The 13th Summit of SAARC (South Asia Association of Regional Cooperation) in Dhaka was a milestone in its over two decades of uneventful history. It took two groundbreaking decisions. One, it decided to admit Afghanistan as its eighth permanent member, and China and Japan as ‘observers’. Two, it declared to set up a Free Trade Area (FTA) by January 2006. The Free Trade Agreement was signed during the Islamabad summit of January 2004.

FTA for economic growth

The region is home to world’s one-fifth population, some of them among the poorest of the world. The summit that has dedicated the next decade to poverty reduction in the region has sought to employ FTA to achieve the goal. The then Sri Lankan President Chandrika Kumaratunga mentioned in her speech, “I sincerely hope that the South Asia Free Trade Area (SAFTA) comes up from January 01, 2006.” “It will represent only a modest beginning of our goal of a regional economic union,” said Indian Prime Minister Dr. Manmohan Singh in his speech.

On the face of it, FTA by January 2006 looks like good news as it promises to open the markets of seven developing countries to each other, bolstering regional trade, and firing economic growth. However, there are a number of issues to be settled for the FTA to take off. Serious differences over issues such as tariff cuts, mechanism to compensate poorer members for loss of revenue, or protection to certain industries have not yet been completely addressed. This raises doubts over the FTA’s success.

There is another dimension to free trade in the region. India, Pakistan, Bangladesh, Sri Lanka, Nepal, Bhutan, and the Maldives—all constituents of SAARC—currently export pretty much the same types of goods. The region’s biggest players compete to export textiles, garments, and agricultural commodities like tea, coffee, and sugar to other parts of the world. SAARC’s bigger players look to the United States, which takes nearly a quarter of all exports from India and Sri Lanka.

Yet another reason for a likely poor response to FTA in the region is the low level of business among the member countries. Intra-regional trade in SAARC forms a paltry 5 percent of the total trade by SAARC nations. By contrast, European Union (EU) members do 60 percent of their trade with each other. The neighbouring Association of South East Asian Nations for instance is busily founding the world’s largest common market with China and Japan—a powerful incentive for SAARC to make its own zone work.

On the other side, Pakistan has linked FTA to the resolution of Kashmir issue; other countries too have their apprehensions. Tension between India and Pakistan, regional economic heavyweights who have long standing dispute over Kashmir, has played a big role in stalling regional trade. Clearly, a lot of hard talk is needed for the FTA to succeed in this region.

India already has free trade agreement with Sri Lanka and China, and uses the growth in its bilateral trade with these nations to push for FTA in SAARC. The bilateral trade between India and China jumped seven-fold since the agreement, which is still less than five years old. Two-way trade between India and Sri Lanka has increased one-and-a-half-times since they signed the bilateral free trade pact two years back.

Dr. Manmohan Singh, in his opening speech at the 13th summit, expressed the hope that South Asian countries would “provide each other with transit facilities, not only to connect one another, but also to link up with the larger Asian neighbourhood, the Gulf, Central Asia and South-east Asia”. The FTA comes at a time when most economies in the region are strengthening and trade balances are improving, making them well placed to take advantage of new markets.

But, doubts still remain with regard to participation of all member countries, with regard to market demands and product diversity in the region, and about cooperation among members. Its success will decide if the region’s squabling partners can bury their political hatchets for business for people.

Inclusion of Afghanistan, China and Japan

Inclusion of China and Japan as ‘dialogue partners’ or ‘observers’ is hoped to give new dimension to SAARC in its third decade. Whereas Afghanistan’s full-fledged membership was moved by India, Pakistan had proposed China’s name initially either as an ‘observer’ or as a ‘dialogue partner’. The exact modalities of their roles are to be finalized in the ministerial meeting of the group in July 2006.

In fact Nepal, Pakistan, and Bangladesh have been pressing for inclusion of China as a permanent member. The issue was proposed by Pakistan on the pretext that giving Beijing such a status would enhance SAARC’s profile and influence internationally, while the covert reason must have been bringing in China as a counter-weight in the organization to neutralize Indian domination. China too has been eager to interact with the grouping. India, though, has been trying to delay the inevitable. There is an unspoken apprehension in New Delhi’s power corridor about China’s inclusion.

Despite India’s discomfiture on the issue, given its perceived policy of blocking China’s keenness to nose its way into the sub-continent’s affairs, New Delhi backed it. The move was said to be aimed at avoiding a misunderstanding with the Chinese, which might fall in the interest of other regional players, and maintaining Sino-Indian economic cooperation that has grown in recent years.

Japan and Germany, besides China, had also indicated their desire to have a formal relationship with SAARC. India managed to get Japan ‘observer’ status despite the country being geographically distant from the region. China, in contrast, shares borders with four South Asian nations. In comparision, Afghanistan shares its borders with only one SAARC member—Pakistan. Japan’s main claim for ‘observer’ status is its role as the biggest provider of aid to the region.

Japan’s entry in the SAARC club can, thus, be seen as India’s way to counter balance China’s entry. Some observers of South Asia, nonetheless, portray China’s inclusion as a setback to Indian diplomacy. The fear in New Delhi’s power corridors is that the smaller neighbours would gang up against the “big brother”, with encouragement from China. Also not to be underestimated is the bonhomie between China and Pakistan, and India’s territorial disputes with both of them.

From the point of view of economic growth, Chinese interaction with SAARC can give a fillip to the region’s economy. The Indian and Chinese economies are amongst the fastest-growing in the world. China’s foreign ministry officials have said that their government is ready to work together with the governments of all South Asian states “to promote the cause of peace and development in the region.”

Pakistani Prime Minister Shaukat Aziz said that Pakistan would try to convince other members to accord China full membership. Chandrika Kumaratunga, in her speech at the opening ceremony, also came out in support of China’s greater involvement in the SAARC process. As SAARC enters the third decade with some new and powerful stakeholders who are likely to provide some impetus to the organization motto, it will be watched for its contribution to the region’s economic growth.

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