Asian countries would South Asia’s exports are shown to increase by 6.8 expand domestic supply, which in turn would percent, compared with imports, which rise by result in an increase in demand for imported 4.5 percent. The total exports of Nepal, Pakistan, intermediates and an aggregate increase in and Bangladesh increase significantly more imports. Consumers would benefit from lower than the regional average, by 19.7, 16.7, and 16.5 prices and workers from higher wages. Increased percent, respectively. Finally, the case of Nepal activity would boost rates of return on capital and is worth highlighting. Nepal is the only country lead to an increase in investment, both domestic in the region that stands to lose slightly, with a and foreign. decline in GDP by 2 percent. A closer look at the disaggregated results shows that this is because On deep integration between the two regions, the of trade diversion effects with its most important liberalization of tariffs and NTBs, trade facilitation, trading partner, India, which dominate the trade and liberalization of barriers to FDI would translate creation effects with Southeast Asian countries. into the most pronounced benefits for South Asia. The results show that undertaking such a NTM liberalization combined with the reduction comprehensive and deep regional integration of tariffs in the previous scenario is estimated to agenda would increase South Asia’s GDP by 10.6 boost gains by close to 12-fold for South Asia, percent. Regional exports would also expand by 41.5 translating into an increase of 4.7 percent of percent and by much higher in the cases of Pakistan regional GDP (Scenario 2). The benefits for Sri and Bangladesh, at 67.6 and 62 percent, respectively. Lanka, Pakistan, and Nepal – currently applying the highest NTBs on imports from Southeast The next two scenarios consider a multilateral Asia – could be even higher, boosting their GDP track for integration between South Asia and by 14.7, 11.6, and 10.4 percent, respectively. Southeast Asia. The benefits of NTM liberalization would be multifold. Lower NTMs would translate into If the United States and China were to engage cost and efficiency savings for firms, boost in a sustained trade dispute, keeping in place competitiveness, improve diversification, and the previously imposed retaliatory tariffs, help in upgrading production to higher value- countries in the South Asia region are set to added manufactures. The reduction of red tape benefit from trade diversion opportunities. is expected to benefit small and medium-size Even in the absence of any additional reform firms the most and encourage their participation measures, GDP in South Asia is expected to in international trade. increase by 0.5 percent (Scenario 5). Assuming that South Asian countries can capitalize on the A more ambitious integration agenda implying opportunities provided by the US-China trade improvements in trade facilitation indicators, diversion and expand exports to respond to in addition to the liberalization of tariffs and these new sources of demand in the United 51 DEEPENING LINKAGES BETWEEN SOUTH ASIA AND SOUTHEAST ASIA SUMMARY CHAPTER States and China, South Asian economies such found to increase by 0.7 percent and even more as Sri Lanka, Pakistan, and Nepal would benefit in the cases of Sri Lanka and Pakistan, by 2.4 and the most. On average, South Asian exports are 1.1 percent, respectively. TABLE 4 | IMPACT ON SOUTH ASIA (percent change) Scenario 1 (S1) Scenario 2 (S2) Scenario 3 (S3) Scenario 4 (S4) Scenario 5 (S5) Scenario 6 (S6) Scenario 7 (S7) South Asia – S1 + South Asia S2 + South Asia – S3 + South Asia Sustained Open Costs of Southeast Asia – Southeast Asia Southeast Asia – Southeast Asia US-China regionalism no integration tariff liberalization NTB liberalization trade facilitation FDI liberalization trade war Impact on GDP Bangladesh 1.4 8.2 13.1 14.3 0.4 17.7 6.5 India 0.2 3.2 7.0 8.4 0.4 13.6 7.4 Nepal -2.0 10.4 13.9 15.9 0.9 36.6 12.6 Pakistan 0.4 11.6 21.4 23.1 0.9 29.5 12.0 Sri Lanka 3.0 14.7 23.0 25.7 2.0 98.3 30.1 Rest of SAR 1.3 10.0 18.1 19.6 0.6 36.9 18.6 Total SA 0.4 4.7 9.2 10.6 0.5 17.6 8.4 Impact on exports Bangladesh 16.5 43.8 60.4 62.0 0.8 70.4 18.4 India 4.6 19.2 36.2 37.2 0.6 58.8 22.1 Nepal 19.7 12.2 6.9 6.0 -1.5 3.4 -19.6 Pakistan 16.7 42.6 66.0 67.6 1.1 88.2 18.9 Sri Lanka 9.9 26.6 38.7 41.5 2.4 144.7 38.0 Rest of SAR 5.3 15.9 25.9 26.9 0.7 61.8 16.2 Total SAR 6.8 23.2 40.4 41.5 0.7 63.7 21.5 Impact on imports Bangladesh 12.5 32.9 46.0 47.1 1.4 55.2 20.6 India 3.8 16.9 33.8 34.7 1.1 57.4 24.8 Nepal -4.1 11.6 16.5 18.8 1.7 53.1 19.3 Pakistan 4.5 19.3 34.6 35.9 1.4 47.7 15.5 Sri Lanka 6.1 19.5 29.2 31.4 2.8 117.4 36.0 Rest of SAR 0.8 7.4 14.2 15.3 0.9 33.1 15.2 Total SAR 4.5 18.3 34.0 35.1 1.2 58.0 23.7 Source: World Bank staff simulations. Note: The results reflect the medium- to long-term effects of policy changes on GDP, exports, and imports, expressed in constant 2021 terms. FDI = foreign direct investment’ GDP = gross domestic product; NTB = non-tariff barrier; SAR = South Asia. The benefits to South Asia of a multilateral integration percent. If the reforms considered in the ambitious track would be significant, on average boosting the interregional South Asia–Southeast Asia liberalization region’s GDP by 17.6 percent and exports by 63.7 (Scenario 4) are extended and replicated not only by 52 3. WHAT ARE THE EXPECTED GAINS FROM DEEPENING LINKAGES BETWEEN SOUTH ASIA AND SOUTHEAST ASIA? third countries, but also intra-regionally within South be beneficial for all countries in the Southeast Asia Asia and Southeast Asia, countries such as Sri Lanka region, except China (Scenario 5). Thailand and and Nepal stand to benefit the most, with increases Vietnam are best positioned to reap the benefits in GDP of 98 and 36 percent, respectively. of trade diversion between the United States and China, with estimated increases of 1.2 percent South Asia has a lot to lose from missing out on in GDP and 1.7 and 1.8 percent, respectively, in intraregional integration (Scenario 7), with GDP exports. The impact on China is comparable to more than halving and exports dropping to a third previous estimates (Freund et al. 2020), translating compared with the open regionalism scenario. into a decline in GDP of 1.6 percent and a decline South Asia’s GDP gains would decline from 17.6 in exports of 4.8 percent. percent in the open regionalism scenario to 8.4 percent. India and Pakistan would be among the The benefits of multilateral integration could be least affected. By contrast, Sri Lanka’s and Nepal’s significant and boost Southeast Asian GDP by 15.7 GDP would drop to a third of their potential in a percent and exports by 55 percent (Scenario 6). multilateral integration scenario. The impact of the “Open regionalism” would benefit countries that are “no integration” scenario on South Asia’s exports strongly dependent on trade and deliver a significant would be even more pronounced, declining on boost to GDP in Vietnam (74.1 percent), Thailand average from 63.7 to 21.5 percent. (66.8 percent), Cambodia (66.7 percent), and Singapore (41 percent). The benefits for countries IMPACTS ON SOUTHEAST ASIA with large domestic markets and lower trade openness would be somewhat more moderate, for Notably and not surprisingly, the impact of instance boosting GDP by 11.4 percent in China, interregional South Asia–Southeast Asia integration 11.5 percent in Indonesia, and 12 percent in Brunei. on Southeast Asia is generally positive but much more muted (table 5). Deeper integration with the In the absence of interregional integration (Scenario South Asia region could bring GDP gains that range 7), Southeast Asia would still benefit but significantly between 0.1 and 1.4 percent and an increase in less than in the “open regionalism” scenario, with exports of 0.5 to 4.1 percent for the Southeast Asia GDP gains declining from 15.7 to 10.2 percent. region as a whole. The losses for Cambodia and Lao PDR would be particularly pronounced, with GDP declining from For Southeast Asia, the liberalization of South Asia– 66.7 and 15.4 percent in the open regionalism Southeast Asia tariffs could translate into GDP scenario to 21.2 and 1.6 percent, respectively. Export gains of up to 0.1 percent and somewhat higher gains would also be wiped out, with an average for countries such as Thailand, at 0.3 percent regional decline from 55.2 to 31.6 percent. (Scenario 1). While most Southeast Asian countries would benefit from trade creation opportunities with To sum up, the results show that a South Asia– South Asia, Cambodia