International Journal of u- and e- Service, Science and Technology

Vol.9, No. 4 (2016), pp.235-248

http://dx.doi.org/10.14257/ijunesst.2016.9.4.24

Prospects for Economic Integration of BIMSTEC: Trade and

Investment Scenario

Mohammad Masudur Rahman1 and Chanwahn Kim2*

1
Professor, School of Economics and Management, Zhejiang A & F University,
Hangzhou, China
2
Professor, Department of Indian-ASEAN Studies, Graduate School of
International and Area Studies, Hankuk University of Foreign Studies,
Seoul, Korea
1
[email protected], [email protected]

Abstract
The purpose of this study is to explore the trade and investment potential under the
ambit of regional cooperation comprising the seven contiguous countries of Bangladesh,
India, Sri Lanka, Nepal, Bhutan, Thailand and Myanmar (BIMSTEC). The study
addressed the latest update of BIMSTEC economic cooperation and then explored the
economic impact of the regional integration. The potential economic impact of the
BIMSTEC economic cooperation as well as BIMSTEC FTA could promote the growth for
the region. One of the major findings of the paper is that a large part of BIMSTEC’s trade
has remained unrealized and the trade transaction cost is one of the major trading
barriers prohibiting the growth of BIMSTEC intra-regional trade. The study reinforces
that improvement in infrastructure and connectivity that leads to less trade transportation
costs should be a necessary step in order to realize BIMSTEC’s trade and investment
potential. The paper concludes that liberalization of non-policy barriers will spur
BIMSTEC’s trade and economic cooperation.

1. Introduction
The Bay of Bengal Initiative for Multi-Sectoral Technical and Economic Cooperation
(BIMSTEC) is a supranational Free Trade Agreement (FTA) that started its journey
through the Bangkok Declaration in 1997. The agreement initialized as a regional
cooperation grouping between Bangladesh, India, Sri Lanka and Thailand, and was
known as BIST-EC, until Myanmar’s inclusion later in that year, when it became BIMST-
EC [1]. In 2004, Bhutan and Nepal joined the panel, which gave the FTA its current name
[2].
The objective of regional integration is to accelerate growth through mutual
cooperation in different areas of common interests by utilizing regional resources and
geographical advantages. Unlike many other regional groupings, BIMSTEC is a sector-
driven cooperative organization. Starting with six sectors—including trade, technology,
energy, transport, tourism and fisheries—for sectoral cooperation in the late 1997, it
expanded to embrace nine more sectors—including agriculture, public health, poverty
alleviation, counter-terrorism, environment, culture, people to people contact and climate
change [2].
BIMSTEC creates a bridge between 5 South Asia and South East Asia, through
establishing intra-regional collaboration between ASEAN and SAARC. The region is
home to 1.6 billion people, which is about 22% of the world’s population, and contributes
to a combined GDP of US$ 2.8 trillion. On an average, the countries have maintained

*
Corresponding Author

ISSN: 2005-4246 IJUNESST

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about 6% annual growth in GDP despite global economic downturns in the recent past[3].
Potentially, BIMSTEC will be aiming towards harnessing the power of emerging markets
across the region.
Covering about one-fourth of the world population, the BIMSTEC has been
negotiating for free trade agreement and some other sectoral cooperation through Annual
Ministerial Meetings, Senior Officials Committee, BIMSTEC Working Groups and
Specialized Task Forces to coordinate and move towards signing and launching the FTA.
In view of the above, the main research question in this paper is to explore the trade and
investment potential under the ambit of regional cooperation of BIMSTEC. Rest part of
the paper is organized as follow. Section 2 addresses the latest achievement of BIMSTEC
economic cooperation. Section 3 explores the potential economic impact of the regional
integration. Section 4 provides the major challenges of the BIMSTEC integration and
finally conclusion and policy recommendations are briefed at the end.

2. Latest Achievement of BIMSTEC Negotiations

As per agreed upon measures, the chairmanship of BIMSTEC rotates between the
member countries. As of now, Nepal is chairing the organization since 2015[1]. The
BIMSTEC Trade Negotiating Committee (TNC) has held 20 sessions of negotiations. The
latest TNC meeting was held in Bangkok from September 9-10, 2015. The negotiations
are spread over the areas of (i) tariff concessions on trade in goods, (ii) customs
cooperation, (iii) trade in services (iv) investments and (v) dispute settlement mechanism.
There are four draft Agreements on Trade in Goods, Rules of Origin, Dispute settlement
and Customs Matters have been agreed in different BIMSTEC TNC meetings and now
waiting for sign the final agreements.

