ABSTRACT
It is natural for neighbours to trade for a number of reasons. The foremost of these is that transportation costs are low. Furthermore, language similarities lower communication barriers and reduce transaction costs. Cultural affinity among neighbours also influences tastes, which causes profitable complementarities to emerge. Trade in turn fosters growth through economies of scale, innovation, knowledge spillover and other channels identified in the recent literature on growth and trade. Indeed, the regional trade alliances forged in many parts of the world (e.g. NAFTA, ASEAN, EC and Mercosur) reflect attempts to exploit the advantages of geography and trade. Several subregional trading ‘triangles’ have also spawned in Southeast Asia, and more recently there is talk of a new trading triangle involving Bangladesh, India and China.
