South Asia’s Twin Deficits of Trade and Trust

Afaq Hussain

Director, BRIEF

The recent border standoff between India and Pakistan has altered the contours of South Asian geopolitics. For India, the idea of South Asia is increasingly defined by its eastern counterparts—where fostering deeper economic and diplomatic ties with neighbours like Bangladesh, Nepal, and Bhutan has become the cornerstone of its regional engagement strategy.

A region that once epitomized ancient civilizations and fostering unity for over four millennia, now grapples with the challenge of rekindling interconnectedness in its fractured landscape. Emerging as the least integrated region in the world, with intra-regional trade accounting for less than 5% of its total trade, South Asia finds itself at the helm of political turmoil and trade disintegration. Yet, amidst tensions, South Asia is presented with the opportunity to unlock its dormant trade potential by facilitating economic and trade integration.

Amidst the ongoing political estrangement between India and Pakistan, India’s regional trade posture is undergoing a clear eastward shift. With formal cross-border trade suspended and diplomatic dialogue at a standstill, the prospects for India–Pakistan economic cooperation remain bleak—undermined further by recent military standoffs, steep tariffs, restrictive visa regimes, and entrenched non-tariff barriers. Over the last few years, India has been recalibrating its strategy by deepening ties with its eastern neighbours such as Nepal, Bhutan, particularly Bangladesh, under former Prime Minister, Sheikh Hasina’s regime.

This pivot is not without precedent. Initiatives like the BBIN (Bangladesh, Bhutan, India, and Nepal) have offered glimpses of integration. Yet, despite these glimpses of sub-regional level integration, the broader South Asian regional architecture remains gridlocked by geopolitical frictions, institutional inertia and infrastructural deficits that hamper connectivity efforts.

Encouragingly, in the past India’s diplomatic engagement gained traction with Bangladesh, with renewed focus on connectivity, energy cooperation, and trade facilitation. This shift in India’s strategic posture comes at a time when regional economic integration is more essential than ever—particularly in the wake of heightened global protectionism and inward-looking economic policies such as America’s sweeping tariff hikes, which exposed the vulnerabilities of over-reliance on distant markets; making the case for resilient and regionally embedded trade partnerships stronger than ever.

In that vein, this article outlines the importance of economic integration for a region where borders once figured as lines of connection not division. In doing so, it establishes the detriments of low trade integration as the world copes with burgeoning fragmentation with economies. In that regard, the discussion is then steered towards Nontariff Barriers (NTBs) and Non-Tariff Measures (NTMs) in South Asia, and how these must be addressed to boost economic integration in the region, in turn facilitating India’s foothold in South Asia through greater value chain integration, similar to Southeast Asia.

Fragmented Growth: South Asia’s Rising Intra-Regional Disconnect

A trend of low economic complementarity reverberates through the subcontinent that marrs trade relations. As case in point, despite geographical proximity, trade between India and Bangladesh accounts for only 10-12% of Bangladesh’s trade and a mere 1% of India’s trade, even at the peak of our trade relationship. Border and connectivity challenges make trading with Germany more feasible for both countries than trading with one another[1]. Analysis also guides one to argue that apart from politics in the region, low connectivity, similar trade baskets further dampen prospects of higher intra-regional economic integration.

[1] https://documents1.worldbank.org/curated/en/635471616767281403/pdf/Bridging-Bangladesh-and-India-Cross-Border-Trade-and-the-Motor-Vehicles-Agreement.pdf

This reality underscores not the absence of potential, but the magnitude of opportunity that remains untapped. Regional economic integration, if pursued, could reinvigorate intra-regional trade. The barriers that currently stifle trade could, with strategic cooperation and political will, pave way to a new era of economic integration—one where proximity becomes an advantage.

Owing to the significant development and GDP growth of South Asia’s economies, this growth has been largely disconnected, as our economies expand individually but fail to align regionally. As a result, the trade gap between neighbors continues to widen, accompanied by a deepening trust deficit. Instead of fostering partnerships within our home ground and neighborhood, we increasingly look outward, forging economic ties globally while neglecting opportunities for collaboration within the region.

While South Asia’s economies have accelerated impressively on the global stage—expanding their collective trade with the world from USD 84.8 billion in 2015 to over USD 126.4 billion in 2024—regional economic integration remains conspicuously weak. Intra-regional trade continues to hover well below USD 100 million, with recent years even witnessing a downturn. This paradox is striking: as individual economies thrive, the region as a whole drifts further apart.

Though intra-regional trade has edged up slightly—from an early base of around 5% to approximately 6–8% of total trade in the past two years[1]—this growth is not only modest but also fragmented. Rather than evolving in concert, South Asian economies appear to be rising in isolation. The result is a widening trade gap among neighbours, compounded by a deepening trust deficit shaped by persistent political tensions and divergent geopolitical allegiances.