and Lao PDR are estimated to Southeast Asia regional integration agenda that lose slightly due to trade diversion effects with their combines the liberalization of tariffs, NTBs, trade main trading partners within the region, China and facilitation, and FDI barriers could boost GDP by 0.4- Thailand. A progressively more ambitious integration 10.6 and 0.1-1.4 percent in South Asia and Southeast agenda, implying the liberalization of NTBs, trade Asia, respectively. If the trade and investment facilitation, and the liberalization of FDI in addition reforms pursued within the interregional integration to tariff cuts, could significantly boost the benefits are extended in a multilateral integration track to for Southeast Asia and result in GDP gains of up to third countries intra-regionally within South Asia and 1.4 percent and an increase in exports of 4.1 percent. Southeast Asia, the gains for participating countries would be significant, increasing GDP by 17.6 and A sustained US-China trade dispute is estimated to 15.7 percent in the two regions, respectively. The 53 DEEPENING LINKAGES BETWEEN SOUTH ASIA AND SOUTHEAST ASIA SUMMARY CHAPTER costs of no integration between the two regions are Asian countries could capitalize on the opportunities significant, cutting the GDP gains by half for South provided by US-China trade diversion, with GDP Asia and by a third for Southeast Asia. Finally, the gains that could add up to 0.5 and 0.8 percent for results also show that given a sustained trade dispute South Asia and Southeast Asia (excluding the losses between the United States and China, Southeast experienced by China), respectively. TABLE 5 | IMPACTS ON SOUTHEAST ASIA (percent change) Scenario 1 (S1) Scenario 2 (S2) Scenario 3 (S3) Scenario 4 (S4) Scenario 5 (S5) Scenario 6 (S6) Scenario 7 (S7) South Asia – S1 + South Asia S2 + South Asia – S3 + South Asia Sustained Open Costs of Southeast Asia – Southeast Asia Southeast Asia – Southeast Asia US-China regionalism no integration tariff liberalization NTB liberalization trade facilitation FDI liberalization trade war Impact on GDP Brunei 0.0 0.8 1.5 1.8 0.4 12.0 6.4 Cambodia -0.3 1.4 3.4 4.0 1.1 66.7 21.2 Indonesia 0.0 0.5 1.1 1.6 0.4 11.5 6.7 Lao PDR -0.1 1.3 2.2 2.6 0.2 15.4 1.6 Malaysia 0.0 0.6 1.9 2.5 1.0 44.0 24.2 Philippines 0.1 1.6 3.2 3.8 1.0 38.1 20.7 Singapore 0.1 2.1 3.6 4.2 0.6 41.0 26.7 Thailand 0.3 1.7 3.5 4.3 1.2 66.8 34.3 Vietnam 0.1 2.2 4.8 5.4 1.2 74.1 39.9 China 0.1 0.3 0.5 1.0 -1.6 11.4 8.2 Rest of 0.0 0.7 1.6 2.1 0.7 19.5 10.8 Southeast Asia -1.2 Total 0.1 0.4 0.8 1.4 15.7 10.2 Southeast Asia Impact on exports Brunei 0.0 0.3 0.6 0.8 0.4 7.5 4.3 Cambodia -0.3 1.4 3.2 3.7 1.5 86.7 21.3 Indonesia 0.4 2.4 4.5 4.9 0.7 30.3 13.8 Lao PDR -0.1 3.5 5.1 5.4 0.5 38.9 -6.0 Malaysia 0.2 0.9 2.4 2.9 1.5 54.0 27.9 Philippines 0.2 2.9 5.3 5.8 1.5 62.6 30.9 Singapore 0.5 2.6 3.9 4.5 0.5 37.0 23.2 Thailand 0.6 2.6 5.0 5.7 1.7 92.7 42.6 Vietnam 0.4 2.3 4.6 5.0 1.8 75.1 38.5 China 0.5 1.8 3.4 3.8 -4.8 54.3 33.7 Rest of 0.1 0.9 1.8 2.2 0.8 21.8 10.4 Southeast Asia Total 0.5 2.0 3.6 4.1 -2.4 55.2 31.6 Southeast Asia 54 3. WHAT ARE THE EXPECTED GAINS FROM DEEPENING LINKAGES BETWEEN SOUTH ASIA AND SOUTHEAST ASIA? Impact on imports Brunei -0.1 -0.2 -0.2 0.0 0.6 5.4 5.0 Cambodia -0.5 0.7 2.2 2.6 1.9 78.8 23.4 Indonesia 0.7 3.5 6.0 6.4 1.2 38.1 17.6 Lao PDR -0.2 4.9 7.3 7.7 1.0 40.1 -1.9 Malaysia 0.3 1.0 2.4 2.9 2.0 59.2 29.6 Philippines 0.1 2.4 4.1 4.5 1.9 60.0 30.1 Singapore 0.6 3.1 4.5 5.0 0.7 41.3 24.5 Thailand 0.7 2.7 5.0 5.6 2.0 93.8 42.2 Vietnam 0.4 2.3 4.3 4.7 2.3 79.0 40.2 China 0.8 2.4 4.1 4.4 -6.7 69.0 42.4 Rest of 0.1 0.8 1.6 1.9 1.4 23.0 11.0 Southeast Asia Total 0.7 2.4 4.2 4.5 -3.3 65.5 37.3 Southeast Asia Source: World Bank staff simulations. Note: The results reflect the medium- to long-term effects of policy changes on GDP, exports, and imports, expressed in constant 2021 terms. FDI = foreign direct investment; GDP = gross domestic product; NTB = non-tariff barrier. ESTIMATING POTENTIAL GAINS FROM SERVICES TRADE LIBERALIZATION IN SOUTH ASIA AND SOUTHEAST ASIA The cost of restrictive services policies is much constant. It therefore equates to a preferential higher than the applied rates of tariff protection in liberalization scenario, whereby the countries goods. The gains from preferential liberalization in under study liberalize their services policies only South Asia, based on a simulation of preferential vis-à-vis each other, through a network of regional liberalization covering South Asia and Southeast agreements. The scenario takes into account the Asia, dwarf the gains from a modest multilateral preferential liberalization that has already taken liberalization because of the strong impact exerted place in this country group, including through by the change in regional policies, starting from a ASEAN’s agreements with its partners. baseline of very low integration. Using a structural gravity model to estimate the gains from a policy It is striking that for Bangladesh and Pakistan, the reform involving the South Asian and Southeast gains from preferential liberalization are huge Asian countries (box 9), the results show that relative to the other changes recorded in the figures countries reduce their Services Policy Index for distribution, finance, and transport (figures 16 scores by 10 percent on a multilateral basis, with to 19 show the results from these simulations, all other countries maintaining baseline policies. expressed as counterfactual percentage changes This simulation is equivalent to coordinated in exports relative to the model baseline). The unilateral liberalization among the South Asian reason for this result is that the complete network and Southeast Asian countries. An additional of trade agreements considered in the preferential simulation, by contrast, assumes that the countries liberalization scenario includes preferential also sign a complete network of preferential trade liberalization between these countries and India, agreements among themselves but keep their their regional neighbor with a large internal market. multilateral Services Trade Policy Index scores As such, the gains from preferential liberalization 55 DEEPENING LINKAGES BETWEEN SOUTH ASIA AND SOUTHEAST ASIA SUMMARY CHAPTER in South Asia, as part of this general simulation of but the changes in exports due to multilateral preferential liberalization covering South Asia and liberalization are typically stronger than from Southeast Asia, dwarf the gains from a modest further preferential integration. Of course, the multilateral liberalization because of the strong other countries in the group already have a impact exerted by the change in regional policies, relatively dense network of regional agreements starting from a baseline of very low integration. among themselves, which means that the preferential scenario does not involve large-scale It is striking that for Bangladesh and Pakistan, the additional liberalization. gains from preferential liberalization are huge relative to the other changes recorded in the In terms of scale, the effects of policy liberalization figures for distribution, finance, and transport are largest in telecom: multilateral liberalization (figures 16 through 19 show results from has an average export gain of 12.6 percent. Next these simulations, expressed as counterfactual come finance (5.5 percent), distribution (3.6 percentage changes in exports relative to the percent), and transport (3.0 percent). The averages model baseline). The reason for this result is for the preferential scenario are skewed by the that the complete network of trade agreements very large numbers for Bangladesh and Pakistan. considered in the preferential liberalization Excluding these two countries results in average scenario includes preferential liberalization changes that are smaller than for the multilateral between these countries and India, their regional scenario in distribution, finance, and telecom. The neighbor with a large internal market. As such, differences between the two scenarios are large: the gains from preferential liberalization in the gains from a modest multilateral liberalization South Asia as part of this general simulation of are at least 50 percent higher than those from preferential liberalization covering South Asia and preferential integration, and as high as 10 times Southeast Asia dwarf the gains from a modest more for telecom. The exception to this overall multilateral liberalization because of the strong pattern is transport, where regional integration impact exerted by the change in regional policies, tends to have a stronger effect than a modest starting from a baseline of very low integration. multilateral liberalization. The reason is likely that the benchmark of an “average” trade agreement It is important to keep this result in context. It effect implicitly involves more liberalization than is not observed in general for other countries, the 10 percent cut in restrictiveness considered where the gains from both scenarios are smaller, for the multilateral reform scenario. 