Kathmandu, August 22

A phrase that is likely to gain popularity in the coming days is ‘regional economic integration’, as Nepal is hosting the fourth summit of the Bay of Bengal Initiative for Multi-Sectoral Technical and Economic Cooperation (BIMSTEC) on August 30 and 31.

BIMSTEC is a club of seven countries — Bangladesh, Bhutan, India, Myanmar, Nepal, Sri Lanka and Thailand — located in and nearby the Bay of Bengal. Like many other regional groupings, BIMSTEC aspires to promote greater connectivity to foster intra-regional trade, investment, technological and cultural exchange, and other connected areas, including security. This, many say, is the recipe to deepen integration. Yet, the group has not been able to kindle regional integration despite its establishment 21 years ago in June 1997.

Things are changing though.

Revival of BIMSTEC

In 2016, Indian Prime Minister Narendra Modi invited BIMSTEC leaders for a retreat meeting with BRICS (Brazil, Russia, India, China and South Africa) leadership in Goa. The invitation was extended close on the heels of India’s cancellation of its participation in the 19th summit of the South Asian Association for Regional Cooperation (SAARC). India had refused to participate in the summit scheduled to be held in Islamabad after its relation with Pakistan hit a new low following a deadly terror attack at Indian army base in Jammu and Kashmir.

India was also miffed at Pakistan at that time because Islamabad had blocked plans to seal SAARC Motor Vehicles Agreement and SAARC Regional Railways Agreement during the SAARC summit held in Kathmandu in 2014. The two pacts backed by India were designed to enable movement of vehicles and rail among SAARC member countries. Later, India pushed for formation of a subgroup called BBIN (Bangladesh, Bhutan, India, and Nepal), which signed BBIN Motor Vehicle Agreement in June 2015 to promote movement of personal, passenger and cargo vehicles across the borders of the four countries.

This subgroup called BBIN was formed because unanimity is required among SAARC member countries before signing any agreement. This provision has emerged as the Achilles heel for SAARC, decelerating the pace of integration in South Asia. Little wonder, India, since 2016, has been showing greater interest to move towards the Bay of Bengal and beyond, giving a new lease of life to BIMSTEC.

“This is a strategic move because a stronger BIMSTEC and a greater connectivity in the Bay of Bengal region would help India to assert its place in the regional economy and help it to promote its Act East Policy (a modified version of the Look East Policy introduced in the 1990s to engage with East Asia and beyond),” said Swarnim Wagle, former vice chairman of the National Planning Commission.

Backlash against integration

But BIMSTEC is being promoted at a time when many countries have started looking inwards to protect jobs, investment and industries, putting economic integration on the back foot. Take the exit of the UK from the European Union for instance or the current trade war between the US and China, which has led to hike in import tariffs. These protectionist tendencies are contagious. Recently, India doubled import tax on over 300 textile products to 20 per cent and is considering raising import duties on consumer durables, such as televisions, refrigerators and washing machines, to promote domestic manufacturing.

More and more countries are becoming protectionist these days, as the rush to liberalise the economy and financial system is deemed to have generated economic insecurity and inequality. Over the years, many countries have made numerous regulatory changes to maximise the volume of trade and investment so as to generate jobs and drive economic growth. But the winners in this race are nations that have made calculative moves. Countries such as Taiwan and South Korea, for instance, subsidised their exports either through tax incentives or financial system for a long time, and removed import barriers only after their economies took off. Another glaring example of economic success is China, which has insulated many of its enterprises from global competition and is said to have violated global rules on intellectual property and subsidies to drive growth and reduce poverty.

On the other hand, countries like Mexico that relied on free trade have taken some beating. So, countries that well understood their inherent weaknesses and strengths and did not completely play by global rulebooks have succeeded, while those that rapidly opened their economies without prioritising domestic concerns ended up getting hurt.

Nepal should keep this in mind when it sits for talks with other BIMSTEC member countries.

Transport connectivity

Nepal is a low-income landlocked country that is still learning how to make markets more efficient and gain

comparative and competitive edges. Whereas its partners in BIMSTEC range from bigger economies, like India and Thailand, and emerging economies, like Bangladesh, Myanmar and Sri Lanka, to a small economy like Bhutan. This obviously creates an asymmetric relationship among BIMSTEC member countries.

But this should not thwart the move to deepen integration because India is trying to use BIMSTEC as a platform to promote its north-eastern region, which is lagging behind, according to Wagle. “Northeast India has a population of around 45 million, which is about one-and-a-half times the population of Nepal. Nepal and Sri Lanka are not far apart in terms of population, whereas Bhutan, a very small nation in terms of population, has a free trade agreement and a pegged currency arrangement with India, making it an extension of the Indian common market,” said Wagle.

On the other side of the Bay of Bengal are Thailand, an industrialised nation, and Myanmar, which is growing rapidly since its transition to democracy in 2011. These two nations have bigger population than Nepal, but they have added vigour to BIMSTEC.

Thailand and Myanmar can work as bridge for South Asian countries, including Nepal, to gain access to booming Southeast Asia, which includes economies such as Indonesia, Malaysia, Singapore, Vietnam and the Philippines. This is the reason why many say Nepal can gain a lot from BIMSTEC than from SAARC.

“But to penetrate the Southeast Asian markets and beyond, Nepal and other BIMSTEC members must push to connect the Himalayas with the Bay of Bengal through roads, railways and inland waterways,” said former foreign secretary Madhu Raman Acharya. Poor transport connectivity, especially lack of quality transport and logistics infrastructure, according to Acharya, has increased Nepal’s trade and transit cost and prevented the country from exploiting its potential.

A logical point to kick start the work on transport connectivity is gradual transformation of existing transport corridors into trade and logistics corridors and clusters, Wagle said. This will help in creation of urban hubs. “These can be thought of as dynamic inter-country versions of Special Economic Zones, where customs and institutional barriers are simplified and supporting infrastructure like multi-modal transport is built better,” he added.

Groundwork for FTA

Better transport connectivity will not only help Nepal to foster trading of merchandise goods but also services, such as tourism, which has now been accepted as a promising exportable item that can generate abundance of foreign income for the country. And since a significant number of countries in BIMSTEC are Buddhist, including Myanmar, Thailand and Sri Lanka, better transport connectivity can help Nepal promote religious tourism. This is one of the reasons why experts have said Nepal should push to increase the volume of trade in services with BIMSTEC member countries located in Southeast Asia.

Southeast Asia is way ahead of South Asia in trading of services, whereas SAARC has long focused on trading of goods only. Take South Asian Free Trade Agreement for instance, which only

promotes trading of goods. “Nepal cannot go far and reap benefits from BIMSTEC unless it broadens tradability of services, especially energy, tourism and transport, which can yield higher

payoffs,” said Shankar Sharma, former vice chairman of National Planning Commission.

Although the upcoming BIMSTEC summit is unlikely to delve into trade related issues — as the meeting of free trade technical negotiation committee is scheduled for September — Nepal, as a host country and incumbent chair of BIMSTEC, can prioritise some of the issues like transport connectivity. This will promote integration in the region and lay the groundwork for signing of BIMSTEC free trade agreement (FTA), talks on which have dragged on since 2004.