[1] https://carnegieendowment.org/research/2025/02/facilitating-confidence-driven-trade-in-south-asia?lang=en

Weaving Regional Strength: Integrating South Asia’s Textile Value Chain

Figure 4 and 5 : Regression Analysis on South Asia’s Textile Trade

The figures above are an attempt to capture South Asia’s trade complementarity in textiles. Textiles being one of its top commodities that have high trade volume. Its textile exports amounted to USD $ 78 billion in 2023, contributing roughly 7.3% to the global textile industry. Despite being at the helm of this industry, South Asia remains remarkably disconnected within its own region. With Bangladesh, India, and Pakistan leading the charge, South Asia has firmly established itself as a global powerhouse in textile production. And yet, as the figures above reveal, this dominance has not translated into deeper regional trade integration.

The scatter plots tell a perplexing story, feeding into one of the causes of low trade complementarity in the region. On the left, South Asia’s textile trade with the European Union shows a clear, consistent upward trajectory. Exports to the EU have grown in a highly linear fashion, underpinned by a striking R² value of 0.98, reflecting strong trade complementarity. This is a classic case of economic alignment: South Asia produces low-cost, high-volume garments, while the EU offers a stable consumer market. The relationship is well-defined, mutually beneficial and reinforced by trade facilitation mechanisms such as the EU’s GSP+ scheme. In sharp contrast, the chart on the right — mapping intra-South Asia trade in textiles — paints a fragmented picture. Trade volumes within the region are modest, and the overall correlation between imports and exports is weak (R² ≈ 0.45). For a region with such concentrated textile capacity, this is a puzzling disconnect. The reasons, however, are primarily structural and political.

First, South Asian countries have largely overlapping trade baskets. Most are exporters of similar goods — cotton yarn, home textiles, and ready-made garments — leading to competition rather than complementarity. Second, the region has failed to develop integrated value chains, where, for example, one country supplies yarn and another manufactures garments. Instead, each economy has built an export-oriented textile sector aimed largely at Western markets.

To overcome this fragmentation, South Asia must adopt a collective strategy focused on Regional Value Chain (RVC) Integration. Such an approach would enable countries to specialize in different segments of the textile value chain based on their comparative advantages, thereby unlocking the untapped potential of intra-regional trade. India, as a global leader in cotton and yarn production stands at producing 25 million 480 lb Bales of cotton, contributing 21% to the global cotton production[1]. Undoubtedly, it is therefore well-positioned to anchor the upstream end of the chain. Bangladesh ( USD $52 billion)[2] and Sri Lanka, ( USD $5.6 billion)[3] with their strengths in garment manufacturing and finishing, can drive the midstream and downstream stages. Meanwhile, Nepal and Bhutan can play a crucial role in the emerging segment of sustainable textile inputs, such as biomass-based and natural fibres like wool, nettle, and hemp—products increasingly in demand in ethical and eco-conscious markets.

[1] https://www.fas.usda.gov/data/production/commodity/2631000

[2] https://www.worldfashionexchange.com/blog/rise-of-bangladesh-textile-and-garment-industry/

[3] https://thetextilenetwork.com/blog/sri-lankas-top-10-garment-manufacturers-leading-sustainable-apparel-exporters

By aligning production roles within a complementary framework, South Asia can move from fragmented competition to cohesive cooperation—laying the foundation for a more resilient and integrated regional textile industry.

Third, political tensions and logistical inefficiencies continue to undermine regional trade. Sensitive border relations — especially between India and Pakistan — a lack of cohesive cross-border infrastructure, and protectionist trade policies have eroded trust and stymied collaboration. As a result, South Asia trades more confidently with Brussels than with its own neighbours.

This dissonance between global integration and regional fragmentation is not just ironic — it is inefficient. While the world readily absorbs South Asia’s textile output, the region itself has failed to leverage its shared strengths. Unlocking this potential will require more than trade agreements. It will demand strategic supply chain planning, targeted investment in infrastructure and connectivity, and above all, political will.

The Role of NTBs and NTMs in South Asia

The textiles industry is one such example amongst myriad other commodities, where South Asia’s intra-regional trade potential remains largely unrealized. At the core of stagnated integration efforts lie the pervasive imposition of Non-Tariff Barriers (NTBs) and Non-Tariff Measures (NTMs)- creating an atmosphere clouded by mistrust and hesitance in South Asia. These barriers, ranging from bureaucratic delays to inconsistent standards and regulatory hurdles, discourage seamless trade flows, undermining the very aims of such projects. Addressing these systemic issues is critical not only to reviving the vision of initiatives such as BBIN but also to unlocking South Asia’s vast trade potential.

