Trade Theories
In 1776 AD, Adam Smith’s An Inquiry into the Nature and Causes of the Wealth of Nations proposed that countries should specialize in producing a good for which they have an “absolute advantage” i.e. their cost of producing that good is the lowest among their trading partners. However, this theory fails if a country is best at producing everything they produce.
To show this failure, David Ricardo’s Principles of Political Economy and Taxation used the example of Portugal and England. Portugal had an absolute advantage in producing both wine and cloth. However, Ricardo showed that if Portugal produced only wine, England produced only cloth, and the two traded the products with one another, both countries would produce more and consume more wine and cloth.
Ricardo’s theory, called the “comparative advantage” theory, upended global trade. Closed economies opened up. Capital and labor mobility between countries grew. Countries started specializing in producing goods in which they had a comparative advantage. They started trading more. Supply chains got integrated between countries. Economies started integrating. Global GDP exploded.
Ricardo’s theory assumed labor productivity differences drove trade gains. However, neoclassical models of the 1920s and 30s showed that “factor endowments” drove exports. The “new trade” theories in the 1980s put forward economics of scale and dynamic gain theories.
Poor Intra-regional Trade in South Asia
Over the years, various trading blocs have emerged to achieve practical gains from trade that the theories proposed. Six European nations formed the European Economic Community trading bloc in 1957, which later became the EU in 1992.
Observing the success of the EEC and later the EU, other regional trading blocs emerged—ASEAN (1967), GCC (1981), MERCOSUS (1991), NAFTA (1994), BIMSTEC (1997), EAC (2000), SAFTA (2004), CPTPP (2018), AfCFTA (2019), and RCEP (2022). Countries have also signed bilateral and multilateral agreements to trade more.
However, some trading blocs have fared better than others. In 2025, intra-EU trade was 66.5%, intra-North American trade was 27%, intra-ASEAN trade was 20%, and intra-African trade was 16%. Meanwhile, intra-SAFTA trade constituted only 5% of South Asia’s total global trade.
Cooperation for trade
Today, South Asia accounts for almost 25% of the global population, but the region’s share of global GDP is just over 4%. While 61.2% of Nepal’s trade and 79.1% of Bhutan’s trade in 2025 occurred within South Asia, it is a pity that most of South Asia still trades more with the outside world than within the region. This low trade within South Asia is mostly due to various barriers the members impose on one another. The World Bank estimates that these trade barriers are equivalent to imposing an import tariff of up to 120%, while we claim to be members of the South Asian Free Trade Agreement (SAFTA) free-trade region.
But how did we get here?
There are many reasons why South Asia trades poorly within itself, but I put my blame on two main factors.
The Bane of NTBs
First, non-tariff barriers (NTBs) impose indirect costs to trading.
For example, all South Asian countries maintain a “sensitive list” of goods to restrict their trading with their neighbors. The list is vast and ridiculous; effectively 35% of all goods traded in the region falls into one or other member country’s sensitive list, rendering the South Asia Free Trade Agreement principles worth less than the value of the paper they are printed on.
In 2025, India forced Bangladeshi garment exporters to use Indian sea ports instead of land ports, increasing Bangladeshi garment exporters’ costs by 20% to sell to Indian consumers. This made Bangladeshi garments less competitive in the Indian market. Bangladesh retaliated by strangling the supply chain of Indian cotton yarn to limit its imports into Bangladesh.
India has weaponized quarantine testing to punish Nepal’s agricultural exports into or through India by using unpredictable, ad-hoc testing bottlenecks on products like tea, ginger, and vegetables. Nepali agricultural exports rot at the border testing site and never reach the final consumers in India or elsewhere. India has weaponized Nepal’s landlocked status to engage in several border blockades to influence Nepal’s political outcomes in the past. Nepalis still remember the inhumane border blockade post-2015 earthquakes, limiting the flow of critical supplies like medicine during a time when thousands of Nepalis lost lives and homes in the earthquakes.
Pakistan and Sri Lanka have ongoing US Dollar foreign exchange limits placed on each other, which limits trade between the two countries. Pakistan’s closure of various border crossings has limited Pak-Afghan trade, denying the landlocked Afghanistan access to critical daily supplies.
Bangladesh’s para-tariffs on Nepali lentils, fruits and cardamoms effectively taxes these products by up to 132%. While Indian trucks deliver goods all the way to Nepal’s capital, Bangladesh forces Nepali trucks to off-load their goods at the Bangladeshi border and re-load onto Bangladeshi trucks manually for the last 30 kilometers of their journey. This damages the goods and increases transportation costs.
Blatant Violation of International Contracts
Second, South Asia is quick to sign various international agreements while blatantly disregarding them to convenience themselves.
All South Asian countries are World Trade Organization members, and therefore must follow the WTO’s General Agreement on Tariffs and Trade (GATT) framework and the WTO Agreement on the Application of Sanitary and Phytosanitary (SPS) Measures. As signatories to the SAFTA, all of South Asia must also abide by the SAFTA agreement.
However, South Asia violates international agreements at a level not seen in any other free-trade regions.
Bangladesh’s para-tariffs on Nepali fruits and cardamom violate GATT’s National Treatment Principle laid out in Article III. India forcing Bangladeshi garment exports to use sea ports instead of land ports violates GATT’s General Elimination of Quantitative Restrictions framework laid out in Article XI.
India’s weaponized testing of Nepali tea, ginger and vegetables violates Article 2.2 and Article 5 of the SPS. Sri Lanka forcing Pakistan’s agricultural exports to Sri Lanka to show radioactive testing proofs violates Article 2.2 of the SPS.
India’s restrictions on Nepal using its transit corridor to export to Bangladesh, and Pakistan’s restrictions on Afghanistan’s imports through Pakistan violate GATT’s Freedom of Transit framework laid out in Article V. India’s border blockades of Nepal and Pakistan, and Pakistan’s border blockage of Afghanistan violate SAFTA’s Article 14. Trade restriction across borders also violates the UN Convention on Transit Trade of Land-Locked States.
Unreached Potential
Studies show that South Asia stands to become stronger and richer if the countries in the region eliminate their non-tariff barriers and uphold the treaties to which they are signatories to.
The World Bank estimates that doing so will grow South Asia’s economy by up to 15%. Trade volume within South Asia will immediately double. Automated trade customs facilitation alone will inject US$36 billion into regional supply chains. The ADB estimates that South Asia’s global exports will increase by up to 35% because of structural labor and capital reallocations, and the regional average real income will increase by up to 6.5%, with real income gains for Nepal reaching 12.5%. The SAARC Chamber of Commerce and Industry estimates that if South Asia truly upholds SAFTA, it will unlock an additional US$2.5 trillion in regional GDP growth windfall.
These are not small numbers. These are generational, life-changing, livelihood standards altering numbers.
Let us make regional trade great again.
The author is an economist and a public policy researcher.
