In the year so far there were two major incidents that shook India’s economic and national security landscape: the reciprocal tariffs imposed by the Trump administration and the terror attack in Pahalgam. While these events may seem unrelated, their underlying causes and consequences are deeply interlinked, highlighting the urgent need for a comprehensive regional approach to security and economic stability. Economic and national security are often discussed separately, but they are deeply intertwined.
Border disputes among South Asian nations significantly hamper trade and economic cooperation, preventing the region from achieving its full potential. Economic instability fuels unrest, while security threats disrupt trade and investment. No country can achieve lasting security without economic prosperity, and vice versa.
One of the least integrated
The South Asian region is one of the least economically integrated regions in the world. Intraregional trade of South Asia (South Asian Free Trade Area or SAFTA) accounts for barely 5% to 7% of its total international trade, which is the lowest when compared to other trading blocs. In contrast, intraregional trade accounts for approximately 45% of total international trade within the European Union (EU), 22% within the Association of Southeast Asian Nations (ASEAN), and around 25% within the North American Free Trade Agreement (NAFTA).
Current trade among South Asian Association for Regional Cooperation (SAARC) countries is just around $23 billion, far below the estimated $67 billion. According to a United Nations Economic and Social Commission for Asia and the Pacific (UNESCAP) study, South Asia’s potential trade could have reached $172 billion by 2020, which means over 86% of its capacity remains unexploited. Even if we consider this assessment to be optimistic, the immense potential for significantly increasing intra-SAARC trade can never be denied. South Asia, the most populous region of the world (25% of the world’s population), represents a combined market of only $5 trillion in GDP. On the other side, the EU, with 5.8% of the world’s population, accounts for $18 trillion in GDP, and NAFTA has a GDP of $24.8 trillion. This clearly shows the underexploited capacity of the South Asian region.
There is much potential
As estimated by the UNESCAP South Asia Gravity Model of intraregional trade, in spite of trade liberalisation under SAFTA, intraregional trade in South Asia is less than a third of its potential. Bangladesh has the highest unexploited proportion, at 93%, followed by the Maldives (88%), Pakistan (86%), Afghanistan (83%), and Nepal (76%). Because of terror insurgencies and border disputes, trade between India and Pakistan has seen a significant decline over the years. Bilateral trade between India and Pakistan fell from $2.41 billion in 2018 to $1.2 billion in 2024. Further, Pakistani exports to India fell from $547.5 million in 2019 to just $480,000 in 2024.
South Asia’s trade-to-GDP ratio decreased from 47.30% in 2022 to 42.94% in 2024. Additionally, the World Bank reported a softened growth forecast of 5.8% for 2025, down from 6% in 2024. As imports have grown faster than exports for all South Asian countries, the trade deficit of the subregion has widened from $204.1 billion in 2015 to $339 billion in 2022. However, the value of overall trade, covering both exports and imports, increased significantly between 2015-22 to approximately $1,335 billion.
Despite SAFTA, trading with neighbours is not ‘free’. The inefficient trade governing mechanism and an unpromising political environment increase the cost of intraregional trade, which is one of the major reasons for significantly smaller intra-regional trade. Costs of trading within South Asia remain high at 114% of the value of the goods being exported, making trading with neighbouring nations more expensive or less competitive, compared to trading with distant partners.
For instance, South Asia’s bilateral trade cost with the U.S. is only 109% despite the vastly greater distance. It is about 20% more costly for a company in India to trade with Pakistan than with Brazil, which is 22 times farther away. This discourages the formation of regional value chains despite the geographic contiguity. In contrast, intraregional trade costs for ASEAN are some 40% lower than intra-SAARC trade costs, at 76%, creating high incentives for interdependence in that bloc.
The main hurdles
The low level of intraregional trade in South Asia demonstrates the absence of strategic policies. SAFTA and other regional agreements have the potential to create greater economic linkages. Besides, over two-thirds of the potential of intraregional trade in goods, the potential of trade in services, and investments in South Asia remain untapped. To this end, greater regional cooperation could facilitate the development of complementary and mutually beneficial export sectors by focusing on lowering trade barriers.
SAARC had the aim of ending distrust and tension, but trust deficits and regional conflicts hinder the full implementation of agreements such as SAFTA. Political diversity, regional disputes, minority issues and terrorism are major obstacles to regional cooperation. Most SAARC countries are in conflict with each other, preventing effective regional integration. Lesser trade opportunity means lesser capacity for innovation, production and investment in the people of the country. Therefore, to exploit the full potential of the South Asian region, members must work actively to enhance intra-regional trade, keeping aside their bilateral conflicts.
Shashank Patel is a scholar of international trade law at the South Asian University (SAU), New Delhi
Published – June 24, 2025 12:08 am IST