To overcome this, South Asia must prioritize reducing NTBs and NTMs through policy harmonization, mutual recognition of standards, and streamlined customs procedures. This is complemented by a cooperative political environment, where trust and shared economic goals take precedence over historic tensions. By tackling these barriers, South Asia can attempt to transform its fractured trade landscape into a model of regional integration, creating lasting benefits for its people and economies alike.

Examining the manifestation of NTBs and NTMs necessitates a parallel focus on addressing the structural barriers that enable them. One prominent manifestation is the lack of adequate infrastructure and facilities at border points, which hinders the seamless flow of trade across the region. For instance, the absence of storage facilities and incapacities to handle large volumes of consignments, delays the timely clearance of goods- a challenge frequently observed at several of India’s border points[1]. Similarly, despite four border check points between India and Myanmar, its regional cross-border trade has been 1% consistently, with only the Moreh-Tamu ICP (Integrated Check-Post) as operational[2]. Apart from unfavorable domestic political drivers, insufficient infrastructural development at these points prevents the maximizing of trade potential between these economies.

[1] https://blogs.worldbank.org/en/endpovertyinsouthasia/visit-indias-busiest-integrated-border-crossing-shows-need-regional

[2] https://csep.org/wp-content/uploads/2021/06/WP_Linking-land-borders-ICP-1.pdf

A second major challenge is the lack of harmonized and standardized quality of goods across the region. Establishing common standards would ease trade by reducing regulatory barriers is thus crucial. Taking from the case of Southeast Asia, that has achieved great feats in intra-regional trade over the years, accounting for almost 22% of total ASEAN trade[1], this can largely be attributed to the implementation of the ASEAN Guidelines for Harmonization of Standards that was primarily aimed at facilitating intra-regional trade of electrical goods and machinery, making it the top traded commodity. In 2023, it accounted for US$53.5 billion or 37.5% of Singapore’s intra-ASEAN exports. Similarly, Malaysia, another major intra-ASEAN exporter, recorded US$92.2 billion in trade, with electrical goods comprising a significant share of its exports within the region[2].

[1] https://www.aseanstats.org/wp-content/uploads/2024/05/ASB-202405-03.pdf?

[2] https://www.aseanstats.org/wp-content/uploads/2024/05/ASB-202405-03.pdf?

In a similar manner, as previously suggested in a report published by BRIEF[1], developing mechanisms that facilitate cross-border PGA (Partner Government Agency) cooperation and recognition between bodies like the FFSAI (Food Safety and Standards Authority of India) or the BIS (Bureau of Indian Standards) with other national agencies in South Asia such as the SLSI (Sri Lanka Standards Institution) will contribute to jointly implementing or complying with standards of goods across borders, provide quality assurance and in turn boost trade across the region.

[1] https://lpai.gov.in/sites/default/files/2024-01/Coordinated%20Border%20Management%20at%20Land%20Ports%20in%20BBIN%20Countries.pdf

By exploring the establishment of practices such as NTB-Free Economic Zones, which function similarly to Special Economic Zones (SEZs), could be beneficial. These zones can be developed with the aim to reduce barriers at border points that restrict the trade of certain goods. By identifying high-priority sectors such as textiles and agriculture which contribute to large volumes of trade to South Asia, that also witness higher percentages of risk inspections- the countries can focus on developing unified Risk Management Frameworks at border points to expedite the movement of goods through reduced barriers in customs procedures and eventually foster a conducive environment for trade and investment. In a similar fashion, developing Green Channel[1] clearance facilities at border points can significantly reduce trade delays and enhance cross-border efficiency. By streamlining customs procedures and allowing expedited clearances for low-risk and compliant traders, that are identified and given certifications based on prior checks; such facilities could reshape cross-border trade amongst South Asia’s neighbors. This feature necessary for border points between India and its neighbors like Bangladesh and Nepal, where logistical inefficiencies and regulatory bottlenecks have long stalled trade.

[1] https://www.outlookbusiness.com/news/india-explores-green-channel-to-boost-speed-of-e-commerce-exports

With increased connectivity projects at border points through the sustained efforts by bodies like the LPAI (Land Ports Authority of India) over the years, South Asia stands at a critical juncture that challenges its regional trade facilitation, especially as domestic politics continue to set the tone for neighborhood relations. Thus, the journey to overcoming these obstacles is not merely an economic necessity but also a step towards the revival of South Asia’s legacy of unity and interconnectedness. By prioritizing collective economic progress over historic divides, and drawing from successful examples of harmonized standards of goods in ASEAN and implementing measures such as Green Channel facilities, South Asia can chart a new course by filling trade gaps through procedures that mend its trust deficits.