2.1. Tariff Reduction or Elimination Under BIMSTEC

The two avenues in which BIMSTEC countries shall reduce and/or eliminate its tariffs
on originating goods of the other party are fast track and normal track. The tariffs on the
goods covered under the fast track as well as normal track shall be eliminated in equal
annual installments with reference to their respective applied MFN tariff rates as of 1 st
August 2007 as the base rate.
Table 1 illustrates the time schedule of tariff reduction and elimination according to
framework agreement of BIMSTEC FTA as well as its amendment by the 19th
BIMSTEC TNC meeting [4]. The table shows that, according to framework agreement
(its amendment by 19th TNC meeting), for fast track product, the Non-LDC member
countries reduced/eliminated tariff imposed on LDC member countries by 30 June
2013 and tariffs among themselves by 30 June 2015. The LDC member countries
are committed to reduce/eliminate tariffs among themselves by 30 June 2015 and
tariff imposed on Non-LDC member countries by 30 June 2017. For normal track
product, Non-LDC member countries are required to reduce/eliminate tariff for the
products of LDC member countries within 30 June 2016 and tariffs for the products
among themselves within 30 June 2018. The LDC member countries are required to do
the same within 30 June 2021 among themselves and within 30 June 2023 for Non-LDC
member countries. However, the 20th TNC meeting in Bangkok is expected to rectify the
agreement.

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Table 1. Tariff Reduction/ Elimination Plan

For Bangladesh,
For India, Sri Lanka &
Countries Bhutan, Myanmar
Thailand
& Nepal
India, Sri Lanka & 1 July 2010 to 30 June 1 July 2010 to 30
FAST Thailand 2013 June 2011
TRACK Bangladesh, Bhutan, 1 July 2010 to 30 June 1 July 2010 to 30
Myanmar & Nepal 2015 June 2013
India, Sri Lanka & 1 July 2011 to 30 June 1 July 2011 to 30
NORMAL Thailand 2016 June 2014
TRACK Bangladesh, Bhutan, 1 July 2011 to 30 June 1 July 2011 to 30
Myanmar & Nepal 2021 June 2019
Source: BIMSTEC

2.2. Safeguard Measures

According to the safeguard measures in place, BIMSTEC member nations are allowed
to withdraw tariff concession for protectionism purposes, in case imports from free trade
access from the FTA members cause significant harm to the domestic industries. The
exceptions to the safeguard measures are as follows:
(i) If the product has originated in a member nation and the import share of
the product does not exceed three percent, given that rest of the members
with less than three percent import shares collectively account for not
more than nine percent of the importing countries import share.
(ii) If the product has originated from an LDC and does not exceed five
percent, given that LDC members with less than five percent import
share collectively account for not more than fifteen percent of the import
share of the importing country.

2.3. Rules of Origin

Free trade agreements emphasize largely on Rules of Origin, and BIMSTEC is no
different. The rules of origin for BIMSTEC are fairly modest. By 18th TNC meeting, held
in June 2009, domestic value addition, regional accumulation, and product specific rules
have been agreed upon between the member nations [5]. The product specific rules have
been agreed upon for 147 products at HS 6 digit level. For a product to obtain BIMSTEC
FTA preferential treatment, the product has to satisfy one of the following conditions:
(i) The product has to be wholly produced or obtained in a member country.
(ii) The product has to satisfy the criteria of change in tariff sub-heading at
HS 6 digit level, and create a local value addition of thirty-five percent
of FOB value. For LDC member countries, the local value addition
criteria is reduced to thirty percent of FOB value.
(iii) Under aggregate regional accumulation, BIMSTEC content of the final
goods is not less than the local value addition mentioned in (ii). In such
cases, change in tariff sub-heading is only applicable for non-BIMSTEC
originating materials.

2.4. Dispute Settlement Procedures

The BIMSTEC FTA arrangement has specific rules and agreements on dispute
settlement procedures. As a tool for dispute settlement, bilateral consultation shall be held
within 30 days upon a request for such made by any of the BIMSTEC members. Upon
failure to resolve the issues through a bilateral consultation within a 60 day period, the
complaining member may request for constitution of an arbitral tribunal.

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The tribunal will consist of three members. The complaining member will appoint an
arbitrator to the tribunal within 20 days of making the tribunal request. The member,
against which the complaint has been filed, will appoint an arbitrator within 30 days of
the request. A third arbitrator will chair the tribunal, and will be agreed upon by the
members in the dispute. While the findings and recommendations of the tribunal is to be
limited to the rights and obligations of the members according to the framework
agreement, the tribunal will submit these in a report within 120 days of the start of the
tribunal.
The arbitral tribunal findings and recommendations are to be complied by the
members. Each member shall bear its own expenses and legal costs during the dispute
resolution process. The costs incurred on the Chair of the tribunal shall be borne equally
by the disputing members.

