1. Introduction

The growth of regional trade blocs has been one of the major developments in

international relations in recent years. Virtually all countries are members of a bloc, and

many belong to more than one. Regional agreements vary widely, but all have the

objective of reducing barriers to trade between member countries. At their simplest, these

agreements merely remove tariffs on intra-bloc trade in goods, but many go beyond that

to cover non-tariff barriers and to extend liberalization to investment and other policies.

At their deepest, they have the goal of economic union and involve the construction of

shared executive, judicial, and legislative institutions.

The success of states in today’s world is not so much measured in terms of capacity

for defending borders or creating uniquely national institutions, but in terms of ability to

adapt to regional and global trends, promote exports, attract investments, and skilled

labour, provide a beneficial environment for transnational companies, build attractive

institutions of research and higher learning, manage political influence on the regional

and global scene, and also brand the nation in the international market-place.

There are many regional organizations and economic unions like Europe Union, not

only in western this has grown in different parts of the world. This includes South Asia

and the regional organization known as SAARC, which has announced the goal of

attaining an economic union and expressed the desire for a common currency. And in this

report you can find information on this regional group.

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2. Historical development of the region

The idea of a South Asian Association for Regional Cooperation was arise in 1980.

The foreign Ministers of the future SAARC countries met at Colombo in 1981 to discuss

the issue of regional cooperation and agreed upon the principles of unanimity in decision

making and keeping bilateral disputes out of the framework of regional cooperation. The

Integrated Programme of Action (IPA) was endorsed in a Foreign Secretary meeting held

at Dhaka in August 1982.

The IPA identified eleven areas of cooperation – agriculture, communications,

education-culture-sports, environment and meteorology, health and population activities,

prevention of drug trafficking and drug abuse, rural development, science and technology,

tourism, transport, and women in development. To translate the objectives enshrined in

the Charter the Foreign Ministers of member countries met in Colombo for the first

Preparatory meeting of SAARC. They agreed on the agenda for SAARC, which included

issues like rural development, agriculture, meteorology, telecommunication, health and

population, science and technology, transport, and posts & telegraph services.

The third meeting held in Thimpu agreed on sports, arts and culture, and planning and

development, which were incorporated into the list of areas for cooperation. The Thimpu

meeting also led to agreement on the creation of an institutional framework for SAARC

and decided the venue and the dates of the first SAARC summit. After these three

preparatory and first meeting of the SAARC summit was held in Dhaka in 1985.

South Asian Association for Regional Cooperation (SAARC) is an economic and

political organization of South Asian Nation. It was established on 8 December 1985 and

has the Afghanistan, Bangladesh, Bhutan, India, Maldives, Nepal, Pakistan, and Sri

Lanka as its members. And also Australia, China, European Union, Iran, Japan,

Mauritius, Myanmar, South Korea and United states are 9 observers’ membership

countries. There are Three Potential future members China, Myanmar and Russia.

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China has expressed interest in upgrading its status from an observer to a full member

of SAARC. Supported by Pakistan, Bangladesh, Nepal, Maldives and Sri Lanka.

Mynnmar has expressed interest in upgrading its status from an observer to a full

member of SAARC.

Russia has expressed interest in becoming an observer of SAARC. Supported by

India.

Hardly anyone would claim that SAARC is going well in every respect, and it’s true

that tangible results are few and far between. But there have been successes: over the last

25 years, despite extremely difficult political circumstances, SAARC has managed to

create situations, institutions and forums where Heads of State have had to shake each

others’ hands and go into talks together. SAARC has tackled important topics for the

region such as a social charter, development agreements and even the sensitive subject of

fighting terrorism and has achieved some good results. The food and development banks

are important steps in the right direction. Exchanges in the areas of civil society and

science have become one of the pillars of South Asian integration efforts.

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3. Objectives of SAARC

The South Asian Association for Regional Cooperation (SAARC) comprising

Bangladesh, Bhutan, India, the Maldives, Nepal, Pakistan and Sri Lanka is a dynamic

institutionalized regional cooperation in South Asia, basically perceived as an economic

grouping to work together for accelerating the pace of socio-economic and cultural

development.

The objectives of the association as defined in the SAARC Charter are:

To promote and strengthen collective self-reliance among the countries of South

Asia;

To contribute to develop mutual trust, understanding and appreciation of one

another’s problem;

To promote active collaboration and mutual assistance in the economic, social,

cultural, technical and scientific fields;

To strengthen cooperation with other developing countries;

To strengthen cooperation among themselves in international forums on matters of

common interest; and

To cooperate with international and regional organizations with similar aims and

purposes.

Cooperation in the SAARC is based on respect for the principles of sovereign equality,

territorial integrity, political independence, noninterference in internal affairs of the

member states and mutual benefit.

