Integrating South Asia into Asia: Evidence from Trade Statistics

Market-led regional integration in Asia is moving fast, despite the slow progress in establishing an effective Asia-wide regional integration institution. However, how South Asian economies are integrating into the Asian economy remains unclear. Using trade statistics from the Asian Development Bank’s regional integration database, this paper investigates the situation and determinants of trade integration of South Asia into Asia. While the trade volume from South Asia to broader Asia rose sharply from US $18.12 billion in 1990 to US $381.84 billion in 2017, the trade share (of total trade) rose from 27.35% to 40.1% during the same period. However, the regional trade intensity index (TII) of South Asia to Asia declined from 1.27% in 1990 to 1.16% in 2017, indicating the declining importance of Asia vis-à-vis the outside world for South Asia. Using the dynamic panel data approach on the cross-country panel data of five South Asian countries for the period 1990–2017, this study explores the determinants of South Asian trade volumes and share into Asia. The results indicate that the past record of the dependent variables and the aid flows from Asian bilateral donors significantly increased both trade volume and share. Other positive determinants of trade volume are the economy size, trade openness, FDI inflows and ICT access. While the number of FTAs is a positive determinant, a country’s level of economic development, size of economy and FDI inflows are the negative determinants of trade share. The military expenditure is a negative determinant for both trade volume and share. The finding suggests that more FTA participations and foreign aids from within the region should be promoted, and militarization should be minimized to accelerate the economic integration of South Asia into Asia.