Despite the concessions to a large number of products, there has hardly been any increase in intra-regional trade in the total international trade of the region. This is because, firstly, negotiations under SAPTA have been conducted mainly on a product-by-product basis, which allows some flexibility to each country, but takes a lot of time1. Second, the tariff cuts offered under SAPTA have not been enough. For example, India has offered the preferences on many products and the margins have been maximum but its MFN rates are typically higher than those of its partners, and as such concessions had very little impact. Third, most of the products, which were given concessions are not widely traded in the region. Confining solely to the tariffs and leaving para-tariff and non-tariff measures out of the negotiations has limited the growth of intra-regional trade as has high local content criterion2. The countries have comparative advantage in similar products which also tends to reduce the trade potential.

Intra-regional trade flows
The shares of intra-regional trade in imports and exports are quite different and vary significantly across different countries.

Despite efforts to strengthen regional economic cooperation through SAPTA, intra-regional trade is only 4 per cent of the total trade, though there have been fluctuations around this level since 1995.

While intra-regional trade has been low, its patterns vary sharply from country to country. For example, the share of intra-regional imports in total imports of Bangladesh, Nepal and Sri Lanka stood at 11.7, 33.2 and 10.1 per cent, respectively, in 2000. Pakistan and India met only 2.3 and 0.7 per cent, respectively, of their import requirements from the region in the same period. Bangladesh's share of the regional imports quadrupled and that of Sri Lanka increased by almost one-half over the 1985-2000 period. The shares of India and Nepal first declined but then recovered in recent years, though only a little higher than their respective shares in 1985. The share of Pakistan shows some fluctuations but it is increasing.

Intra-regional exports
In intra-regional exports, Bangladesh's share has gone down from 7.7 per cent in 1985 to 1.6 per cent in 2000, of Nepal from 38.3 per cent to 30.0 per cent, of Sri Lanka from 3.8 to 1.8 per cent and of Pakistan from 5.3 per cent to 2.9 per cent. However, India increased its share from 3.3 per cent in 1985 to 4.4 per cent in 2000. [For details see Kemal et al (2003)]. Smaller countries have the pro-regional bias in their trade structure while larger countries, both Pakistan and India, have an anti-regional bias in their trade structure. Unless all the trade partners benefit from trade liberalisation, trade expansion in SAARC can expand little.

Table 3: Percentage Shares of Intra Regional Imports in Total Imports Year Bangladesh India Nepal Pakistan Sri Lanka 1985 3.46 0.69 32.43 1.59 6.17 1986 3.57 0.49 32.44 1.75 7.64 1987 4.28 0.5 18.8 1.61 6.49 1988 5.28 0.48 18.09 1.86 7.79 1989 4.48 0.28 12.11 1.75 5.79 1990 6.84 0.41 11.7 1.64 6.74 1991 7.47 0.54 13.76 1.42 6.88 1992 10.13 0.83 17.4 1.48 11.89 1993 11.88 0.45 17.23 1.55 10.11 1994 12.76 0.49 18.37 1.55 10.58 1995 17.66 0.53 17.53 1.46 11.08 1996 16.29 0.5 28.55 2.41 12.59 1997 12.91 0.45 26.76 1.96 10.7 1998 17.26 1.11 31.66 2.42 10.09 1999 13.47 0.80 31.99 1.94 9.78 2000 11.68 0.73 33.15 2.32 10.11 Source: PIDE (2003)

Table 4: Percentage Shares of Intra Regional Exports in Total Exports Year Bangladesh India Nepal Pakistan Sri Lanka 1985 7.65 3.25 38.32 5.28 3.8 1986 6.06 3.01 38.11 3.2 4.52 1987 4.1 2.82 27.84 3.92 3.58 1988 5 2.78 17.63 5.04 5.76 1989 3.9 2.43 2.69 3.51 5.21 1990 3.62 2.71 7.19 3.97 3.3 1991 4.7 1.78 7.86 3.33 2.6 1992 2.21 3.83 13.07 4.93 1.97 1993 2.42 4.00 4.69 3.21 2.17 1994 2.3 4.13 3.87 3.25 2.37 1995 2.65 4.98 8.7 3.13 2.28 1996 1.82 4.92 12.99 2.54 2.27 1997 2.26 4.36 25.44 1.75 2.05 1998 2.69 5.46 36.49 4.08 1.53 1999 1.92 4.82 28.85 3.27 2.03 2000 1.57 4.43 26.95 2.92 1.81 Source: PIDE (2003)

India's trade has not only an anti-region bias, the index of trade balance3 for India falls short of unity; its exports to the region have invariably been higher than its imports. On an average, Indian imports from SAARC countries have been less than its exports to the region. Pakistan, on an average, has trade balance less than 0.5 while other countries, in general, have a trade balance greater than one [see Kemal et al, (2003)].