56 3. WHAT ARE THE EXPECTED GAINS FROM DEEPENING LINKAGES BETWEEN SOUTH ASIA AND SOUTHEAST ASIA? BOX 9 | STRUCTURAL GRAVITY MODEL TO UNDERTAKE SIMPLE GENERAL EQUILIBRIUM SIMULATIONS OF SERVICES POLICY REFORMS In addition to constructing Services Policy Indexes available on preferential services policies for most (SPIs) using World Trade Organization–World Bank countries. So the expedient is to interact the SPI with data, Hoekman and Shepherd (2021) use a structural a dummy variable for countries that are members gravity model to undertake simple general equilibrium of the same regional agreement. The authors find simulations of policy reforms. Arkolakis, Costinot, and that the interaction term usually has a positive and Rodriguez-Clare (2012) and Costinot and Rodriguez- statistically significant coefficient, which is consistent Clare (2014) show that standard single-sector gravity with the degree of trade liberalization within regional models like the Armington model of Anderson and Van agreements. The question deserves further research Wincoop (2003) or the Ricardian model of Eaton and using directly collected data from agreements; Kortum (2002) have the same relationship between however, as previous work such as Miroudot and changes in trade costs – such as policy reforms – and Shepherd (2014) indicates, most services policy counterfactual changes in trade flows. Baier, Yotov, and reforms are de facto nondiscriminatory, even when Zylkin (2019) provide a simple algorithm for solving the they are associated temporally with entry into a system while respecting general equilibrium constraints. regional agreement. The Hoekman and Shepherd (2021) structural gravity To formalize the above statements, the standard gravity model distinguishes between multilateral and model takes the following form, considering a single year preferential policies. As of this writing, no data are and single sector cross-section only: (9.1) Xij = Fi Fj t─ ij θ e ij where: Xij is exports from country i to country j; the standard gravity model controls based on geography F terms are exporter and importer fixed effects; tij is and history, along with tariffs, a preferential trade bilateral trade costs; θ is a parameter capturing the agreement (PTA) dummy, and an indicator of service sensitivity of demand to cost; and eij is an error term sector restrictiveness (the Services Trade Restrictiveness satisfying standard assumptions. Trade costs t are Index (STRI), for presentational purposes), as well as an specified in the usual iceberg form. These costs are interaction between the STRI and a dummy for countries unobserved but can be specified in terms of observable that are members of an economic integration agreement proxies. For the present purposes, the model includes (EIA), the services equivalent of a PTA for goods. Formally: (9.2) ─ θ logtij = b1 STRIj * intlij + b2 STRIj * intlij * EI Aij + b3 log(1 + tariffij ) + b4 PTAij + b5 log(distanceij ) + b6 contiguousij + b7 colonyij + b8common languageij + b9common colonizerij + b10same countryij + intlij Standard international trade data are not well-suited to input-output table. They use data for 2015 only, the latest structural gravity modeling because they do not include available year, corresponding most closely to the year of the internal flows. Hoekman and Shepherd (2021) therefore SPI data (2016). Estimation is by Poisson pseudo-maximum use the Eora multi-region input-output table. Eora covers likelihood, and counterfactual simulations are solved using 183 countries and 26 sectors through a single harmonized the approach of Baier, Yotov, and Zylkin (2019). Source: Shepherd (2020). 57 DEEPENING LINKAGES BETWEEN SOUTH ASIA AND SOUTHEAST ASIA SUMMARY CHAPTER FIGURE 16 | EXPORT IMPACTS OF MULTILATERAL AND PREFERENTIAL LIBERALIZATION: DISTRIBUTION SERVICES (PERCENT OVER BASELINE) (percent over baseline) 120 100 80 Percent 60 40 20 0 Bangladesh China Indonesia India Myanmar Malaysia Pakistan Philippines Singapore Thailand Vietnam Multilateral Preferential Source: Calculations based on Hoekman and Shepherd 2021. FIGURE 17 | EXPORT IMPACTS OF MULTILATERAL AND PREFERENTIAL LIBERALIZATION: FINANCIAL SERVICES (PERCENT OVER BASELINE) (percent over baseline) 180 160 140 120 Percent 100 80 60 40 20 0 Bangladesh China Indonesia India Myanmar Malaysia Pakistan Philippines Singapore Thailand Vietnam Multilateral Preferential Source: Calculations based on Hoekman and Shepherd 2021. FIGURE 18 | EXPORT IMPACTS OF MULTILATERAL AND PREFERENTIAL LIBERALIZATION: TELECOM SERVICES (PERCENT OVER BASELINE) (percent over baseline) 30 25 20 Percent 15 10 5 0 Bangladesh China Indonesia India Myanmar Malaysia Pakistan Philippines Singapore Thailand Vietnam Multilateral Preferential Source: Calculations based on Hoekman and Shepherd 2021. 58 3. WHAT ARE THE EXPECTED GAINS FROM DEEPENING LINKAGES BETWEEN SOUTH ASIA AND SOUTHEAST ASIA? FIGURE 19 | EXPORT IMPACTS OF MULTILATERAL AND PREFERENTIAL LIBERALIZATION: TRANSPORT SERVICES (PERCENT OVER BASELINE) (percent over baseline) 100 90 80 70 60 Percent 50 40 30 20 10 0 -10 Bangladesh China Indonesia India Myanmar Malaysia Pakistan Philippines Singapore Thailand Vietnam Multilateral Preferential Sources: Shepherd 2021, based on Hoekman and Shepherd 2021. The analysis undertaken here shows that limitations highlights the importance of moving liberalizing services polices in South Asia and forward on services policy reforms in the region. Southeast Asia can help boost the regional The point is all the more salient in light of the services economy. But as noted at the outset, COVID-19 pandemic, which has had major there is more to international trade in services implications for services activities, in particular than is captured in standard data from the balance those requiring international travel or personal of payments, which are used for the simulations interactions. As such, policy makers across Asia here. The simulations do not take account of will be called upon to pay renewed attention trade under the General Agreement on Trade in to measures that can help support services Services Mode 3 (sales by foreign affiliates), and production, trade, and employment, following the they only capture the other modes of supply severe shocks to which they have been subjected imperfectly. The figures reported should therefore over the past year. be considered as lower bounds on the likely true effects of policy liberalization. The potential gains from regional integration in South Asia are very high in relative terms, that Another limitation is that the models used are is, starting from a baseline of low intraregional single sector, so they do not capture the input- trade. Given the historical political tensions in output relationships at the core of the concept South Asia, the degree of regional integration is of embodied services trade. As such, regional very low compared with Southeast Asia and other integration of services markets can promote greater world regions. Of course, regional integration is sourcing of services inputs from abroad in other not straightforward given the political landscape. sectors, including manufacturing, with consequent The size of the gains from preferential integration trade and income gains. This dynamic is important, should not overshadow the more general finding and again suggests that the figures produced by that multilateral liberalization, including when the simulations here are on the low end. undertaken autonomously, can bring significant economic gains to South Asia just as it can to Taking the simulation results set against these Southeast Asia. 59 4. ADVANCING REGIONAL INTEGRATION BETWEEN SOUTH ASIA AND SOUTHEAST ASIA – SELECTED ISSUES The evidence from the simulations in this report other world regions. The gains from regional has three key implications for policy makers. integration in South Asia are therefore very high in relative terms, that is, starting from a • First, as a general proposition, the baseline of low intraregional trade. Of course, largest economic gains come from regional integration is not straightforward nondiscriminatory