However, it is true that most of the programmes and achievements of SAARC exist on

paper. The much talked about SAARC Food Security Reserve could not be utilized to

meet the needs of Bangladesh during its worst natural disaster in 1991. It is also true that

most SAARC activities are confined to the holding of seminars, workshops, and short

training programmes. These activities may be useful, but they do not address priority

areas and lack visibility and regional focus so essential for evolving a South Asian

identity. Most importantly, SAARC suffers from an acute resource crunch. Unless the

organization is successful in mobilizing funds and technical know-how from outside

sources, most of its projects cannot be implemented and, thus, its relevance will remain

limited.

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4. Progress of the trade block

Cooperation in the core economic areas amongst Member Countries was initiated

following the completion of the Study on Trade, Manufactures and Services (TMS) in

June 1991. Among other things, the TMS Study recognized economic cooperation as an

imperative for promoting all-round development of South Asia.

Following are the main economic agenda of the SAARC.

a. SAARC Preferential Trading Agreement (SAPTA)

In December 1991, the Sixth Summit held in Colombo approved the establishment of

an Inter-Governmental Group (IGG) to formulate an agreement to establish a SAARC

Preferential Trading Arrangement (SAPTA) by 1997. Given the common consent within

SAARC, the Agreement on SAPTA was signed on 11 April 1993 and entered into force

on 7 December 1995 well in advance of the date contracted by the Colombo Summit. The

Agreement reflected the desire of the Member States to promote and sustain mutual trade

and economic cooperation within the SAARC region through the exchange of

acknowledgment.

The basic principles underlying SAPTA are:

a) Overall reciprocity and mutuality of advantages so as to benefit equitably all

Contracting States, taking into account their respective level of economic and

industrial development, the pattern of their external trade, and trade and tariff

policies and systems;

b) Negotiation of tariff reform step by step, improved and extended in successive

stages through periodic reviews;

c) Recognition of the special needs of the Least Developed Contracting States and

agreement on concrete preferential measures in their favour; and

d) Inclusion of all products, manufactures and commodities in their raw, semi-

processed and processed forms.

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b. South Asian Free Trade Area (SAFTA)

SAPTA was imagine primarily as the first step towards the transition to a South

Asian Free Trade Area (SAFTA) leading subsequently towards a Customs Union,

Common Market and Economic Union. In 1995, the Sixteenth session of the Council of

Ministers agreed on the need to strive for the realization of SAFTA and to this end an

Inter-Governmental Expert Group (IGEG) was set up in 1996 to identify the necessary

steps for progressing to a free trade area. The Tenth SAARC Summit decided to set up a

Committee of Experts (COE) to draft a comprehensive treaty framework for creating a

free trade area within the region, taking into consideration the asymmetries in

development within the region and aspect in mind the need to fix realistic and achievable

targets.

The Agreement on SAFTA, drafted by the COE, was signed on 6 January 2004

during the twelfth SAARC Summit in Islamabad. The Agreement entered into force on 1

January 2006.

Under the Trade Liberalization Programme scheduled for completion in ten years

by 2016, the customs duties on products from the region will be progressively reduced.

However, under an early harvest programme for the Least Developed Member States,

India, Pakistan and Sri Lanka are to bring down their customs duties to 0-5 % by 1

January 2009 for the products from such Member States. The Least Developed Member

States are expected to benefit from additional measures under the special and differential

treatment accorded to them under the Agreement.

c. South Asian Economic Union

The Eleventh Summit provided further impulsion to the regional economic

cooperation to give effect to the shared aspirations for a more prosperous South Asia. At

the Summit, the Leaders agreed to advance cooperation in the core areas of trade, finance

and investment to realize the goal of an integrated South Asian economy in a step-by-step

manner. They also agreed to the vision of a development and planned process eventually

leading to a South Asian Economic Union. At the Twelfth SAARC Summit the SAARC

FINANCE was given the responsibility to study and make recommendations on the early

and overall realization of a South Asian Economic Union (SAEU). It was also tasked with

examining the concept of a South Asian Development Bank.

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5. Impact to the global trade

Trend in SAARC’s global trade as also intra-SAARC trade in recent years are

presented in this chapter. Further, trade developments in each SAARC member countries

as also developments in SAARC trade integration are also presented in the chapter.

During the period 2000 to 2006, the total exports of SAARC countries increased from

US$ 63.5 billion to US$ 161.4 billion. The growth rate of exports also increased from

3.9% in 2001 to 23.9% in 2006. Among all the member countries, India is the largest

exporter followed by Pakistan and Bangladesh.

Table 5.1 presents the trend in SAARC’s global exports. The total global imports of

SAARC countries also increased from US$ 79.5 billion in 2000 to US$ 255.3 billion in

2006, registering more than a three-fold rise during the period.

India is the largest importer in the SAARC region followed by Pakistan and

Bangladesh. Thus, data on exports and imports reveal that SAARC as a trade bloc

experienced trade deficit of US$ 93.9 billion with the world in 2006. Table 5.2 presents

the trend in SAARC’s global imports.

