The South Asian Association for Regional Cooperation (SAARC), established in 1985, has long been at the center of discussions regarding economic integration in South Asia, aiming to facilitate regional trade, economic cooperation, and political stability among its eight member states: India, Pakistan, Bangladesh, Sri Lanka, Nepal, Bhutan, Maldives, and Afghanistan. Despite being home to nearly a quarter of the world’s population and having a combined GDP exceeding $4 trillion as of 2024, South Asia remains one of the least integrated regions in the world in terms of intra-regional trade, which accounts for only 5% of total trade activity among member states. This is a stark contrast to ASEAN (Association of Southeast Asian Nations), where intra-regional trade exceeds 25%, or the European Union, where the figure surpasses 60%.

The South Asian Free Trade Agreement (SAFTA), signed in 2004, was intended to reduce tariffs and trade barriers, increase economic connectivity, and create new opportunities for cross-border investments. However, despite reducing tariffs on thousands of products, the region has struggled with political tensions, infrastructure limitations, non-tariff barriers, and regulatory inefficiencies that continue to hinder trade integration. India, the region’s largest economy, accounts for over 80% of South Asia’s GDP, but its trade with neighboring countries remains limited compared to its economic ties with nations outside the region.

By 2024, total trade within South Asia stands at just $80 billion, whereas India alone trades over $120 billion annually with China and $100 billion with the European Union. The persistent low levels of trade within SAARC nations raise critical questions about whether deeper economic integration is possible, what benefits regional trade could bring, and how existing challenges can be addressed to unlock economic potential. This case study explores the advantages and disadvantages of the South Asian trade bloc, the barriers to economic cooperation, and the future of trade relations in the region.

The Economic Advantages of a Stronger South Asian Trade Bloc

One of the biggest potential benefits of deepening trade integration within South Asia lies in boosting economic growth, industrial development, and employment opportunities. If trade barriers were removed, logistics improved, and political tensions reduced, analysts estimate that intra-regional trade could increase threefold, reaching over $250 billion annually. Given that over 500 million people in the region still live in poverty, expanding trade could lead to higher wages, stronger supply chains, and new investment in underdeveloped sectors.

A stronger trade bloc would allow South Asian countries to specialize in industries where they have a comparative advantage, increasing export diversification and economic efficiency. Bangladesh, for example, has a thriving textile and garment industry, exporting over $50 billion worth of apparel in 2023, making it the world’s second-largest exporter of textiles after China. If regional trade barriers were lowered, Bangladesh could export more fabric, raw materials, and finished garments to neighboring markets such as India, Sri Lanka, and Nepal, reducing dependence on Western markets.

India, with its advanced technology and pharmaceutical sectors, could also expand its exports within the region. The Indian pharmaceutical industry, valued at $50 billion, is one of the largest producers of generic drugs globally, supplying over 20% of the world’s generic medicines. However, high tariffs and complex regulatory approval processes make it difficult for Indian pharmaceutical companies to export life-saving medicines to neighboring SAARC nations.

Infrastructure improvements could further enhance trade efficiency, lowering logistics costs and improving connectivity between key economic hubs. The cost of transporting goods within South Asia is currently one of the highest in the world, with trade costs between India and Bangladesh being 84% higher than those between India and Brazil, despite their geographical proximity. If major investment were directed toward railways, ports, and digital trade networks, South Asia could benefit from faster trade routes, increased investor confidence, and stronger economic resilience.

Barriers Hindering Regional Trade Growth in South Asia

Despite the theoretical benefits of increased trade, the South Asian trade bloc continues to face significant challenges that limit its effectiveness. The most pressing issue is political instability and historical tensions, particularly between India and Pakistan, the two largest economies in the region. Trade between these two nations has remained highly restricted, with bilateral trade standing at just $2 billion in 2023, despite estimates that normalizing relations could lead to $35 billion in annual trade. Border disputes, security concerns, and geopolitical rivalries have stalled progress on key trade agreements, making it difficult for SAARC to function as a cohesive economic bloc.

Non-tariff barriers, including complex customs procedures, differing product standards, and restrictions on foreign investments, also impede economic integration. While SAFTA reduced tariffs on thousands of goods, bureaucratic delays and excessive red tape at border crossings add significant costs and inefficiencies. For instance, it takes over 30 days to process trade shipments between India and Nepal, compared to just one week for similar shipments between India and Southeast Asia.

A further challenge is the lack of harmonized trade policies across South Asia, leading to inconsistent regulations and unpredictable economic conditions. Many industries face protectionist policies, including government subsidies and import restrictions, which limit competition and discourage private sector investment in regional trade partnerships.

Another pressing issue is insufficient cross-border energy cooperation, as energy demand in South Asia continues to rise. Countries like Nepal and Bhutan have vast hydropower resources, with Nepal alone having the potential to generate over 80,000 megawatts of hydroelectric power, yet limited energy trading agreements exist between South Asian nations. If cross-border energy trade were expanded, electricity shortages in countries such as India, Bangladesh, and Pakistan could be alleviated, reducing costs and improving energy security.

The Future of Trade in South Asia: Integration or Fragmentation?

As the global economy shifts toward regional trade alliances, South Asia faces critical decisions on whether to deepen economic integration or maintain the status quo. While trade liberalization could significantly boost economic development, current geopolitical realities make rapid progress unlikely.

One possible solution is expanding trade cooperation through sector-specific agreements, focusing on high-growth industries such as technology, agriculture, and renewable energy. Strengthening trade relations between non-conflicting SAARC nations, such as India and Bangladesh or Sri Lanka and Nepal, could serve as a model for broader regional integration in the long run.

Some analysts argue that South Asia should pivot toward stronger bilateral and multilateral trade agreements with other regions, rather than prioritizing SAARC-based economic policies. India, for example, has signed major trade agreements with the United Arab Emirates (UAE), Australia, and ASEAN nations, suggesting that it may focus more on external partnerships rather than regional economic cooperation.

Additionally, South Asia’s role in global supply chains is evolving, particularly with the rise of "China+1" manufacturing strategies, where businesses seek to reduce reliance on China by shifting production to India, Bangladesh, and Vietnam. If South Asia enhances its manufacturing base, improves ease of doing business, and strengthens digital trade networks, the region could become a more competitive global trade hub, reducing the urgency of intra-regional economic integration.

The success of South Asia’s trade bloc will ultimately depend on political will, regulatory harmonization, and private sector engagement. Whether SAARC evolves into a stronger economic force or remains a fragmented trade bloc will shape the region’s economic trajectory for decades to come.