policy reforms. While given the political landscape. The size of the these reforms – covering goods, services, and gains from preferential integration should investment – are consistent with the aims of not overshadow the more general finding the multilateral trading system, they do not that multilateral liberalization, including strictly require multilateral negotiations to be when undertaken autonomously, can bring feasible: individual countries are always free to significant economic gains to South Asia just liberalize autonomously, on a de facto most as it can to Southeast Asia. favored nation basis. This path forward has much to recommend, as it allows countries • The third implication is that an ambitious to appropriate significant economic gains but regional integration agenda that covers does not require complex coordination with goods, services, and investment can boost policy makers in other countries. Given the gains for both South Asia and Southeast difficulty of moving forward on multilateral Asia. An agenda that covers services and negotiations, this path is one that should investment reforms and improvements seem increasingly appealing to policy makers in trade facilitation, in addition to the in South Asia and Southeast Asia, especially liberalization of tariffs and NTBs, produces in the area of investment in services, with the the largest benefits for both regions. growing realization of their importance in the regional trading landscape. Regional integration can be pursued through free trade agreements (FTAs). South Asian policy • The second implication comes in the form makers can join existing regional groupings of a partial exception to this finding: South such as ASEAN or the Regional Comprehensive Asia. Given historical political tensions there, Economic Partnership. A case can be made the degree of regional integration is very for signing bilateral agreements with individual low compared with Southeast Asia and Southeast Asian countries. Hub-and-spoke 60 4. ADVANCING REGIONAL INTEGRATION BETWEEN SOUTH ASIA AND SOUTHEAST ASIA – SELECTED ISSUES FTAs tend to marginalize the spoke economies, and transportation logistics. But another critical since factories in the spokes have artificially part of the trade equation lies in import conditions lower market access than factories in the hub. imposed by importing countries. These can be in Consequently, hub-and-spoke FTAs can become the form of tariffs, import quotas, and, particularly an artificial deterrent to investment in the outer relevant to this discussion, SPS requirements. economies. Filling in the gaps with spoke-spoke SPS compliance is sometimes a game changer. FTAs may remove this policy-induced investment Although SPS compliance can also be a benefit to deterrent and avoid self-induced peripherality for trade by providing a quality product that can elevate spoke nations (Baldwin 2004). export competitiveness and establish a country with increased market share, and reducing trade Deeper regulatory cooperation can be pursued costs through lowering of border formalities, failure as part of FTAs or other regional mechanisms. to meet an importing country’s requirements can Regulatory cooperation in the selected areas mean complete cessation of trade. examined in this report, ranging from protection at the border, such as SPS measures, to new South Asian and Southeast Asian countries elements, such as digital trade, complementarity vary in their basic ability to trade and the SPS of factors, and environmental goods and services, challenges they face. Many factors contribute to is explored in more depth below as a means these differences, including economic capacity, of providing options for deepening economic geography, access to ports, distance to markets, linkages between South Asia and Southeast Asia. commodity portfolio, internal and regional political stability, alliances with neighboring ADDRESSING NON- countries, technical capacity, regulatory capacity, TARIFF MEASURES – THE and governance systems. In some circumstances, these are tied to the level of economic CASE OF SANITARY AND development or the unique geography of individual PHYTOSANITARY REFORMS countries. In other cases, regional differences can be linked to intraregional connectivity, effective SPS measures were designed to limit NTMs trade facilitation, and functional cooperative to legitimate human plant and animal health initiatives among regional partners. Other factors concerns based on the least restrictive measures, include legacies from colonial influences and but NTMs have increased dramatically over the the dynamics of agricultural reform and changes past two decades as countries have reduced tariff in trade patterns following independence. All barriers. These increases can be attributed to the countries in South Asia and Southeast Asia various factors, including trading tariff barriers have unique circumstances that influence their for NTBs, but also increased global awareness capacity to respond to trade-related SPS issues, of SPS hazards, greater precision in testing, but many similarities exist. For example, smaller climate change and changing distributions of countries, such as Bhutan, Nepal, and Lao PDR, pests and diseases, increased variety in traded share commonalities related to limited economic commodities, and lower tolerance for chemical and human resources, while larger economies residues by importing countries (particularly by can be burdened by complex bureaucracies. In developed countries). addition, these are landlocked countries that are reliant on transportation systems and neighboring SPS compliance is a critical part of the trade countries for access to ports. equation. The ability to produce and trade a commodity is driven by many factors, including The costs associated with SPS compliance basic economic functions such as production capacity must be considered, including human capacity at a competitive cost, market demand, resources for SPS oversight, and building and 61 DEEPENING LINKAGES BETWEEN SOUTH ASIA AND SOUTHEAST ASIA SUMMARY CHAPTER maintaining accredited laboratory systems. As of shipments. Implementation remains low, international trade systems increasingly adopt but it is progressing with the addition of more SPS concepts, it is essential that exporting documents, such as the electronic Phytosanitary countries build their awareness of and capacity Certificate, electronic Animal Health Certificate, for SPS compliance. and electronic Food Safety Certificate, as well as the possibility of exchange of such electronic This can be accomplished through phytosanitary trade documents with ASEAN countries. The and veterinary evaluations, and training programs Framework Agreement on Facilitation of and workshops available through various Cross-border Paperless Trade in Asia and the international development agencies. Exporters Pacific, which entered into force in 2021, has often need to comply with plant health or been signed by Bangladesh, Cambodia, China, food safety testing requirements of importing Armenia, and the Islamic Republic of Iran, countries. This can be challenging when products leading the way for other countries to adopt do not meet the requirements (for example, and implement the Agreement. presence of quarantine pests or products exceed maximum residue limits), accredited laboratory • The World Bank South Asia Regional Trade testing facilities are not available to exporters, Facilitation Program is advancing digitization or laboratory certification is not recognized of border documents for Bhutan, Bangladesh, by the importing country. Governments and and Nepal. Part of this effort is to connect aid agencies can help by providing chemical the Nepal National Single Window to the management training programs, building and International Plant Protection Convention’s staffing accredited laboratories, and ensuring ePhyto hub to facilitate exchange of that mutual standards recognition is included in electronic phytosanitary certificates (ePhytos). bilateral trade agreements. Regionally, Southeast Implementation of ePhytos provides Asia has some clear advantages related to the efficiency gains for traders who can apply development of SPS capacity. for and receive certificates remotely as well as increased confidence in the authenticity of To address outdated legislation, overlapping certificates issued by authorities. bureaucracies, and insufficient capacity, policy makers in South Asia and Southeast Asia can focus • Efforts to implement risk-based border on the following national and regional SPS-related management measures in some countries reforms: (for example, the Philippines and Thailand) and increased transparency of requirements Implementing trade facilitation measures have contributed to efficiency improvements in trade. However, in many countries • Analyses have shown a trend of decreasing in both regions, the application of risk- average trade costs in Indonesia, Malaysia, based approaches to reduce interventions the Philippines, Singapore, and Thailand from and remove duplicative or unnecessary 1990 to 2006 (Sourdin and Pomfret 2009). The documentary requirements such as licenses improvements are likely the result of ongoing and permits is still overused by authorities and trade facilitation efforts made by these countries contributes to inefficiencies in trade. Greater in recent years (Bayley 2014). ASEAN is promoting cooperation between border agencies within the concept of the ASEAN Single Window the countries or between regional partners as an integrated platform for the electronic is also needed to improve trade efficiencies. exchange of border trade–related documents Regional administrative burdens of both among its member states, facilitating trade importing and exporting countries play a role through faster clearance of cargo and release in trade efficiency. 