Editorial 2: The sorry state of South Asian economic integration

Context

Lack of trust and regional conflicts are stopping important trade agreements from being fully carried out.

Introduction

So far this year, two major events have shaken India’s economic and national security: the reciprocal tariffs by the Trump administration and the terror attack in Pahalgam. Though these events seem unrelated, their root causes and effects are closely connected. This shows the urgent need for a comprehensive regional strategy for both security and economic stability. Economic and national security are often treated separately, but they are strongly linked. Border disputes among South Asian countries greatly block trade and economic cooperation, stopping the region from reaching its full potential. Economic instability causes unrest, while security threats disrupt trade and investment. No country can have lasting security without economic growth, and the reverse is also true.

Economic Integration in South Asia: Key Facts and Comparisons

• South Asia is among the least economically integrated regions globally.
• Intraregional trade within South Asia (SAFTA) accounts for only 5% to 7% of total international trade.
• This percentage is lowest compared to other major trading blocs:
  • European Union (EU): ~45%
  • ASEAN: ~22%
  • NAFTA: ~25%
• Current trade among SAARC countries is around $23 billion, much lower than the estimated potential of $67 billion.
• A UNESCAP study estimated that South Asia's potential trade could have reached $172 billion by 2020, indicating that over 86% of trade capacity remains untapped.
• South Asia, with 25% of the world’s population, has a combined GDP of $5 trillion—much smaller compared to:
  • EU: $18 trillion (5.8% of world population)
  • NAFTA: $24.8 trillion

Intraregional Trade and GDP of Major Economic Blocs

South Asia Intraregional Trade: Challenges and Key Data

• Intraregional trade in South Asia remains less than a third of its potential, despite trade liberalization under SAFTA (according to the UNESCAP South Asia Gravity Model).
• Countries with highest unexploited trade potential:
  • Bangladesh: 93% unexploited
  • Maldives: 88%
  • Pakistan: 86%
  • Afghanistan: 83%
  • Nepal: 76%
• India-Pakistan trade has sharply declined due to terror insurgencies and border disputes:
  • Bilateral trade fell from $2.41 billion (2018) to $1.2 billion (2024).
  • Pakistani exports to India dropped from $547.5 million (2019) to just $480,000 (2024).
• South Asia’s trade-to-GDP ratio dropped from 47.30% (2022) to 42.94% (2024).
• The World Bank growth forecast for the region was reduced to 5.8% (2025) from 6% (2024).
• Imports have grown faster than exports, widening the trade deficit from $204.1 billion (2015) to $339 billion (2022).
• However, the total trade value (exports + imports) rose significantly from 2015 to 2022, reaching approximately $1,335 billion.

High Costs and Political Barriers

• Despite SAFTA, trading with neighbors is not truly free due to:
  • Inefficient trade mechanisms
  • Unstable political relations
  • High costs of intraregional trade (114% of the goods' value)
• For comparison:
  • Trade cost between South Asia and the U.S. is 109%, despite the longer distance.
  • Trading with Pakistan is 20% more expensive for India than trading with Brazil, which is 22 times farther.
  • High costs discourage regional value chains despite geographic closeness.
• ASEAN’s intraregional trade costs are 40% lower than SAARC’s, at 76%, encouraging greater economic interdependence.

The main hurdles

Conclusion

South Asia’s economic integration remains weak due to deep-rooted political conflicts, trust deficits, and high trade costs, despite significant untapped potential. The region’s low intraregional trade limits growth and stability, underscoring the urgent need for political reconciliation and stronger regional cooperation. Only by overcoming these barriers can South Asia fully harness its economic and security potential for lasting prosperity.