2.5. Cooperation and Mutual Assistance in Customs Matters

In the spirit of just application of customs law, for the prevention, investigation, legal
proceedings and combating of customs offences and for the purpose of cooperation and
mutual assistance in customs related matters, the BIMSTEC member countries will
provide apt and necessary administrative assistance to each other. The scope of the
customs assistance is elaborated in Article 3 of the Agreement on Cooperation and Mutual
Assistance in Customs Matters for BIMSTEC FTA, which includes the following:
(i) Exchange information to be used in administering and enforcing Customs
laws;
(ii) Cooperate in the prevention, suppression and investigation of Customs
offences, including smuggling and fraudulent activities;
(iii) Cooperate in the exchange of intelligence for combating illicit
trafficking in narcotics, psychotropic substances, fire arms,
ammunition and explosives, articles of historical, artistic, cultural and
archaeological value;
(iv) Cooperate in the research, development and evaluation of new Customs
procedures and in the training of personnel or technical assistance;
(v) Collaborate in simplifying and harmonizing Customs procedures etc.
The negotiating parties agreed to conclude the Agreement on Trade in Goods within
2011 and to implement the tariff concessions from July 1, 2012 at the 19th meeting of the
TNC. However, the negotiation was not successful, and the above three agreements are
expected to be signed in the 20th TNC. However, negotiations are anticipated to continue
on the Agreements on Services and Investment.

3. Prospects for Economic Integration

3.1. Trade and Investment Scenario among BIMSTEC
Table 2 shows major macroeconomic scenario of BIMSTEC countries. The countries
have a combined population of 1.6 billion, which also goes to illustrate the abundance of
labor supply in the region, whether unskilled, or semi-skilled. This also makes a good
case for manufacturing hub investments in the region, as supply abundance lowers the
equilibrium price leading the investors to enjoy a higher consumer surplus in the labor
market.
The economies contributed to a total GDP of US$ 2.8 trillion in the year 2014[3]. Due
to the variation of country size, population, population density and other resource-based
factors, a mean of their gross domestic product may not be a strong indicator of their
progress. However, looking at the annual growth of their GDP, it can be easily seen that
even during the global economic disintegration, the BIMSTEC countries maintained a
near-steady growth of approx. six percent per annum [3].

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In 2014, the member countries together had a staggering total export value of US$
606.6 billion, and an import value of US$ 685.3 billion [6]. It is interesting to note that
except for Thailand, all the other six BIMSEC member nations have a higher volume of
imports than the export volume.

Table 2. Macroeconomic Profiles of BIMSTEC Countries, 2014

GDP Exports Imports Tariff
Population
Country (in current (US$ (US$ (Simple
(Millions)
US$ Billions) Millions) Millions) Mean, MFN)
Bangladesh 159 173.8 30,131.6 42,267.6 13.9
Bhutan 0.8 1.8 534.7 900.5 -
India 1,295.3 2,066.9 329,633.0 405,122.0 13.5
Myanmar 53.4 64.3 8,860.1 12,749.5 5.6
Nepal 28.2 19.6 901.5 6,614.7 12.2
Sri Lanka 20.6 74.9 11,767.1 17,475.1 9.9
Thailand 67.7 373.8 224,777.0 200,217.0 11.4
Source: World Bank, UNCTAD, and World Trade Organization Statistics Databases
imports than the export volume.
Table 2 gives a holistic overview of macroeconomic profiles of the member
countries, which goes on to show that BIMSTEC is a vibrant regional block, and has a
huge market and trade potential for regional cooperation[3][6][7].
According to Bloomberg, total exports of BIMSTEC countries increased from
US$113.5 billion in 2001 to US$ 608 billion in 2014, whereas the imports grew robustly
from US$118.4 billion in 2001 to US$ 685 billion in 2014. Its share in the world trade
was about 3.7 % in 2014. However, BIMSTEC’s share in total world trade is very small
compared to other blocs in the region
At the same time the intraregional trade was only US$37 billion in 2014. However, the
intraregional trade is significantly lower compared to many regional blocks. In 2014
intraregional trade among BIMSTEC countries was 2.86 % as against 7 % among the
SAARC countries, 7.5 % among APTA and 16 % among South American Common
Market (MERCOSUR) countries 29 % among ASEAN countries. Therefore, once PTAs
and FTAs are negotiated and come into force, intraregional trade will grow much faster.