62 4. ADVANCING REGIONAL INTEGRATION BETWEEN SOUTH ASIA AND SOUTHEAST ASIA – SELECTED ISSUES Improving regional cooperation on developing SPS opportunities for cooperation on SPS capacity, mutual recognition, and harmonization issues and special commitments reflecting of SPS processes adaptations to regional conditions. Trade agreements increasingly include chapters • Tangible targets that can lead to greater on SPS measures. These promote regional SPS capacity for all countries include a cooperation, coordination of activities, broad range of initiatives. These can include and transparency and encourage support restructuring and coordinating government from developed economy partners. Some departments to streamline SPS response extend beyond the provisions of the WTO capacity, establishment of accredited SPS Agreement, adding greater precision laboratory facilities with trained personnel to the concepts of cooperation, such for testing and certification of commodities, as requiring prescribing time frames for and SPS training for all participants of consultation, requiring that partners be given SPS trade-related commodity production the opportunity to review and comment on streams, including producers, processors, risk assessments, and so forth. In Southeast exporters, regulators, and so forth. All parties Asia, developed economies have provided must be kept up to date with standards and leadership to regional partners in developing technologies as they change. Access to regulatory capacity. Australia, for example, information and transparency of procedures coordinates an annual meeting of regional provide predictability so that traders both regulators in an effort to build capacity know what is required and what will happen and harmonize understanding through to their goods during trade processes. technical discussion leading to improved understanding of what is expected to meet • Trade arrangements and membership in market requirements by both exporting economic unions are beneficial to members and importing officials. With appropriate when the focus is regional harmonization, knowledge dissemination of these technical mutual recognition, equivalence, and the requirements, producers and traders are implementation of least-restrictive SPS trade better positioned to increase commodity measures. Other benefits of effectively run compliance and thereby market stability. regional organizations have been realized In South Asia, countries focus on their through SPS training and trade facilitation collaboration with India but could consider exercises. FTAs, bilateral or between a partnering with ASEAN countries in selected region and individual countries, provide areas (Allen et al. 2021). 63 DEEPENING LINKAGES BETWEEN SOUTH ASIA AND SOUTHEAST ASIA SUMMARY CHAPTER SERVICE SECTORS AND REGULATORY APPROACHES – THE CASE OF DIGITAL SERVICES Governments in South Asia and Southeast Asia Philippines has introduced legislation that draws must adapt to the rapidly evolving realities of together a group to examine the regulation the digital services market. Many Southeast of telemedicine.13 In Thailand, telemedicine Asian countries are already demonstrating the has grown significantly without clear rules and transformative power of technology and the regulations on medical liability or access to emergence of digital services such as IT and patients’ health records. These different regimes, ITES, e-health, e-education, e-financial services, coupled with the absence of legislation on e-distribution, or e-transport. Although, except for telemedicine in the rest of the region, have India and some niche markets in the region, these created a complex environment of overlapping services are in a more incipient phase in South medical practice regulations, medical device Asia, the need to address the new technologies regulations, and medical data regulations, which is becoming ever closer and more apparent. make it virtually impossible for a regional provider Technological developments, including improved to emerge. This situation is echoed in many other artificial intelligence and deep learning technology, traditionally highly regulated service sectors. as well as the advent of 5G and increased uptake of blockchain, are disrupting sectors and enabling Regulatory heterogeneity is particularly the digital provision of new services, raising new challenging for many small and medium-size legal and regulatory questions. enterprises when attempting to scale up their business from the national level to trading at the As technological disruption reaches highly regional level.14 Complying with the requirements regulated sectors, adequate regulation becomes of differing national regulations can be daunting, pressing. Unsurprisingly, the first services in South particularly for small businesses that struggle Asia and Southeast Asia to experience significant to meet the administrative and cost barriers. technological disruption were in less regulated By encouraging regulatory convergence, this sectors, such as e-commerce and ride hailing. barrier can be greatly reduced. Another concern However, as digital services have expanded into arising from national regulation is the creation of more regulated sectors, the impacts exerted regulatory gray areas.15 Due to unclear regulatory by national and regional regulations have been environments, many digital service providers thrown into sharper relief. For example, in just operate in an environment where they are one subsector of healthtech – telemedicine – the permitted to continue operations provided that regional variations in regulation are significant. a specific regulation is not enforced. Examples Only a few countries have created specific include the use of commercial messaging regulation around telemedicine. For example, for medical purposes or other private data India introduced several telemedicine measures transmissions.16 This is obviously a suboptimal as a reaction to COVID-19,11 while Singapore situation, as it creates an environment where introduced a regulatory sandbox in 2018.12 The existing services could be rapidly shut down 11 Jalan (2020). 12 Ministry of Health of Singapore (2018). 13 Luci-Atienza (2019). 14 Nordås (2016). 15 OECD (2018). 16 Drake et al. (2016). 