Decrease font Decrease font
Decrease font Decrease font
Enlarge font Enlarge font
Enlarge font Enlarge font

By Kishore Dash, Ph.D.
Associate Professor of Global Studies, Thunderbird School of Global Management


Toward Free Trade In South Asia: Political And Economic Dimensions

After more than a decade of negotiation, The Heads of State of the South Asian Association for Regional Cooperation (SAARC) signed the Framework Agreement on South Asian Free Trade Area (SAFTA) at the twelfth SAARC Summit at Islamabad in January 2004.* The signing of the Framework Agreement on South Asian Free Trade Area (SAFTA), represented a major pragmatic initiative by the South Asian leaders to address the issues of trade and development in the region. However, the slow process and limited progress of SAFTA has led some scholars to argue that SAFTA is unlikely to succeed. Instead, these scholars argue that SAFTA is hardly beneficiary for its members and will mostly lead to trade diversion and the slowing down of unilateral trade liberalization in South Asia (Panagariya 1999; Bandara and Yu, 2003; Bhagawati 2008).

The supporters of SAFTA, however, argue that despite the potential for trade diversion, SAFTA would bring significant benefits to small countries in the region and would facilitate unilateral trade liberalization in South Asia (Srinivasan and Canonero, 1995; Srinivasan, 1998; Pigato et al., 1997; Kemal, 2004; Mukherji 2004; Newfarmer 2004). What lies ahead of SAFTA? What are the prospects of SAFTA? Will SAFTA agreement drive South Asian countries toward deeper regional economic cooperation?

The answer to these questions requires an extensive examination of a broader question about regional trade agreements (RTAs); that is, once launched, what forces drive RTAs further and determine the chance of success? The literature on RTAs suggests three “facilitating” conditions to explain the growth of RTAs. First, regional trading arrangements operating with the presence of a benevolent hegemonic power are more likely to experience growth than are RTAs without a benevolent hegemonic power (Crone 1993; Hurrell 1992). Second, political actors will be more motivated to pursue RTA policies if such trade arrangements serve their power-retaining goals by improving their country’s overall economic conditions (Grossman and Helpman 1995; Milner 1997; Haggard 1997). Further, growing literature suggests that political leaders of strong ruling coalitions are likely to be more willing to pursue RTAs than political leaders of weak coalitions ( Huelshoff 1994; Solingen 1997). Third, for sustained success of RTAs, strong support from business groups (market actors) is necessary (Martin, 1992; Milner 1997; Chase 2003). Business groups will show preferences for RTAs when there is potential for significant market gain from such trading arrangements. Significant market gain in a region is possible when there are regional economic complementarities or large size of regional markets (Mattli 1999; Chase 2005).

Given the above conditions, this study examines several key questions: (1) How has India’s hegemonic status affected regional trading arrangements in South Asia?; (2) How has the strength of South Asian ruling coalitions affected the process of regional trading arrangements?; (3) Is there potential for market gain in terms of regional economic complementarities or large size of regional markets in South Asia?; and (4) How has this economic dynamic shaped the preferences of business actors toward regional trading arrangements in South Asia?

The findings of this study suggests that the three above conditions identified in the literature as facilitating conditions for the growth of RTAs have produced three different dynamics in South Asia that have diminished policy-makers’ enthusiasm for regional trading arrangements. Despite India’s hegemonic position, there is no consensus among South Asian countries to recognize India as the region’s undisputed leader. Additionally, most South Asian countries share a distrust of India’s economic and military domination in the region. This distrust makes it difficult for South Asian countries to work toward common regional economic and security strategies. In particular, Pakistan continues to challenge India’s leadership in the region. The lack of consensus about India’s leadership within SAFTA has two important implications. First, India shows unwillingness to assume the role of a regional “paymaster” who can ease distributional problems associated with free trade practices for small countries in South Asia. Second, India’s reluctance to assume leadership has also made coordination of rules, regulations, and policies regarding free trade issues difficult and time-consuming. Thus, individual countries continue to undermine free-trade principles by excluding numerous products from tariff cuts by keeping them under the sensitive lists.

