Source: The post South Asia must strengthen trade for stability has been created, based on the article “The sorry state of South Asian economic integration” published in “The Hindu” on 24th June 2025
UPSC Syllabus Topic: GS Paper2-Bilateral, regional and global groupings and agreements involving India and/or affecting India’s interests.
Context: Two key events—the reciprocal tariffs imposed by the Trump administration and the terror attack in Pahalgam—have exposed South Asia’s vulnerability at the intersection of economy and security. These incidents underline the pressing need for a unified regional strategy to address interconnected economic and security challenges.
Interdependence of Economy and Security
- Economic Strength and Security Are Linked: Stability in trade supports peace, while conflict and unrest damage economic progress. A secure region encourages investment and trade, creating a virtuous cycle of growth and peace.
- Border Tensions Disrupt Progress: Territorial disputes in South Asia obstruct the development of economic partnerships, slowing integration and regional cooperation.
- Need for Unified Vision: Security and economic issues must be tackled together. Isolated measures fail to deliver long-term stability or prosperity.
South Asia’s Limited Regional Integration
- Weak Intra-Regional Trade Performance: Under SAFTA, intra-regional trade remains just 5–7% of South Asia’s total trade—the lowest globally. In contrast, the EU reaches 45%, ASEAN 22%, and NAFTA 25%.
- Large Gap Between Current and Potential Trade: SAARC nations trade $23 billion, while estimates suggest they could reach $67 billion. UNESCAP predicted a $172 billion trade potential by 2020, revealing that 86% of capacity remains unused.
- Underperformance Despite Large Population: With 25% of the global population, South Asia has a GDP of $5 trillion. The EU, with only 5.8% of the population, has $18 trillion GDP; NAFTA stands at $24.8 trillion, showing South Asia’s unfulfilled potential.
Barriers to Intra-Regional Trade
- Declining Bilateral Ties: Trade between India and Pakistan dropped from $2.41 billion in 2018 to $1.2 billion in 2024. Pakistani exports to India fell from $547.5 million in 2019 to $480,000 in 2024, largely due to tensions and insurgency.
- Worsening Trade Deficit: The trade-to-GDP ratio declined from 47.30% in 2022 to 42.94% in 2024. South Asia’s trade deficit widened from $204.1 billion in 2015 to $339 billion in 2022, even though total trade rose to $1,335 billion.
- High Cost of Trading with Neighbours: Intra-SAARC trade costs 114% of the value of goods, higher than trade with distant partners. For instance, it’s 20% cheaper to trade with Brazil than with Pakistan, despite Brazil being 22 times farther. By contrast, ASEAN countries trade at 76% of goods’ value, encouraging deeper integration.
Structural and Political Challenges
- Ineffective Trade Mechanisms: Despite SAFTA, poor governance and political hurdles raise trade costs, making regional commerce unattractive.
- Lack of Policy Coordination: There is no shared roadmap for harnessing two-thirds of untapped potential in goods, services, and investments across the region.
- Trust Deficits and Conflicts: Regional tensions, minority issues, and terrorism continue to block cooperation. SAARC’s goal to end distrust remains unfulfilled.
The Way Forward for Regional Growth
- Reduce Barriers for Mutual Gain: Lowering trade costs and simplifying procedures can encourage the creation of regional value chains.
- Decouple Economics from Politics: Regional trade must advance independently of bilateral tensions. Shared growth should guide the integration agenda.
- Leverage Complementary Strengths: Identifying mutually beneficial sectors can unlock economic opportunity and enhance regional stability.
Question for practice:
Examine the reasons behind South Asia’s low level of intra-regional trade despite having significant economic potential.