Table 5.1:SAARC’S GLOBAL EXPORTS DURING 2000-2006 (US$ billions)

CountriesYear

2000 2001 2002 2003 2004 2005 2006

Afghanistan 0.1 0.1 0.1 0.2 0.2 0.2 0.3

Bangladesh 5.6 5.7 5.4 6.2 7.6 8.5 12.7

Bhutan 0.10 0.1 0.1 0.1 0.2 0.3 -

India 42.6 45.2 50.5 61.1 75.4 97.9 122.7

Maldives 0.1 0.1 0.1 0.1 0.1 0.1 0.2

Nepal 0.7 0.8 0.6 0.6 0.7 0.8 0.8

Pakistan 8.9 9.2 9.9 11.9 13.3 16.0 17.2

Sri Lanka 5.5 4.7 4.7 5.1 5.8 6.4 7.5

Total63.5 66.0 71.4 85.4 103.2 130.3 161.4

- (3.9) (8.2) (19.6) (20.8) (26.3) (23.9)

SOURCE: Direction of Trade Statistics Year Book 2007, IMF.

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Table 5.2:SAARC’S GLOBAL IMPORTS DURING 2000-2006 (US$ billions)

CountriesYear

2000 2001 2002 2003 2004 2005 2006

Afghanistan 0.6 0.6 1.0 1.6 2.0 3.0 3.8

Bangladesh 9.0 9.0 7.8 9.8 11.6 13.9 17.8

Bhutan 0.2 0.2 0.2 0.2 0.4 0.4 -

India 50.3 59.0 58.9 74.0 99.8 134.7 185.0

Maldives 0.4 0.4 0.4 0.5 0.6 0.7 0.9

Nepal 1.6 1.6 1.4 1.6 1.8 2.0 2.4

Pakistan 10.7 10.2 11.2 13.0 17.8 25.4 33.8

Sri Lanka 6.7 5.7 6.0 6.7 8.0 8.9 11.6

Total79.5 86.7 87.1 107.4 142.0 189.90 255.3

– (9.1) (0.46) (23.3) (32.2) (33.01) (35.2)

SOURCE: Direction of Trade Statistics Year Book 2007, IMF.

Figure 5.1 draws the trend in intra-SAARC trade (exports plus imports), vis-a-vis

trend in SAARC’s global trade. A comparison of the trends would help to highlight the

floatability in intra-SAARC trade especially after 2003, as compared to SAARC’s global

trade.

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Figure 5.1

6. Challenges to the trade block

A growing emphasis on attracting foreign investment and seeking access to new

markets in SAARC states indicates that economic progress is central to the future of

South Asia. SAARC, however, is likely to play only a limited role in that future because

of India’s considerable position of power over the other SAARC states. This imbalance of

power within SAARC allows conflicts between India and its neighbors to undermine

organizational unity. Clashes between South Asian countries end up jeopardizing the

formation and effectiveness of regional trade agreements. They also lead individual

SAARC countries to advance their economic interests through bi-lateral agreements,

reduce the incentive to connect in multi-laterally.

Some factors that are discussed below are main challenges to the trade block,

Weak port and transport infrastructure: The poor port and transport infrastructure,

regulatory environment. Delays in transit due to road or port condition, and customs

procedures raise the costs for exporters.

Too small and too few with similar revealed comparative advantage: The South

Asian region comprises of only eight countries compared to more than twenty in East

Asia and Latin America, coupled with the dominance of a large country namely India,

which tends to trade less as a share of GDP.

Difficult business environment: Besides the high levels of protection in the region,

the procedural delays stemming from institutional requirements have been a major

factor inhibiting trade and business across borders.

Restrictive rules of origin and destination: Rules of origin in preferential or free

trade agreements help determine the products for tariff preferences but high tariff

barriers and tight rules of origin raises the risk of trade-diversion and the port-specific

restrictions have increased transactions costs of trading across border.

Fear of India: There is a real fear of de-industrialization in some sectors where

Indian manufactures could compete out domestic products in the smaller countries,

which are far less diversified than India. For example, in Pakistan where textiles and

clothing sector is considered to be the major driving force for economic growth, and

contributed more than 60% in total export value, a business section feels threatened

by the Indian imports.

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Different Inter & Intra State Conflicts in the region

1. Kashmir border conflict between India & Pakistan

2. India- Pakistan nuclear tension

3. India- Nepal trade disputes

4. India- Sri Lanka security issues

5. India-Bangladesh boarder conflicts

6. Pakistan-Afghanistan religious and sectarian disputes

7. Pakistan-Bangladesh disputes over nationalism

8. Punjab separatist movement (India)

9. Nagaland issue (India)

10. Sectarian violence ( Pakistan)

11. Balochistan and North-Western Frontier Province communal tension

12. Sri Lanka’s civil conflict

13. Maoist struggle in Nepal

14. Bangladesh – Chakma insurgency

15. Communal and religious tension in Afganistan

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