Although South Asian countries have pursued economic liberalization policies in the early 1990s, these policies have not led to deeper regional economic cooperation. One important reason for South Asian political leaders’ lack of deep commitment toward regional trade is limited potential of economic benefits from SAFTA arrangements. South Asian leaders remain largely unconvinced that SAFTA would facilitate their power-retaining objective. Instead, perceived inequity—that is, larger economies like India would benefit more from SAFTA arrangement—is widespread among smaller South Asian countries. Another important reason is the emergence of weak ruling coalitions in South Asian countries. Weak strength of ruling coalitions throughout South Asia has made the leaders of these countries critically dependent on the support of important domestic groups. The leaders’ need for domestic support for political survival have led them to pursue populist, nationalist, and self-reliant policies. While these policies may have brought short-term political payoffs to the ruling elites in South Asia, they have become enormously counterproductive for the growth of free trade. Given the unlikely scenario of any significant change in South Asia’s current political and economic landscape, the stop-and-go pattern of regional trade policy that South Asian leaders have pursued so far is likely to continue for the foreseeable future.

As examined in this study, with the exception of India, the economies of SAARC members are not complementary. Since SAARC countries export the bulk of their primary commodities and manufactured goods to the same world markets, they tend to compete in the same industrial sectors with each other. Indeed, most of SAARC members’ trade is with the United States and Europe rather than with their neighbors. Given the small size of markets of South Asian countries with India as an exception, there is limited scope for mutually beneficial market exchange among South Asian countries. Thus, South Asian business groups have no powerful incentives to seek regional trade liberalization. Consequently, demand for SAFTA by business groups is weak.

The rivalry between India and Pakistan signifies trouble for SAFTA’s future. Already, the policy differences of India and Pakistan have driven these two countries to engage in several transregional, bilateral, and subregional trading arrangements. While India’s transregional trading arrangements include India-ASEAN FTA, BIMSTEC-FTA, and Indian Ocean Rim Association for Regional Cooperation (IORARC), Pakistan remains actively involved in Economic Cooperation Organization (ECO) and Organization of Islamic Countries (OIC). India’s involvement in a “noodle bowl” of bilateral trade agreements with Singapore, Thailand, Vietnam, Japan, China, South Korea, Sri Lanka, Nepal, Bhutan, and Bangladesh, and her initiatives for the “spoke-spoke” pattern of economic cooperation among subgroups of South Asian countries—for example, the creation of South Asian Growth Quadrangle (SAGQ) with India, Bangladesh, Bhutan, and Nepal—are motivated in part by Pakistan’s unwillingness to increase the speed of free trade negotiation with India. While such transregional and “spoke-spoke” pattern of trade cooperation may provide some short-term solutions to India’s need for trade expansion and market access, given their lack of commonality and different rules of origin, it is not clear as to what extent these type of trade agreements will facilitate deeper economic cooperation. SAFTA would make a great deal more sense and would be an essential underpinning of an emerging regionalism in South Asia. But the level of regional economic interdependence achieved so far and the pace at which South Asian countries are progressing in their negotiation for free trade arrangements will leave South Asian countries at an appreciable distance from the goal of SAFTA, even after a decade. Any substantially faster rate of progress on free trade arrangements would be a desirable goal. But that would require a substantially greater political effort from South Asian political leaders, specifically Indian and Pakistani leaders.

*SAFTA members are: India, Pakistan, Bangladesh, Sri Lanka, Nepal, Bhutan, and Maldives.

