An opening for South Asian trade?

India and Pakistan have initiated dialogue several times over the last six decades, only to end the process amid acrimony. Why, then, would things be different following Prime Minister Narendra Modi’s recent Christmas Day stopover in Lahore? Optimists believe the answer might lie in the desire of Modi and Pakistani Prime Minister Nawaz Sharif to expand economic cooperation across South Asia.

The idea of building a South Asian economic bloc makes a lot of sense but the obstacles in its path are equally formidable. South Asian cooperation has been held back because of conflict between India and Pakistan. Resolution of conflict would open the way for regional integration though some are hoping that expansion of regional connectivity might lead to resolution of conflict.

South Asia is home to around 1.7 billion people living in eight countries (Afghanistan, Bangladesh, Bhutan, India, Maldives, Nepal, Pakistan and Sri Lanka) with a combined GDP (at nominal rates) of over USD $2.9 trillion. Yet it is currently the least integrated region in the world with intra-regional trade comprising only 5% of total trade.

Compare that with the region covered by the Association of Southeast Nations (ASEAN). Its ten countries have a joint population of 650 million people, a combined GDP of USD $ 2.6 trillion and conduct 25 percent of their trade within their region. Intra-regional trade in North America (covered by NAFTA comprising Mexico, Canada and the United States) and the European Union is a hefty 50 percent of members' countries' total trade.

Ironically, the idea of regional integration and cooperation in Asia dates back to the Asian Relations Conference held in Delhi in March 1947, Baguio conference of 1950 and Bandung conference of 1955. Indian leaders like Nehru often spoke of the need for a South Asian customs union or confederation but while Southeast Asia created ASEAN, a similar initiative was lacking in the subcontinent. Pakistan consistently remained averse to accepting 'Indian dominance' while India was reluctant to make concessions to accommodate Pakistan.

As a result, the initiative for the Creation of the South Asian Association for Regional Cooperation (SAARC) in 1977 came, not from the two major countries of the region, but from President Ziaur Rehman of Bangladesh and King Birendra Bir Bikram Shah Deva of Nepal. Although India and Pakistan have been part of SAA RC since its foundation, Islamabad saw it as another likely instrument of Indian hegemony. Thirty years later, intra-region trade remains minuscule and the region still lacks connectivity across land, rail, sea and air borders.

In an attempt to boost intra-region trade and create a South Asian Free Trade Area (SAFTA), an Agreement on South Asian Preferential Trading Arrangement (SAPTA) was signed in 1993 and came into effect in 1995. The objective of the agreement was to reduce tariffs and other barriers within the region while bearing in mind the differences within the various countries and providing protection to the weaker economies. This amounted to effectively adopting what is referred to as the MFN or Most Favored Nation principle of the World Trade Organization i.e. any country granted MFN must be treated by the granting state as it treats every other country that has been granted MFN.

India granted Most Favored Nation (MFN) status to Pakistan in 1996 in accordance with WTO guidelines and the SAPTA Agreement. But politics - the desire to settle the Kashmir dispute before opening trade - kept Pakistan from reciprocating the act for 15 years. Pakistan's Ministry of Commerce and the Karachi Chamber of Commerce and Industry supported normal trade relations with India, arguing that low transportation costs, low prices and cultural similarities would help expand business between the two countries.

In November 2011 Pakistan's cabinet finally approved granting of MFN to India but more than four years later it has not yet happened. Pakistan's businessmen say the decision would give them access to a larger market of over 1 billion while opening a relatively smaller market of 180 million people. That argument, however, has yet to find sufficient takers in Pakistan's all powerful military and the conservative pockets of civilian opinion. South Asia falls between the Middle East, Central Asia and East and South East Asia. The region has the potential to become one of the most integrated regions and could also be the crossroads of trade, commerce, energy and transportation throughout Asia.

However, the notion that India and Pakistan need to resolve their conflicts before they can have normal relations is holding up regional integration. But will the two countries now agree to normalise relations as a means of solving disputes? The future of South Asia hinges on the answer to that question.
 
(The writer is the director for South and Central Asia at the Hudson Institute in Washington D.C. was Pakistan's Ambassador to the United States from 2008-11. His latest book is ‘Magnificent Delusions-Pakistan, the United States and an Epic History of Misunderstand-ing.’)