Trade Win No. 8
CONNECTING SOUTH ASIA TO ASIA'S PRODUCTION NETWORKS | Nora Dihel
As companies rethink where they produce and source goods, Asia's production networks are evolving. This shift creates new opportunities for South Asia, but the region has yet to fully take advantage of them. Despite its size and economic potential, South Asia remains only loosely connected to the production networks that link much of Asia’s economy. A key part of the solution lies in transport services, which determine whether goods can move quickly, reliably, and at competitive cost.
South Asia remains only weakly integrated into Asia's regional supply chains. Trade between South Asia and Southeast Asia rose from US$38 billion in 2000 to US$349 billion in 2018, yet intra-regional trade still accounts for only 5.6% of South Asia's total trade, compared with around 25% within ASEAN. In the current geoeconomic context, this is a missed opportunity: better connectivity with Southeast Asia can help South Asian economies diversify export markets, attract investment, and build resilience.
Transport services are the backbone of this integration. Roads, ports, and railways provide the physical links, but transport and logistics services determine how effectively those links are used. The World Bank's Deepening Linkages between South Asia and Southeast Asia shows that services policy barriers remain high relative to goods tariffs. Average ad valorem equivalents are estimated at 52% for telecommunications, 26% for distribution, 22% for transport, and 18% for finance. Transport is not the most protected services sector, but it carries economy-wide importance because virtually every traded good depends on efficient transport and logistics services.
Telecommunications and distribution face higher average tariff-equivalent barriers, but transport restrictions directly raise the cost of moving goods. Lowering these barriers can therefore reduce trade costs across manufacturing, agriculture, and services, while increasing the returns to infrastructure investment.
The costs of weak connectivity are visible in trade procedures. Documentary and border compliance averages 127 hours and USD468 per shipment in South Asia, compared with 96 hours and USD384 in Southeast Asia. These delays reduce supply-chain reliability, raise inventory costs, and make it harder for firms to participate in regional production networks.
The potential gains from services reform are substantial. Hoekman and Shepherd (2021) simulate how liberalizing services policies changes services exports, sector by sector. Under multilateral liberalization, defined as a 10% reduction in each country's Services Policy Index applied on a most-favored-nation basis, average export gains are largest in telecom (12.6%), followed by finance (5.5%), distribution (3.6%), and transport (3.0%). Transport is the exception to the general pattern: it is the one sector where regional, preferential liberalization tends to outperform this modest multilateral reform. The report treats these figures as lower bounds. The underlying single-sector, balance-of-payments-based models do not capture sales by foreign affiliates (GATS Mode 3), capture the other modes of supply only imperfectly, and omit the input-output linkages through which cheaper producer services raise output in manufacturing and other sectors.
Building roads, ports, and railways remains important, but infrastructure alone will not connect South Asia deeply to Asia’s regional supply chains. Those investments deliver the greatest benefits when supported by competitive logistics markets and better cross-border coordination. As companies continue to diversify their supply chains, improving transport services could help South Asia seize a larger share of new trade and investment opportunities.