Table 3. Intra BIMSTEC Trade (US$ Millions), 2014

Exporting Country
Country Banglades India Myanma Nepal Sri Thailand Total
h r Lanka
Banglades 6,174.40 71.59 19.44 68.30 698.91 7,032.6
h 4
Importing Country

India 556.64 1,401.03 602.0 591.69 5,686.98 8,838.3

4 8
Myanmar 16.97 955.94 - 5.76 4,614.95 5,593.6
2
Nepal 22.55 4,845.59 - 4.18 63.16 4,935.4
8
Sri Lanka 26.06 3,977.06 29.71 0.04 461.92 4,494.7
9
Thailand 43.60 3,045.26 3,917.02 0.9 58.46 7,065.2
7
Total 665.82 18,998.2 5,419.35 622.4 728.39 11,525.9
5 5 2

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Source: Bloomberg L.P., 2015

In al trade will grow much faster.
Table 3, it can be seen that the BIMSTEC member countries enjoy a vibrant inter-
country trade relationship. In 2014 alone, the BIMSTEC countries conducted intra-
BIMSTEC cross-border trade counting up to US$ 38 billion [8], demonstrating an
economic window, as well as the existence of a trade bloc that can very much benefit
from introduction and appreciation of preferential trade agreements.
A closer look at the table demonstrates that India and Thailand are the two members of
BIMSTEC who experience a positive net trade balance, achieved through a higher export
volume than their imports. Bangladesh, Myanmar, Nepal and Sri Lanka import more from
these trade bloc members than they export to them. Bhutan has a smaller trade volume
compared to the rest of the six members, and specializes in the trade of cross-border
hydropower, mining and some agriculture, majority of it with India [9].

3.2. Investment Cooperation to Strengthen Intraregional Investment

Intraregional investment can be divided into two categories: Foreign Direct Investment
(FDI) and Portfolio Investment. Investment flows are often strong indicators of
investment commitments and cross-border trade cooperation rends. In the year 2000, FDI
inflows reached about US$8 billion in the BIMSTEC region, and kept increasing robustly
till it hit its recent peak at US$ 58 billion in 2008. Despite global slowdown of economic
activities since then, BIMSTEC countries maintained an upwards trend, as can be seen in
the trend line drawn in Error! Reference source not found. below, over the annual
FDI inflow values through 2000 to 2013 in the region. In 2013, FDI inflow to BIMSTEC
crossed US$ 46 billion[10].
In terms of the distribution of FDI inflow during the period, the highest recipient of
FDI was India with 61% of total FDIs in the region followed by Thailand (28%),
Myanmar (5.6%), Bangladesh (3.4%) and Sri Lanka (2%). In view of this trend,
investment cooperation is of utmost importance to strengthen intraregional investment for
achieving industrial and market integration. At the same time, member countries have to
strengthen their productivity and competitiveness to attract FDIs. Large inflows of FDI
contribute directly to increase income through raising the capital intensity of production,
and indirectly through enhancing ethnical progress.

Table 4. Inward Foreign Direct Investment Hlows, 2000 – 2013 (US$ Millions)
Country 2000 2002 2004 2006 2008 2010 2011 2012 2013
Bangladesh 579 328 460 792 1,086 913 1,136 1,293 1,599
Bhutan - 2 9 72 20 31 26 22 21
India 3,588 5,630 5,778 20,328 47,139 27,431 36,190 24,196 28,199
Myanmar 208 191 251 276 863 1,285 2,200 2,243 2,621
Nepal 0 -6 0 -7 1 87 95 92 74
Sri Lanka 173 197 233 480 752 478 981 941 916
Thailand 3,410 3,355 5,859 9,501 8,455 9,147 3,710 10,705 12,946
Total 7,957 9,698 12,589 31,443 58,316 39,371 44,339 39,492 46,376
Source: UNCTAD Trade Statistics Database

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70,000 Total Inward FDI Flow ($USD Millions) in BIMSTEC, 2000-13

60,000
50,000
40,000
30,000
20,000
10,000
0
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
Total 7,957 11,29 9,698 10,43 12,58 17,04 31,44 38,69 58,31 42,69 39,37 44,33 39,49 46,37
Source: UNCTAD Trade Statistics Database
Figure 1. Total Inward FDI Flow in the BIMSTEC Region, 2000-2013
($USD Mill)

It is important to note that many BIMSTEC economies are relatively smaller to be able
to undertake economic activities that could exploit substantial economies of scale.
Economies of scale are better utilized in grander markets rising out of economic
assimilation, and small countries have greater market penetration. Significant benefit can
be derived by the BIMSTEC economies by adjoining and sharing the factors of
production and the huge marketplace through preferential trading policies. Investments in
the trade bloc will largely depend on governance, transparency, accountability, and
predictability of policies, rules and regulations relating to investments, both in public and
private sectors [11].
In order to achieve increased intraregional FDI and portfolio investment flows, member
countries should further reinforce macroeconomic environments, leading towards
liberalizing and harmonizing their investment regime. Moreover, robust native fiscal
structures and deregulation of domestic monetary and capital markets are vital for
drawing private investment as well as for intraregional investment.

