South and Central Asia Trade Linkage: Gauging Regional Trade Dynamics Based on the Gravity Model

This chapter investigates the dimensions impacting inter- and intraregional trade dynamism within CASA countries from 2005 to 2022, by employing a combination of analytical methods, including the gravity model and augmented simulations. The findings regarding inter-intra CASA trade, intraregional trade in South Asia and Central Asia align with expected patterns and show statistical soundness at the 1% level of significance. The distance variable reveals that trade tends to be more robust with neighbouring countries than with distant ones. The competitiveness factor is statistically significant for intraregional trade in South Asia and both intra- and interregional trade within Central Asia at the 5% level. The trade cost between Central and South Asia, as well as for intraregional trade within South Asia, is statistically significant at 1%. The time required to process exports for intraregional trade in Central Asia is significant at the 10% level, showing a negative correlation. For the trade between South and Central Asia, the contiguity variable shows statistical significance at the 1% level. Binary variables representing common languages and the colonial history do not suffice to demonstrate statistical significance at the 10% level for either intra- or interregional trade in CASA. Based on income, price, and non-price factors, the simulation results of intra- and interregional trade were aimed for each relationship. The predictions for baseline intraregional trade in South Asia predict an average annual growth rate of 6% from 2021 to 2030. A 0.5% yearly attrition in trade costs for each bilateral trade flow in South Asia from 2014 to 2030 results in a 118% gain in intraregional trade by 2030. These results emphasise the importance of reducing trade barriers, particularly non-tariff ones. The results indicate that a 0.5% annual enhancement in bilateral competitiveness in prices of South Asian exporters will result in an 8% annual gain in export earnings from intraregional exports. Similarly, a 0.5% annual reduction in trade costs for bilateral trade flows in Central Asia leads to a 12% yearly increase in intraregional trade. The baseline forecasts for South Asia indicate an average annual growth rate of 11.5% for intraregional trade from 2015 to 2030, which is considerably greater than the income responsiveness of South Asian exports. A 1% annual reduction in trade costs for each bilateral trade flow in the region from 2014 to 2030 results in an 11.7% yearly increase in intraregional trade. These findings, similar to those in South Asia, underscore the need to minimise trade barriers and equally highlight the critical need to prioritise the reduction of trade barriers.