 

References

  • Bandara, Jayatilleke S. and Wusheng Yu. 2003. “How Desirable is the South Asian Free Trade Area? A Quantitative Economic Assessment.” World Economy 26: 1293-1323.
  • Bhagwati, Jagdish. 2008. Termites in the Trading System: How Preferential Agreements Undermine Free Trade. New York: Oxford University Press.
  • Chase, Kerry. 2003. “Economic Interests and Regional Trading Arrangements: The Case of NAFTA.” International Organization 57: 137-74.
  • Chase, Kerry. 2005. Trading Blocs: States, Firms, and Regions in the World Economy. Ann Arbor: The University of Michigan Press.
  • Crone, Donald. 1993. “Does Hegemony Matter? The Reorganization of the Pacific Political Economy.” World Politics 45:501-525.
  • Dash, Kishore. 2008. Regionalism in South Asia: Negotiating Cooperation, Institutional Structures. New York: Routledge.
  • Dent, Christopher M. 2006. New Free Trade Agreements in Asia-Pacific. London: Palgrave Macmillan.
  • Frankel, J.A. 1997. Regional Trading Blocs in the World Economic System. Washington, D.C.: Institute for International Economics.
  • Grossman, Gene, and Elhanan Helpman. 1995. “The Politics of Free Trade Agreements.” American Economic Review 85: 667-90.
  • Haggard, Stephan. 1997. “The Political Economy of Regionalism in Asia and the Americas.” In The Political Economy of Regionalism, edited by Edward D. Mansfield and Helen V. Milner. New York: Columbia University Press.
  • Huelshoff, Michael G. 1994. “Domestic Politics and Dynamic Issue Linkage: A Reformulation of Integration Theory.” International Studies Quarterly 38 (2): 255-279.
  • Hurrell, Andrew. 1992. “Latin America and the New World Order: A Regional Bloc in the Americas?” International Affairs 68:121-139.
  • Kemal, A. R. 2004. “SAFTA and Economic Cooperation.” South Asian Journal 6: 1-21.
  • Krishna, Pravin. 2005. Trade Blocs: Economics and Politics. Cambridge: Cambridge University Press.
  • Martin, Lisa. 1992. “Interests, Power, and Multilateralism.” International Organization 46: 765-792.
  • Mattli, Walter. 1999. The Logic of Regional Integration: Europe and Beyond. Cambridge: Cambridge University Press.
  • Milner, Helen V. 1997. “Industries, Governments, and the Creation of Regional Trade Blocs.” In The Political Economy of Regionalism, edited by Edward D. Mansfield and Helen V. Milner. New York: Columbia University Press.
  • Milner, Helen V. 1997. Interests, Institutions and Information: Domestic Policy and International Relations. Princeton: Princeton University Press.
  • Mukherji, Indra N. 2004. Towards a Free Trade Area in South Asia: Charting a Feasible Course for Trade Liberalization with Reference to India’s Role. RIS Discussion Paper 86/04, New Delhi: Research and Information System for the Non-Aligned and Developing Countries.
  • Newfarmer, Richard. 2004. SAFTA: Promise and Pitfalls of Preferential Trade Arrangement.Background paper for Global Economic Prospects 2005, World Bank, Washington, D.C.
  • Pigato, Miria, Caroline Farah, Ken Itakura, Kwang Jun. 1997. South Asia’s Integration into the World Economy. Washington, D.C.: World Bank.
  • Solingen, Etel. 1997. “Economic Liberalization, Political Coalitions, and Emerging Regional Orders.” In Regional Orders: Building Security in a New World, edited by David A. Lake and Patrick M. Morgan. Pennsylvania: The Pennsylvania State University Press.
  • Srinivasan, T. N. and G. Canonero. 1995. Presidential Agreements in South Asia: Theory, Empirics and Policy. Discussion Paper. Yale Growth Center, Yale University.
  • Srinivasan, T. N. 1998. Developing Countries and the Multinational Trading System: From GATT to the Uruguay Round and the Future. New Delhi: Oxford University Press.

About the Author

Kishore Dash, Ph.D.

KISHORE DASH, Ph.D.
Associate Professor of Global Studies, Thunderbird School of Global Management

Read biography »