3.3. The GTAP Model for Macroeconomic Analysis

The most common modeling technique for estimating economic impacts of a trade
agreement with economy-wide effects involves the Computable General Equilibrium
(CGE) modeling framework of the Global Trade Analysis Project (GTAP). The general
equilibrium model is thoroughly documented by Hertel in 1997[12] and in the GTAP
database documentation [13]. It is a comparative static multi-regional CGE model.
The basic structure of the GTAP database includes: industrial sectors, households,
governments, and global sectors across countries. Countries and regions in the world
economy are linked together through trade. Prices and quantities are simultaneously
determined in both factor and commodity markets. The main factors of production are
skilled and unskilled labor, capital, natural resources and land.
Producers operate under constant returns to scale, where the technology is described by
the Leontief and constant elasticity of substitutions (CES) functions. Two broad
categories of inputs are identified: intermediate inputs and primary factors of production.
In the model, firms minimize costs of inputs given their level of output and fixed
technology. First, producers use composite units of intermediate inputs and primary
factors in fixed proportions following a Leontief production function. At the second level
of the production nest, intermediate input composites are obtained combining imported
bundles and domestic goods of the same input-output group. Trade policy can affect the
price of traded goods relative to domestically produced goods. As a result, a key
relationship for model analysis is the degree of substitution between imported and
domestic goods. This key relationship is commonly identified as the Armington elasticity

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[14]. It is assumed that domestically produced goods and imports are imperfectly
substitute. This is modeled using the Armington structure.
Households’ behavior in the model is determined from an aggregate utility
function[15]. The aggregate utility is modeled using the Cobb-Douglas production
function with constant expenditure shares [16]. This utility function includes private
consumption, government consumption and savings. Current government expenditure
goes into the regional household utility function as a proxy for the government provision
of public goods and services. Private households’ consumption is explained by a constant
difference elasticity expenditure function.
Domestic support and trade policy (tariff barriers) are modeled as ad valorem
equivalents. These policies have a direct impact on the production and consumption
sectors in the model. In equilibrium, all firms have zero real profit, all households are on
their budget constraint, and global investment is equal to global savings. Changing the
model’s parameters allows one to estimate the impact from a country’s/region’s original
equilibrium position to a new equilibrium position.
The simulation represents what the economy would look like if the policy change or
shock had occurred. The difference in the values of the endogenous variables in the
baseline and the simulation represents the effect of the policy change. All the policy
simulations as well as the results reported in this paper, as in other major models of this
type, may be thought of as occurring in one-shot over a time-period that is needed for
equilibrium to be achieved. This time-period is akin to what is widely thought of by
economists as ‘medium run’, possibly 3-5 years in a go. So the model should be able to
foretell the effect on trade and production patterns if the trade policy was changed.
Furthermore, based on the change in welfare, the policy-maker would be able to judge
whether the country benefited from the change in policy or not.
The GTAP framework has strength because of theoretical rigor, its ability to represent
direct and indirect interactions among all sectors of an economy and precise detailed
quantitative results. The strength of the multi-country CGE model is that incorporates in
an elegant manner, the features of neo-classical general equilibrium and real international
trade models in an empirical framework [17]. However, this study does not adequately
capture the service trade reforms and thus the results may underestimate the potential
effect of liberalization where the services sector is to be included. It is to be noted that the
GTAP model has both static and dynamic versions. However, in this paper, the static
GTAP model is used. The static model has disadvantages relative to dynamic techniques,
of not describing the time path, i.e. attention in the analysis is concentrated on the end
outcome rather than the transition [18]. The model’s results may be very sensitive to the
assumptions and data used. Almost all CGE exercises include a sensitivity analysis to
obtain a range of results based on different assumptions or data.

3.3.1. Data and Country and Sectoral Aggregation: The study makes use of Version 8
of the GTAP database which was released in 2012. Data on regions and commodities are
also aggregated to meet the objectives of this study. Version 8 of the GTAP database
covers 57 commodities, 129 regions/countries and 5 factors of production. For the sake of
convenience the 129 regions have been aggregated to 9 regions and the 57 commodities
have been aggregated into 9 as shown in Annex 1. The study has simulated all tariff
elimination among BIMSTEC countries.