64 4. ADVANCING REGIONAL INTEGRATION BETWEEN SOUTH ASIA AND SOUTHEAST ASIA – SELECTED ISSUES without the scrutiny present under full regulatory needed to support digital services, such as change. It also creates a dependency on the privacy and consumer protection. Even where whims of the enforcer, again creating an unstable such frameworks exist, however, there is no investment and development environment. guarantee that these are properly supportive. Regional information exchanges between What is clear from these developments is that South Asia and Southeast Asia could help ignoring them is not an option. At best, this address the challenge of keeping up with the could lead to societies being left behind and need for rapidly evolving frameworks. not having access to innovation that could provide huge advances across a broad spectrum • Pursuing sectoral legislative and regulatory of sectors. At worst, it could lead to the use of reforms in services. Asymmetries of information these technologies outside safe and regulated in services often prompt policy intervention parameters, creating great potential for consumer in the form of regulation, which can create harm. Therefore, governments must prepare barriers to entry and service supply. Professional themselves for the explosion of possibilities that services, for example, are often highly technology will present in the near future. regulated, while lengthy approval mechanisms may be required to provide financial or audio- To address regulatory challenges and heterogeneity visual services. As a result, regulation needs to issues and prepare for the digital developments be calibrated and designed carefully to achieve over the coming decades, policy makers in South the public interest justifications that motivate Asia and Southeast Asia can focus on the following its introduction, without raising costs, reducing national and regional reforms: efficiency, or creating rigidities in industries. Regulation can be an even greater issue for • Developing supporting policies for digital digital services because the ability of such services. Digital services require general services to develop and be commercialized supporting policies in areas like data will often require positive action on the part protection, cyber security, consumer of regulators. protection, competition law, and recognition of e-signatures and electronic transactions, • Harmonizing or encouraging mutual which are the basic building blocks of all recognition of qualifications and regulations. business online. Dialogue is needed on There is an opportunity to promote a regional the regulatory architecture that ensures a debate on the regulation of digital services transparent national regulatory environment and e-trade. If a degree of consensus and that protects consumer interests and standardization could be achieved regionally, makes compliance as easy as possible for this would make market entry and product companies. Relevant laws and regulations that development far less complex, significantly are currently in place or absent in countries in reducing the regulatory burden on producers South Asia and Southeast Asia are summarized without compromising on the level of in table 6. Unsurprisingly, the countries with consumer protection offered by regulators. the most vibrant digital service economies are Options include adding regulatory elements those with the most complete legislative and to existing regional agreements or embarking regulatory frameworks. The table also shows on new regional regulatory initiatives, perhaps that there are still important gaps in several focused on selected priority sectors. This countries in the basic legislative infrastructure could mean agreeing on standard practice in 65 DEEPENING LINKAGES BETWEEN SOUTH ASIA AND SOUTHEAST ASIA SUMMARY CHAPTER developing regulation that specifically affects using evidence from other jurisdictions, as e-commerce providers. It could also involve well as gathering evidence through trials such exchange of information on balancing risks, as regulatory sandboxes. TABLE 6 | NATIONAL REGULATIONS DIRECTLY RELATED TO THE DIGITAL ECONOMY Country Electronic Consumer Privacy Cybercrime AI Blockchain transactions protection and data protection India Y N Y Y N - But ongoing Ban on crypto assets dialogue under review following India Supreme Court decision in March 2020 Sri Lanka Y Y N Y N N Bangladesh Y Y N Y N Ban on cryptocurrencies Nepal Y Y Y Y N All transactions related to Bitcoin are illegal Pakistan Y N Draft Y N Not recognized in any way but not currently regulated Bhutan Y Y Y Y N N Afghanistan Draft N N Y N N Malaysia Y Y Y Y N - But plans to Not recognized as legal develop national AI tender, regulations framework put in place to record exchanges for anti- money laundering and tax purposes Singapore Y Y Y Y Research funding into Currently working ethics and AI regulation on full regulatory - authorization for trials framework including of autonomous vehicles initial coin offering, payments, exchange licensing, and so forth Indonesia Y Y Y Y N - But promoting Not banned, but discourse warned against use Brunei Y N N Y N Not considered legal Darussalam tender, not regulated Vietnam Y Y Y Y N Not considered legal tender, reports on working toward a legal framework 66 4. ADVANCING REGIONAL INTEGRATION BETWEEN SOUTH ASIA AND SOUTHEAST ASIA – SELECTED ISSUES Country Electronic Consumer Privacy Cybercrime AI Blockchain transactions protection and data protection Philippines Y Y Y Y N Trading is subject to permission from the central bank Cambodia Y Y N Draft N Not legal tender, but not illegal, banks asked not to allow people to conduct transactions – development of internal interbank blockchain network Thailand Y Y Y Y N Working toward implementation of new laws on tax and exchange registration, financial institutions asked not to trade Lao PDR Y Draft Y Y N N Myanmar Y Y Draft Draft N N Source: UNCTAD 2020. LEVERAGING THE UNTAPPED POTENTIAL OF FDI AND ITS COMPLEMENTARITY WITH LABOR MIGRATION Mounting evidence of FDI and migration improve website navigation, consolidation of complementarity suggests that developing regulatory information, and accessible translations. countries could better leverage factor movements Visa inflexibility and red tape are a widespread to support national and regional economic concern. Annual renewals, non-transferability development. South Asian and Southeast Asian between employers and visa categories, strict countries offer a diverse range of approaches to sponsorship requirements, and multiple approval FDI and migration policies and their intersection. processes (for visas, work permits, and registration) This only partly reflects differences in economic deter migrants and investors alike. Cooperation development, with historical, political, and to cut red tape and highlight country differences societal influences explaining much of the would also promote smoother processes across divergence. And while there is no single policy the region. FDI approval processes are also more formula that is appropriate for every country, of a burden than a benefit in most countries collective experience regionally and globally that deploy them. Streamlined and inexpensive offers lessons from which opportunities for approvals that facilitate host country integration enhancement can be drawn. and guard against post-establishment interference can improve investor certainty and appease wary Potentially large gains are achievable at minor cost locals, but in most of the countries in the region, by simply improving information accessibility for they lack objective criteria and timely, transparent, investors and migrants. A regional initiative could and predictable processes. 67 DEEPENING LINKAGES BETWEEN SOUTH ASIA AND SOUTHEAST ASIA SUMMARY CHAPTER MAKING REGIONAL TRADE SUSTAINABLE – THE ROLE OF ENVIRONMENTAL GOODS AND SERVICES Trade in environmental goods and services (EGS) untapped potential for trade in South Asia remains is essential to support global efforts to reduce an important element to spur economic growth environmental degradation and the resulting through trade in EGS, which will also improve the inequalities, enabling developing countries to sustainability of other industries, such as textiles embark on a more resilient, inclusive, and greener in Bangladesh, phosphates in India, or tourism in path to recovery from the COVID-19 pandemic. Sri Lanka. Focusing on economic growth through Climate change is expected to affect business EGS is necessary for policy makers to help create productivity and competitiveness in the near more sustainable and long-term jobs. future. Therefore, reducing trade barriers for EGS in developing countries is crucial to improve Trade and FDI will play a crucial role in this and maintain firms’ competitiveness by ensuring transition. Companies that are involved in access to affordable and appropriate EGS that are global production processes and exporting will critical for environmental protection and climate be exposed to new stringent environmental change mitigation. requirements. This will likely affect other domestic industries and businesses. Several untapped The broader debate revolving around trade in EGS opportunities and strong regional linkages and also has important consequences for countries in production networks in South Asia and Southeast South Asia and Southeast Asia. Policy makers and Asia could lead to a more complex regional private sector actors need to learn how to mitigate value chain in environmental goods that could environmental impacts and adjust their business accelerate technology