Dhriti Mukherjee Pipil | Lead, Trade | TheNewsSite.In |
South Asia presents one of the most striking empirical anomalies in international trade. Despite extreme geographic proximity, shared borders, and deep historical linkages, the region records the lowest intra-regional trade share among all major economic groupings globally. This outcome contradicts the most robust empirical regularity in trade theory: the gravity model. The model predicts that bilateral trade tends to increase with the economic size of countries and decline with distance and other trade costs. By this logic, South Asia, with one large economy and several smaller neighbouring economies located in close geographic proximity, had strong potential for regional trade integration. However, in South Asia, proximity fails to translate the geographical advantages into commercial integration. This is not a short-term disruption or a temporary policy outcome. The persistence of low regional trade depicts a deeper structural problem that prevents geography from turning into an economic partnership. To understand why this has not happened, it is useful to place South Asia in a global context. Comparing its trade patterns with other regional groupings helps isolate whether the problem lies in geography itself or in how economic relationships are organised within the region.
Proximity Without Trade: The Aggregate Puzzle
Geographic proximity is converted into economic density across many parts of the world. The European Union conducts close to 60 per cent of its total trade internally, ASEAN around 20–25 per cent, and the USMCA functions as a deeply integrated production system rather than a loose trade arrangement. By contrast, South Asia conducts barely 5 per cent of its trade within the region, despite hosting nearly one-quarter of the world’s population
This weak regional integration is not the result of global isolation. UN Comtrade data show that the South Asia region’s exports expanded from USD 21 billion in 1980 to over USD 540 billion by 2024, while imports approached USD 930 billion. The region is outwardly integrated but internally fragmented. Globalisation exists, but it bypasses neighbours.
India’s trade pattern illustrates this breakdown clearly. Figure 1 shows India’s exports to South Asia as a share of its total exports. Even as India’s total exports exceeded USD 778 billion in FY 2023–24, exports to all South Asian neighbours together accounted for only 3.3 per cent. Bangladesh, the largest regional destination, absorbed just 1.4 per cent, while Pakistan and Bhutan each accounted for less than 0.2 per cent. From a gravity model perspective, this pattern is anomalous. India trades more intensively with distant economies than with contiguous ones. Transport cost, similarity in culture, and languages are insufficient to explain this divergence. The explanation, therefore, lies beyond geography: institutional unreliability and policy discretion dominate physical proximity in shaping regional trade outcomes.
Figure 1: Share of India’s Total Exports to South Asian Countries in 2024 (in %)
Value Matters More Than Volume:
Why does proximity translate into trade in some regions but fail in others? One strategic difference lies not in export volumes, but in how much value countries capture from trade. Conventional trade statistics often emphasise export volumes while obscuring where income is actually generated. OECD Trade in Value Added (TiVA) data shift the focus to domestic value added embedded in foreign demand, offering insight into a country’s productive depth and its position within value chains. Higher value capture reflects an economy’s capacity to transform inputs into exportable outputs that meet foreign market requirements. Over time, sustained value capture is closely associated with deeper structural capabilities and supporting infrastructure, including logistics, skills, and stable policy frameworks, rather than export volume alone.
Between 2015 and 2022, the United States increased foreign-demand-driven domestic value added from USD 1.85 trillion to USD 2.41 trillion. Over the same period, Canada and Mexico expanded their domestic value capture by more than 50 per cent and 45 per cent, respectively. These gains did not result from tariff reductions alone. They reflect the deepening of regional production networks in which intermediate goods, services, and intellectual property circulate repeatedly across borders before final export.
Table 1 illustrates the internal structure of this integration. USMCA functions as a hierarchical but mutually reinforcing production system. The United States anchors the network by supplying finance, business services, technology, and intellectual property. Canada specialises in upstream inputs such as energy, metals, and chemicals, while Mexico focuses on large-scale manufacturing and assembly in sectors such as automotive, electronics, and machinery. Crucially, around 40 per cent of Mexican exports to the United States consist of US-origin intermediate inputs, underscoring vertical specialisation rather than one-sided dependence. For instance, A car part may cross North American borders 8 times; the U.S. designs the software, Canada provides the raw metals, and Mexico assembles the final vehicle.
This production structure explains why economic asymmetry can strengthen, rather than weaken, regional integration. Smaller economies integrate more deeply when a large neighbour provides stable demand, policy predictability, and credible contract enforcement. In such systems, asymmetry supports specialisation, repeated cross-border transactions, and sustained value capture across the region.