3.3.2. Analysis of the Simulation Results: Welfare and Macroeconomic Effects:

Based on the model simulations, this section reports the results that show the likely
impacts on important macro-economic variables, economic welfare, industry outputs and
exports. The effects of BIMSTEC FTA can be assessed at both the macro-economic and
sectoral levels of analysis. Hossain(2013) has examined the possible impacts of
BIMSTEC FTA on its member countries using GTAP database and observed that

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BIMSTEC FTA will be welfare enhancing for all its members except Bangladesh. He also
found that trading arrangement might generate employment for its members and creating
employment opportunities for unskilled labor, BIMSTEC FTA can reduce poverty within
the bloc[19]. However, some differences have been identified in this research compared to
the aforementioned study. The welfare and other macroeconomic effects of the
simulations for the countries/regions concerned are presented in .
Table 5.

Table 5. Welfare Impact of BIMSTEC FTA, in US$ Millions

Allocative Endowment ToT IS Total
Regions Efficiency Effect Effect Effect Welfare (EV)
Thailand 43.6 0 350 -49.1 345
Bangladesh 74.2 0 -58.4 -4.53 11.2
India 606 0 467 88.8 1,162
Sri Lanka 43.9 0 -37.1 -35.5 -28.6
Nepal 49.1 0 -27.9 -25.9 -4.69
Rest of Asia -68.9 0 -346 46.5 -368
North America -0.051 0 -59.4 -26.6 -86
EU_25 -67.7 0 -113 -3.27 -183
Rest of World -37.6 0 -176 9.48 -204
Total 642 0 0 0 642
Source: Author’s simulation of GTAP version 8.
If the BIMSTEC countries completely eliminate import tariffs with each other,
Thailand, India and Bangladesh are expected to experience welfare gain. The welfare gain
is highest in case of India which is US$ 1,162 million followed by Thailand (US$ 345
million), and Bangladesh (US$ 11.2 million). The Sri Lanka and Nepal are expected to
experience welfare loss. All other regions lose because of diverted trade and unfavorable
terms of trade effects. There are three determining factors of equivalent variation i.e.,
allocative efficiency, terms of trade (TOT) effects and investment-saving (I-S) effects. If
we look at the allocative efficiency we can see that complete removal of all tariffs among
BIMSTEC member countries that improve the allocative efficiency in all BIMSTEC
countries [20].

Table 6. Macroeconomic Impact of BIMSTEC FTA

Countries GDP Export Import ToT
Thailand 0.33 0.2 0.56 0.2
Bangladesh -0.18 3.53 2.8 -0.41
India 0.30 0.55 0.68 0.2
Sri Lanka -0.68 2.27 2.23 -0.38
Nepal -2.27 12.87 5.14 -2.23
Rest of Asia -0.02 -0.01 -0.02 -0.01
North America -0.01 0 -0.01 0
EU_25 -0.01 0 -0.01 0
Rest of World -0.01 -0.01 -0.02 -0.01
Source: Author’s simulation of GTAP version 8.

The BIMSTEC FTA could enhance intra-regional trade as the simulations show export
and import of all BIMSTEC countries would experience high growth. In terms of real

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GDP Thailand and India would experience increase by 0.3 percent. However, Bangladesh
would experience a fall in real GDP of 0.18 per cent if the deal becomes realized. Sri
Lanka and Nepal would experience a fall in real GDP of 0.68 per cent, 2.27 percent
respectively [20].

Table 7. Impact on Industrial Output of BIMSTEC FTA

Rest of Asia
Bangladesh

Sri Lanka

Of World
Thailand

America

EU_25
North
Nepal
India

Rest
Grains Crops -0.05 -0.32 0.08 -0.37 -1.04 0 -0.01 0 -0.01
Meat and Livestock -0.24 -0.14 0.01 -0.15 -0.46 0 0 0 0
Extraction -0.13 -0.25 -0.16 -0.14 -1.67 0.01 0 0 0
Process Food 0.12 -0.26 0.08 -0.82 -1.34 -0.01 0 0 -0.01
Textiles 1.05 0.86 0.02 0.84 9.66 -0.06 0.01 0 0
Clothing -0.56 3.79 -0.67 -0.19 5.06 -0.01 -0.03 -0.02 -0.01
Light Manufacturing 0.1 -1.58 -0.04 2.62 -7.26 0 0 0 0.01
Heavy Manufacturing 0.12 -1.57 0.09 -1.56 2.99 0 0 -0.01 -0.01
Service -0.07 -0.02 -0.01 0.26 0.58 0 0 0 0
Source: Author’s simulation of GTAP version 8.