transfer and adoption and operations. The wider effects of trade in EGS reduce environmental degradation. Policy makers should not only be considered within industry, need to ensure that an appropriate investment but also across sectors, as companies must shift environment is created to attract new FDI in EGS- from a strategy of “pollute and grow” to a more intensive sectors with a high potential for spillover sustainable strategy of “mitigate and grow.” effects to other major industries at the national level. Prioritization is key for promoting a greener South Asia has not yet moved toward more recovery from the pandemic. sustainable trade growth. Economic growth in the region is driven by environmentally hazardous Liberalizing trade in environmental goods can modes that should be transmuted through increase the competitiveness of domestic firms by extensive trade in EGS. Policy makers should focus promoting the growth of highly productive firms. In on mitigating environmental pollution, enhancing addition, trade in EGS can help reduce greenhouse energy efficiency and the use of renewable gas emissions and the use of fossil fuels, which energy, and promoting environmental industries in turn can significantly increase productivity. and creating green jobs. Substantial trade in EGS However, trade liberalization alone will not be can reduce environmental degradation as well as sufficient to create a regionally integrated market promote growth. for trade in EGS. The availability of investments and incentives to increase the uptake of EGS is also Potential enablers of green growth in South important for creating a market and integrating Asia and Southeast Asia are related to the use the value chain. The region has a growing network of renewable energy and the shift of industries of trade and investment agreements, including away from carbon-intensive growth toward with China and Korea. Nevertheless, challenges more sustainable growth models. The largely related to policy coherence, coordination, and 68 4. ADVANCING REGIONAL INTEGRATION BETWEEN SOUTH ASIA AND SOUTHEAST ASIA – SELECTED ISSUES long-term planning can act as barriers to trade Regional trade agreements have traditionally and investment in EGS. described environmental regulations but are often not ambitious. The World Bank’s Deep While various trade and environmental policies are Trade Agreement’s database 2.0 reveals that of implemented at the national level, there is a need all the trade agreements globally, the European for harmonization of these policies at the regional Union’s trade agreements have attempted to level. Examples include electronic recognition include environmental provisions in the most of test certificates to avoid double testing; significant way, covering issues of institutions, access to affordable testing; and harmonization cooperation, and welfare, as well as an of some sectoral areas, such as water quality, enforcement mechanism. However, Shapiro energy efficiency, pipes, quality of solar panels, (2020) finds that these agreements typically and so forth. A regional framework that includes describe domestic environmental regulations standards and identifies and monitors barriers or monitoring investments, but not patterns to trade in EGS could be created to unlock the of tariffs and NTBs. Many of these merely seek existing trade potential for EGS. to prevent the relocation of dirty industries by barring the use of weak domestic environmental Reductions of tariffs and NTMs could boost policies to lure dirty production across borders. domestic uptake of cleaner technologies and Thus, governments need to delineate the types of spur green growth in South Asia. Looking at the trade policies that affect the environment so that Southeast Asian countries, their development of appropriate amendments can be made. renewable industry could be attributed to the low tariffs in the ASEAN region, as well as the proximity In the region, the Chile-Malaysia Free Trade Agreement of Southeast Asian countries to Chinese markets contains the most advanced environmental provisions and the spinoff of technologies, existence of a (figure 20). This agreement includes provisions that competitive semi-conductor sector, potential prohibit the dilution of environmental protection for Chinese companies to ship equipment to to promote trade, technical assistance in the European and US markets without being subject environmental area, and provisions on cooperation to antidumping rules, and large potential for and the establishment of an intergovernmental those countries to adopt solar technologies. As committee on environment. Additionally, compared such, South Asian countries would be best placed with all the other trade agreements analyzed in the to institute policies enabling the development of South Asia and Southeast Asian regions, the Chile- this industry, of course, in tandem with research Malaysia FTA also requires states to control ozone- and development. depleting substances. 69 DEEPENING LINKAGES BETWEEN SOUTH ASIA AND SOUTHEAST ASIA SUMMARY CHAPTER FIGURE 20 | ENVIRONMENTAL PROVISIONS IN SOUTH ASIAN AND SOUTHEAST ASIAN TRADE AGREEMENTS Treaty on European Union (TEU) and Treaty on the Korea - India Asean - Korea Korea - Vietnam Eurasian Economic Union - Accession of the Chile - Vietnam Malaysia - Australia Chile - Malaysia India - Japan India - Malaysia Asean India India - Nepal Asean - Australia - New Zealand India - Afghanistan Mercosur - India Asean - Japan Japan - Vietnam Chile - India India - Bhutan Japan - Indonesia Pakistan - Sri Lanka South Asian FTA Pakistan - Malaysia Pakistan - china Japan - Thailand India - Singapore Japan - Malaysia Asean - China Asia Pacific Trade Agreement (APTA) - Accession India - Sri Lanka South Asian Preferential Trade Agreement Asean Trade Agreement Eco Trade Agreement 0 2 4 6 8 Does the agreement provide for a general exception to other obligations for environmental reasons? Does the agreement prohibit dilution of environmental protection to promote trade? Does the agreement provide for differential and greater liberalization of trade environmental goods? Enforcement: Does the agreement subject environmental provisions to general state to state dispute settlement? Ext. Assistance: Does the agreement provide for technical assistance/financial assistance/capacity building specifically in the environmental area? Env. Protection: Does the agreement require states to control ozone-depleting substances? Cooperation: Does the agreement establish an intergovernmental committee on environment? Source: Deep Trade Agreements 2.0 database. To move toward more sustainable trade growth, green growth. Looking at the Southeast Asian policy makers in South Asia and Southeast countries, their development of renewable Asia can focus on the following national and industry could be attributed to the low tariffs regional reforms: in the ASEAN region, as well as the proximity of Southeast Asian countries to Chinese • For South Asia, a reduction in the tariffs on markets and the spinoff of technologies. environmental goods could boost domestic Similarly, South Asian countries could benefit uptake of cleaner technologies and spur from this proximity to improve their access 70 4. ADVANCING REGIONAL INTEGRATION BETWEEN SOUTH ASIA AND SOUTHEAST ASIA – SELECTED ISSUES to EGS by reducing or eliminating tariffs on trade agreements, particularly so for trade these products. agreements in South Asia. Work in this area is still in its infancy in South Asia, while it is • There is a need for appropriate measures to relatively advanced in Southeast Asia, where regulate markets for environmental goods, most trade agreements cover environmental including standards and the capacity to provisions and trade in services. Trade in implement them while minimizing the costs services will be crucial for the conservation of compliance for producers and distributors and monitoring of environmental assets and of such goods. Cooperation and knowledge knowledge transfer. Therefore, policy makers sharing between regulators and standards in South Asia should take steps to deepen bodies would facilitate trade in EGS. Ultimately, their trade agreements with provisions that this could lead to common approaches can facilitate trade in EGS. to standards and mutual recognition of conformity assessment. • Facilitating trade in EGS would help South Asian countries commit to and implement • Upgrading of existing trade agreements allows more ambitious climate-related targets. South for the inclusion of more environmentally Asian countries could follow the ASEAN friendly provisions and can help reduce NTMs. model, which sets targets for renewable This will provide the basis for greener and more energy, energy efficiency standards, waste sustainable trade in EGS by allowing countries management, and air pollution. to align their environmental standards and take action to reduce their carbon emissions, • Overall, investing in trade facilitation and while using trade to achieve these goals. South reducing NTBs on EGS can help domestic Asian countries would benefit from stronger firms maintain comparative advantages. The collaboration with ASEAN and other countries world is in transition to a low-carbon future, by deepening existing trade agreements. and competitiveness will increasingly depend on the ability to implement environmental • The liberalization of trade in services can technologies and demonstrate environmental help to promote the free movement of benefits. Countries that improve access to environmental experts and services. Trade EGS now are likely to give their companies in services and environmental provisions an advantage over countries that are slow to should become a priority for existing implement measures to facilitate this trade. 