Complementarities and Intra-Industry Trade
Revealed comparative advantage ratios4, a concept developed by Balassa (1965), is simply a ratio of the share of a given product in a country's exports to its share in world exports. A country is said to have a revealed comparative advantage (disadvantage) in product h if the ratio exceeds or falls short of unity. However, it may give misleading results amid distortions in the market. Therefore, the pattern of ‘true’ comparative advantage may differ from the one suggested by the revealed comparative advantage ratios.

The finer the disaggregation, the more useful would be the revealed comparative advantage ratios. Here we report results at three digit classification and the reader is referred to [Kemal et al (2002)] one and second digit classification. The revealed comparative advantages of various countries are examined below.

Bangladesh has comparative advantage in fish, vegetables, jute, tea, leather, textile yarn, made-up articles of textile material, clothing, and woven cotton fabrics. India has comparative advantage in food, beverages and tobacco products including meat, fish, crustaceans, rice, fruits and nuts, tea and coffee, spices, feeding stuff for animals, a wide range of 'crude materials' including oilseeds, cotton, stone, sand and gravel, iron ore, ores and concentrates of basic metals, and crude animal, vegetable materials, petroleum, oils and preparations, fixed vegetable oils; in chemicals and related products including nitrogen-function compounds, other organic chemicals, synthetic organic coloring material, medicinal and pharmaceutical products, perfumery, cosmetic and soaps, and insecticides and herbicides; leather; articles of textile and clothing; machine tools, household equipment, and steel products; and motor vehicles, motor cycles, and bicycles.

Nepal has comparative advantage in men and women's clothing, knitted or crocheted, floor coverings, textile clothing accessories, and essential oils and perfumes etc. Pakistan's revealed comparative advantage is in fish and crustaceans, rice, fresh and dried fruits, sugar, molasses, honey, spices, vegetables, roots and tubers; crude materials including cotton, besides oilseeds and oleaginous fruits, warm clothing, stone, sand, gravel, crude animal and vegetable materials; textile and clothing; leather; floor coverings; medical instruments; baby carriages; and toys and cutlery.

Sri Lanka has comparative advantage in fish, crustaceans, other cereal meals, flour, fruits and nuts, tea and spices; crude materials such as synthetic rubber, fuel wood, oilseeds, oleaginous fruits, paper, paperboard, vegetable, textile fibres, and crude vegetable materials; rubber tyres and articles; wood manufactures; made-up articles of textile materials; pottery, pearls and precious stones; materials of rubber; textile yarn, and woven fabrics of textile materials; and electric power machinery. The profile of revealed comparative advantage suggests that the pattern of revealed comparative advantage is quite similar across the South Asian countries.

With the exception of India and Sri Lanka, the South Asian countries enjoy comparative advantage in a relatively narrow range of products. Out of 71 commodity groups, Bangladesh, Nepal and Pakistan have revealed comparative advantage in only 7, 5 and 12 commodity groups while India and Sri Lanka have comparative advantage in 26 and 21 product categories; and no country has comparative advantage in capital intensive and high value-added products. Despite the similar comparative advantage, there is still some scope for increasing intra-regional trade. South Asian countries could import veneers, plywood, particle boards and other textile fabrics from Bangladesh; 43 products ranging from various food items to machinery and transport equipment from India; oilseeds and oleaginous fruits from Nepal; molasses, honey, cotton, clothing, crude animal and vegetable materials, fabrics, cutlery, live animals, and surgical instruments from Pakistan; and synthetic rubber, fuel wood, raw or processed textile fibers, residual petroleum products, tobacco, rubber articles, and electric power machinery and parts from Sri Lanka.

Trade complementarities
Regional trading arrangements are likely to succeed in strengthening intra-regional trade if the trade structures of member countries exhibit strong complementarities5. The low values of trade complementarity indices highlight the absence of strong complementarity among the countries of South Asia. The trade complementarity between Bangladesh and India has increased and is highest in the region. The pattern of complementarity between India's imports and its trading partners' exports shows lack of trade complementarity in exports of South Asian countries to India. Except for Sri Lanka, the index is around 10 per cent. The structure of Nepal's imports exhibits some compatibility with the exports of Bangladesh, India, and Pakistan. While trade complementarity between Nepal and Bangladesh has improved, it has weakened in Nepal's trade with India. On average, Nepal's import structure exhibits the lowest complementarity with exports of Sri Lanka and the complementarity is higher for trade between Pakistan and India. Exports of Bangladesh, Nepal and Sri Lanka depict weak compatibility with imports of Pakistan. While Sri Lanka and India are mostly compatible, exports of Nepal and Bangladesh do not match imports of Sri Lanka. The trade complementarity between Sri Lanka and Pakistan, though not substantial, has improved.