Table 7 shows the sectoral analysis under BIMSTEC FTA, the production of Textiles
and Clothing will increase significantly. Thailand and India could be the most benefited
countries.
4. Challenges Facing the BIMSTEC Countries
4.1. Connectivity and Infrastructure
Infrastructure and connectivity are core elements of trade facilitation. Poor physical
infrastructure—particularly the lack of telecommunication links, parking space, cold
storage, accommodation facilities and power—is a major problem in the border station
areas. BIMSTEC initiative will need to be geared to build the road, rail and air transport
connectivity lack of which at present hinders deepening of trade and investment
infrastructure. Improving the state of connectivity within the region, and mobilizing the
required resources to build the necessary infrastructure must be seen from the
perspective of long term development strategy of BIMSTEC members. Experiences of
other regional and sub-regional integration attempts suggest that participating countries
incurred substantial expenditures to develop their infrastructures particularly to develop
internal as well as cross-border transportation infrastructure including railways,
roadways, airways, bridges and ports. ASEAN could serve as a very good example for the
BIMSTEC group members in this regard. An integrated transportation system must be
seen as critical to generating the expected gains for BIMSTEC cooperation. Serious
attention ought to be given to the development of a multi-modal transport system
linking road-rail-sea transport in a seamless continuity.

4.2. Non-Tariff and Long Negative List

As most of BIMSTEC members also member of South Asian Free Trade Agreement
(SAFTA) and Asia Pacific Trade Agreement (APTA), the average tariff have been
reduced. However, there are numerous non-tariff barriers that have to be removed. There

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are long negative list among BIMSTEC countries that need to be reduced within a
specified timeframe in order to realize the trade potential. Harmonizations of standards,
tariff elimination as well as dismantling of all para-tariff and non-tariff barriers are key for
regional integration.

4.3. Trade Facilitation

World Bank’s Doing Business report provides an aggregate ranking on the ease of
doing business based on indicator sets that measure and benchmark regulations applying
to domestic small to medium-size businesses through their life cycle [21]. One of the
indicators in trade facilitation is the number of documents required to complete the
process per business cycle. However, difficulties arise when different trading partners ask
for different documents in the process of exporting or importing the same product. The
table 8 shows the status of trade facilitation in BIMSTEC countries.

Table 8. The Status of Trade Facilitation in BIMSTEC Countries (2014)

Bangladesh

Sri Lanka
Myanmar

Thailand
Bhutan

Nepal
India
Economy

Ease of Doing Business Rank 173 125 142 177 108 99 26

Trading Across Borders Rank 140 165 126 103 171 69 36
Documents to Export (number) 6 9 7 8 11 7 5
Time to Export 28.3 38 17.1 20 40 16 14
Cost to Export(US $ Per Container) 1,281 2,230 1,332 620 2,545 560 595
Documents to Import (number) 9 11 10 8 11 7 5
Time to Import 33.6 37 21.1 22 39 13 13
Cost to Import(US $ Per 20 Container) 1,515 2,330 1,462 610 2,650 690 760
Source: World Bank, 2015
This shows that establishment of a seamless system of cross-border movement of both
cargo and people are major challenge for the BIMSTEC. For easing up cross-border
movement and establishing greater connectivity the existing trans-border formalities,
vehicular movement and customs procedures need to be simplified. Use of modern
technology could play an important role in speeding up the procedures. A BIMSTEC visa
could also be introduced to facilitate movement of people particularly for the investors
and the businessmen.

4.1. Political Economy and Overlapped with SAARC

Political commitment is essential to move forward for closer cooperation among
BIMSTEC countries. The major focus of BIMSTEC initiative should be to develop the
growth zone that is a relatively underdeveloped area. Five of the members of BIMSTEC
had been members of SAARC as well. In this backdrop, the enthusiasm for BIMSTEC
was slightly misplaced and unrealistic given the inability of SAARC to bring to light the
program agreed upon. Attracting investments, both from within and also from outside, to
exploit the complementarities of the sub-region, through horizontal and vertical
cooperation, should be at the centre of the design of BIMSTEC cooperation.

