Regional Integration and Trade Cost in South Asia

Until now, amount of inter-country trade within South Asian nations have been low. While similarities in exports profile can be seen as a reason for this low value of trade it might not be a valid one, especially in presence of growing South Asian income. Intra-industry trade theory suggests that complementarity might actually increase trade in presence of a rising income. There can be other important factors, such as, trade costs. Using an augmented gravity model in a panel framework the authors try to identify the components of trade costs that might have resulted in lower inter-country South Asian trade. This paper was prepared for the Latin America/Caribbean and Asia/Pacific Economics and Business Association (LAEBA)'s 4th Annual Meeting held in Lima, Peru, on June 17, 2008.