The South Asian region has an almost identical pattern of comparative advantage in some products, and that there is no strong complementarity in the bilateral trade structures of South Asian countries. Similarities in the trade structures and absence of comparative advantage in capital intensive and high value-added products, i.e. the products that are normally imported by countries in the region may have limited the growth of intra regional trade in South Asia.

Intra-Industry trade in South Asia
While trade would take place only if there are differences in factor endowments, Grubel-Lloyd (1975) argue that differences in technology and human capital can lead to intra-industry trade even in products with identical factor input requirements. Krugman (1981) argues that industries in which increasing returns are achieved at a fairly low level of output can accommodate many producers, with each producing differentiated products. Under these circumstances, each country will specialise in different varieties of the product and engage in intra-industry trade. The growth of regional integration schemes involving cross-country production sharing arrangements also increases intra-industry trade6. Yeats (1998) points out that production sharing has become a major factor in regional trading arrangements, approximately 30 per cent of the world trade in manufactured goods is largely of intra-industry variety.

On the basis of two-way trade in similar products Grubel-Lloyd have provided the index of intra-industry trade7. The intra-industry trade index ranges between zero and one with larger values indicating a greater degree of intra-industry trade. In the chemicals and related products category, the bilateral intra-industry trade between Bangladesh and India largely consisted of inorganic chemical elements, oxides and halogen salts, fertilisers, insecticides and herbicides. Significant intra-industry trade took place in basic manufactures, such as made-up articles of textile material, floor coverings, nails and screws. Intra-industry trade in machines and transport equipment is hardly noticeable, except for some trade in ships, boats and floating structures in the year 1995. Intra-industry trade has strengthened over time in such miscellaneous manufactured goods as clothing, knitted or crocheted women's clothing, articles of apparel, textile fabrics and clothing accessories of textile fabrics.
No intra-industry trade took place between Bangladesh and Nepal during this period. A low level of intra-industry trade occurred in chemical and related products consisting of dyeing, tanning extracts and synthetic tanning materials, medicinal and pharmaceutical products, and monofilament rods between Bangladesh and Pakistan,. A moderate to high degree of intra-industry trade was indicated in textile yarn, woven textile fabrics, special yarns, made-up articles of textile materials, and manufactures of base metals. In 1998, Bangladesh and Pakistan engaged in significant intra-industry trade in several industrial products; machinery and transport equipment, prominent among them being rotating electrical plants and parts, agricultural machinery, excluding tractors, and pumps for liquids. In miscellaneous manufactured goods, intra-industry trade was confined to knitted and crocheted women's clothing, and articles of plastic.

There are only a few products in which the Grubel-Lloyd indices show a reasonable intensity of intra-industry trade between Bangladesh and Sri Lanka. These products include textile yarn, woven fabrics, special yarns, and printed matter. Some intra-industry trade is discernible in soap and cleansing preparations, monofilament rods, cotton fabrics, and made-up articles of textile materials.

In the chemicals and related products group, the Grubel Lloyd index indicated some intra-industry trade between India and Nepal in nitrogen compounds, inorganic chemical elements, perfumery and cosmetics, and a moderate degree of intra-industry trade in monofilament rods, and miscellaneous chemical products. In some years, intra-industry trade was significant in some basic manufactures, such as articles of textile and clothing, leather, rubber tyres, plywood, floor coverings, mineral manufactures, rails and railway track construction materials, copper, aluminium, metal containers, wire products, and equipment of base metal. In machinery and transport equipment, no significant intra-industry trade occurred except in heating and cooling equipment. Other miscellaneous manufactured goods in which intra-industry trade was indicated were mainly women's clothing, footwear, road motor vehicles, articles of plastic and works of art.

Intra-industry trade took place between India and Pakistan in nine items in chemicals and related products in which, the prominent among them being medicinal and pharmaceutical products and soap and cleansing preparations. The Grubel-Lloyd indices show some intra-industry trade in basic manufactures, such as leather, articles of paper and paperboard, embroidery, made-up articles of textile materials, floor coverings, lime, cement and fabricated construction materials, nails and screws, and manufactures of base metal. There are many products in the category of machinery and transport equipment in which intra-industry trade occurred between the two countries. These products range from