Table 1: North America’s Mutual Dependence by Value-Chain Function (OECD–TiVA, 2022)
| Country | Economic “Superpower” | What it provides to the Bloc | Dependency on Partners |
| USA | Innovation & Capital | IP, software, finance, and the massive consumer market (Demand). | Depends on Canada for raw energy and Mexico for affordable high-speed assembly. |
| Canada | Resources & High-Tech | Crude oil, critical minerals (lithium/cobalt), and specialized engineering. | Depends on U.S. demand for its energy and Mexico for low-cost auto-part manufacturing. |
| Mexico | Manufacturing & Labor | Skilled assembly in automotive, electronics, and aerospace. | Depends on U.S. technology/chips and Canadian industrial metals/energy. |
Likewise,Figure 2 reveals a parallel but instructive pattern in ASEAN. Paradoxically, the poorest economies in the bloc—such as Laos, Cambodia, and Myanmar—exhibit some of the highest intra-regional trade shares, often exceeding 30–50 per cent. This outcome is not the result of political goodwill or regional sentiment. It reflects production necessity. Regional hubs such as Thailand and Vietnam provide reliable markets, logistics networks, and investment certainty, allowing smaller economies to integrate deeply into regional supply chains..
Data source: Statista
The implication is clear. Development gaps do not impede regional trade; they can enable it, provided production roles are clearly defined and supported by predictable economic relationships
Why South Asia Fails Where Others Succeed
South Asia possesses the basic industrial hierarchy required for value-chain integration. India has scale in chemicals, pharmaceuticals, machinery, and yarn. Bangladesh specialises in large-scale garment assembly. Sri Lanka focuses on higher-value apparel finishing. Pakistan remains a major cotton and textile producer, while Nepal and Bhutan have potential in hydropower and agro-processing. On paper, this structure closely mirrors the production hierarchies observed in USMCA and ASEAN.
Yet these regional value chains do not materialise. Instead, trade flows remain episodic and fragile. Frequent export bans on food grains, cotton, and intermediate inputs; ad-hoc border closures; and the politicisation of trade instruments prevent firms from organising production across borders. Without predictability, regional specialisation becomes commercially risky.
Where a functional regional chain would resemble
India → Bangladesh → Sri Lanka → world,
South Asia operates through fragmented, extra-regional routes:
India → Europe, Bangladesh → EU, Sri Lanka → United States.
The region effectively bypasses itself.
Political Economy: When Security Logic Thickens Borders
The failure of regional value chains in South Asia is not accidental, nor does it stem from irrational trade policymaking. It reflects deliberate domestic political-economy choices in which governments prioritise short-term economic stability over regional trade coordination. Across South Asia, trade policy is shaped by internal political and macroeconomic constraints rather than by regional production efficiency. India emphasises food security and strategic autonomy; Pakistan’s trade relations remain constrained by unresolved political tensions; Bangladesh uses trade controls to manage domestic price stability; Sri Lanka’s trade restrictions are driven by fiscal stress and balance-of-payments pressures; while Nepal and Afghanistan face persistent border disruptions and transit uncertainty.
While these national trade policies are defensible in isolation, together they create a regional coordination failure. When trade policy remains discretionary instead of rules-based, firms are unable to plan cross-border production or invest in regional supply chains. Consequently, even where geography and production complementarities clearly support regional integration, neighbouring countries are often perceived as unreliable trade partners. In such an environment, trade policy uncertainty outweighs geographic proximity, and regional value chains in South Asia remain weak due to institutional choices rather than economic fundamentals.
The Economic Cost of Mistrust
The economic consequences of this mistrust are substantial. In 2023, South Asia exported over USD 78 billion in textiles, yet only a negligible share circulated within the region. According to World Bank indicators, border compliance times in South Asia are two to three times higher than in East Asia, despite far shorter physical distances. For many firms, particularly small and medium enterprises, it is often easier to trade with Rotterdam than with a neighbouring capital. Western markets compensate for distance by offering higher unit prices, enforceable contracts, regulatory stability, and insulation from regional political shocks. Even with higher freight costs, these destinations are economically closer than South Asia’s immediate neighbours. As a result, firms rationally bypass the region, reinforcing the very fragmentation that policy seeks to manage.
Conclusion: Proximity Without Trust Is Economically Empty
South Asia’s trade failure is not a consequence of geography, factor endowments, or industrial capacity. The region possesses all three. Instead, it reflects the dominance of policy discretion over institutional trust. Proximity alone does not generate trade. Predictability does.
Until regional trade is insulated from political volatility and governed by credible, rules-based frameworks, South Asia will remain outward-facing but internally fragmented, exporting to the world while bypassing its neighbours. The region’s tragedy is not distance. It is the failure to convert proximity into predictable production partnerships. That is the true proximity paradox.
[ Dhriti Mukherjee Pipil is Lead, Trade, TheNewsSite.In and Doctoral Researcher at Indian Institute of Foreign Trade. ]
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