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5. Concluding Remarks
The BIMSTEC regional integration is a bridge between South and South East Asia and
represents a reinforcement of relations among these countries. BIMSTEC is key to
establishing a platform for intra-regional cooperation between SAARC and ASEAN
members. The BIMSTEC region is home to around 1.6 billion people with a combined
GDP of 2.7 trillion economies and total trade US$1295 Billion[3]. However, intra-
regional share accounts for only 2.8 percent, which easily puts BIMSTEC as the least
integrated area in any regional block.
However, The BIMSTEC members’ countries have been negotiating for regional
economic cooperation. The negotiations are spread over the areas of (i) tariff concessions
on trade in goods, (ii) customs cooperation, (iii) trade in services (iv) investments and (v)
dispute settlement mechanism. There are four draft agreements on trade in goods, rules of
origin, dispute settlement and customs matters have been agreed in different BIMSTEC
TNC meetings and now waiting for sign the final agreements in the 20th TNC meeting
that will be held in Bangkok from September 9-10, 2015.
This studies shows that if the BIMSTEC countries completely eliminate import tariffs
with each other, Thailand, India and Bangladesh are expected to experience welfare gain.
The welfare gain is highest in case of India which is US$ 1162 million followed by
Thailand (US$345 million), Bangladesh (US$ 11.2 million). The Sri Lanka and Nepal are
expected to experience welfare loss. There are three determining factors of equivalent
variation i.e., allocative efficiency, terms of trade (TOT) effects and investment-saving (I-
S) effects. If we look at the allocative efficiency we can see that complete removal of all
tariffs among BIMSTEC member countries that improve the allocative efficiency in all
BIMSTEC countries. The BIMSTEC FTA could enhance intra-regional trade as the
simulations shown that export and import of all BIMSTEC countries would experience
high growth. In terms of real GDP Thailand and India would experience increase by 0.3
percent. However, Bangladesh would experience a fall in real GDP of 0.18 per cent if the
deal becomes realized. Sri Lanka and Nepal would experience a fall in real GDP of 0.68
per cent, 2.27 percent respectively.
Establishment of a seamless system of cross-border movement of both cargo and
people is major challenge for the BIMSTEC. In the context of the current state of play,
BIMSTEC remains one of the least connected regions in the world. BIMSTEC initiative
will need to be geared to build the road, rail, port and air transport connectivity which at
present hinders deepening of trade and investment infrastructure. The BIMSTEC
countries should work on Single Window facility that allows parties involved in trade and
transport to lodge standardized information and documents with a single entry point to
fulfill all import, export, and transit-related regulatory requirements. Non-tariff barrier
have to remove within a mutually agreed timeframe. The member states should reduce the
negative list to unlock trade potential in the BIMSTEC region. Transit facilities should be
introduced to promote effective intra BIMSTEC trade, especially for Land-Locked
member countries. A BIMSTEC visa could also be introduced to facilitate movement of
people particularly for the investors and the businessmen. Improving the state of
connectivity within the region, and mobilizing the required resources to build the
necessary infrastructure must be seen from the perspective of long term development
strategy of BIMSTEC members.

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Vol.9, No. 4 (2016)

Appendix
Annex 1. Regional and Commodity Aggregation of GTAP Database
Aggregated GTAP Aggregated
SL SL GTAP Commodities
Region Region Commodities
Grains Crops (9 pdr wht gro v_f osd
1 Thailand Thailand 1
products) c_b pfb ocr pcr
ctl oap rmk wol cmt
Meat and Lstk (6
2 Bangladesh Bangladesh 2 omt
products)
Extraction (6
3 India India 3 frs fsh coa oil gas omn
products)
Process Food (5
4 Sri Lanka Sri Lanka 4 vol mil pcr sgr ofd
products)
5 Nepal Nepal 5 Textiles (1) tex
Rest of all Apparel (1)
Asian
Countries
6 Rest of Asia (including 6 wap
East and
Southeast
Asia)
All North Light Mnfc (7)
America
North lea lum ppp fmp mvh
7 (USA, 7
America otn omf
Canada,
Mexico etc)
Heavy Mnfc (7) p_c crp nmm i_s nfm ele
8 EU_25 EU_25 8
ome
Rest of Services (15)
countries in ely gdt wtr cns trd otp
Rest of the
9 the World of 9 wtp atp cmn ofi isr
world
GTAP obs ros osg dwe
Database
Source: GTAP version 8

Acknowledgment
This work was supported by the National Research Foundation of Korea Grant funded
by the Korean Government (NRF-2014S1A2A3044733) and Hankuk University of
Foreign Studies Research Fund.

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Authors

Mohammad Masudur Rahman Professor: School of

Economics and Management, Zhejiang A & F University,
Hangzhou, China. Former Economist: Microcredit Regulatory
Authority (MRA), Ministry of Finance, Government of the
People’s Republic of Bangladesh.Former JSPS-UNU Fellow:
United Nations University-Institute of Advanced Studies, Japan.

Chanwahn Kim, Professor, Graduate School of International

and Area Studies, Hankuk University of Foreign Studies, Seoul,
KoreaDirector, Center for Bay of Bengal Studies, Hankuk
University of Foreign Studies, Seoul, Korea Editor-in Chief,
Journal of South Asian Studies, Seoul, Korea.

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