71 DEEPENING LINKAGES BETWEEN SOUTH ASIA AND SOUTHEAST ASIA SUMMARY CHAPTER REFERENCES ADB (Asian Development Bank). 2019. 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Unleashing Development Studies 32 (3): 41–57. 75 ANNEXES ANNE X A | APEC LIST OF ENVIRONMENTAL GOODS HS code Air pollution control 840420 Auxiliary plant for use with boilers of heading 84.02 or 84.03 (for example, economizers, super-heaters, soot removers, gas recovers); condensers for steam or other vapor power units 840490 Auxiliary plant for use with boilers of heading 8402 or 8403 (for example, economizers, super-heaters, soot removers, gas recovers); condensers for steam or other vapor power units; parts 841960 Machinery for liquefying air or other gases 841989 Industrial machinery, plant, or equipment for the treatment of materials, by process involving a change in temperature, nesoi 842139 Filtering or purifying machinery and apparatus for gas (other than intake air filters for internal combustion engines) HS code Environmental monitoring, analysis, and assessment equipment 902610 Instruments and apparatus for measuring or checking the flow or level of liquids 902620 Instruments and apparatus for measuring or checking pressure of liquids or gases, nesoi 902680 Instruments and apparatus for measuring or checking other variables of liquids or gases, nesoi (e.g., heat meters) 902690 Parts and accessories for instruments and apparatus for measuring or checking the flow, level, pressure, or other variables of liquids or gases, nesoi 76 ANNEXES 902710 Gas or smoke analysis apparatus (automatic NOX and NO2 sampler and measuring apparatus; automatic SO2 sampler and measuring apparatus) 902720 Chromatographs and electrophoresis instruments 902730 Spectrometers, spectrophotometers, and spectrographs using optical radiations (ultraviolet, visible, infrared) 902750 Instruments and apparatus for physical and chemical analysis using optical radiations (ultraviolet, visible, infrared), nesoi (e.g., automatic infrared oil content analyzer) 902780 Instruments and apparatus for physical and chemical analysis, nesoi (magnetic resonance instruments, mass spectrometers, etc.) 902790 Microtomes; parts and accessories for instruments and apparatus for physical or chemical analysis (e.g., polarimeters, refractometers) 903149 Measuring or checking instruments, appliances, and machines, nesoi (e.g., profile projectors) 903180 Other instruments, appliances, and machines, not elsewhere specified in heading 90.31 903190 Parts and accessories for measuring or checking instruments, appliances, and machines, nesoi; parts and accessories for profile projectors 903290 Parts and accessories of automatic regulating or controlling instruments and apparatus 903300 Parts and accessories (nesoi in this chapter) for machines, appliances, instruments, or apparatus of Chapter 90 HS code Environmentally preferable goods 441872 Other Assembled Flooring Panels, Multilayer, of Bamboo (44187210) HS code Management of solid and hazardous waste and recycling systems 840290 Super-heated water boilers and parts of steam generating boilers 840410 Auxiliary plant for steam, water, and central boiler 841780 Other industrial or laboratory furnaces and ovens, including incinerators, non-electric 841790 Industrial or laboratory furnaces and ovens, including incinerators, nonelectric, and parts thereof: parts 847420 Crushing/grinding machines for earth/stone/ores/other mineral substance, in solid (including powder/ paste) form 77 DEEPENING LINKAGES BETWEEN SOUTH ASIA AND SOUTHEAST ASIA SUMMARY CHAPTER 847982 Mixing, kneading, crushing, grinding, screening, sifting, homogenizing, emulsifying, or stirring machines, nesoi in Chapter 84 847989 Machines and mechanical appliances having individual functions, nesoi in this chapter; other (e.g., air humidifiers or dehumidifiers; machines for squeezing radioactive waste) 847990 Parts of machines and mechanical appliances having individual functions, not specified/included elsewhere in this chapter (e.g., parts of air humidifiers or dehumidifiers) 851410 Resistance heated furnaces and ovens 851420 Furnaces and ovens; functioning by induction or dielectric loss 851430 Industrial or laboratory electric furnaces and ovens, nesoi 851490 Parts for industrial or laboratory electric furnaces and ovens (including those functioning by induction or dielectric loss); parts for other industrial or laboratory equipment for the heat treatment of materials by induction or dielectric loss 854390 Parts of the machines and apparatus of 85.43 HS code Natural risk management 901580 Surveying instruments and appliances, hydrographic, oceanographic, hydrological, meteorological, or geophysical instruments and appliances, nesoi HS code Renewable energy plant 903289 Automatic regulating or controlling instruments and apparatus (excluding thermostats, manostats, and hydraulic types), nesoi 840690 Parts for steam and other vapor turbines 841182 Gas turbines, except turbo-jets, and turbo-propellers, of a power exceeding 5,000 kW 841199 Parts of gas turbines 841290 Parts of the engines and motors of 8412.10-8412.80 841919 Instantaneous or storage water heaters, non-electric (solar water heaters) 841990 Parts of machinery, plant or laboratory equipment of heading 84.19 850164 AC generators (alternator), of an output exceeding 750 kVA 78 ANNEXES 850231 Wind-powered electric generating sets 850239 Electric generating sets and rotary convertors: other 850300 Parts suitable for use solely or principally with the machines of heading 8501 or 8502 (e.g., nacelles and blades for wind turbines) 850490 Parts for electrical transformers, static converters, and inductors 854140 Photosensitive semiconductor devices, including photovoltaic cells whether or not assembled in modules or made up into panels; light emitting diodes (solar cells) 901380 Optical devices, appliances, and instruments, nesoi (solar heliostats) 901390 Parts and accessories for optical devices, appliances, and instruments, nesoi (parts for solar heliostats) HS code Wastewater management and potable water treatment 841939 Dryers, other (sludge driers) 842121 Filtering or purifying machinery and apparatus for liquids: for filtering or purifying water 842129 Filtering or purifying machinery and apparatus for liquids: other 842199 Parts of household filtering and purifying machines for gases Note: nesoi = not elsewhere specified or indicated. 79 DEEPENING LINKAGES BETWEEN SOUTH ASIA AND SOUTHEAST ASIA SUMMARY CHAPTER ANNE X B | PPML GRAVITY ESTIMATES (S1) (S2) (S3) (S4) Host country GDP 0.602*** 0.666*** 0.748*** 0.738*** (-0.0484) (-0.0467) (-0.0556) (-0.0628) Source country GDP 0.644*** 0.629*** 0.631*** 0.526*** (-0.0545) (-0.0531) (-0.0524) (-0.0576) Distance -0.769*** -0.711*** -0.709*** -0.565*** (-0.0645) (-0.0627) (-0.063) (-0.0608) Common language 0.909*** 0.999*** 1.057*** 0.896*** (-0.205) (-0.203) (-0.208) (-0.233) Host country tariff -4.714* -3.816 -3.491* (-2.765) (-2.698) (-1.865) Host country CIT -4.553*** -3.785*** (-1.202) (-1.232) Host days/procedure to start a business -0.330*** (-0.112) HIC host fixed effect 0.195 (-0.261) HIC source fixed effect 1.870*** (-0.31) Constant 4.381*** 25.37** 42.65*** 36.30*** (-0.801) (-12.79) (-11.16) (-13.13) N 153,093 146,332 140,861 138,958 Note: CIT = ; GDP = gross domestic product; HIC = high-income country; PPML = Poisson pseudo maximum likelihood. 80