Delwar Hossain

The Politics of FTAs in South Asia 1
THE POLITICS OF FTAs IN SOUTH ASIA: TOWARDS

A NEW BILATERALISM OR NEW REGIONALISM?
Delwar Hossain*
Introduction
The world has been witnessing the global proliferation of bilateral
free trade agreements along side deepening regionalism in most parts of
the global economic system over the last decade. Both these trends
connect closely and give a new dimension to regional integration. When
SAARC was established in 1985, there was no provision for trade
cooperation among its member states. It took about a decade for the
South Asian countries to embark upon a preferential trading
arrangement (PTA) with the establishment of the SAARC Preferential
Trading Arrangement (SAPTA) in 1993. For the first time, the region
witnessed a mechanism to liberalize trade regimes on a preferential
basis. Ironically, this did not generate momentum for progress and
virtually it was stalled after several rounds of talks. However, since the
late 1990s South Asian countries have pursued an aggressive policy of
trade cooperation through free trade agreements (FTAs) within the
region and outside. So far South Asia has witnessed a dramatic rise of
FTA initiatives at three levels - regional, sub-regional and bilateral.
Different nations in South Asia have considered FTAs a critical
component of their trade policies. Particularly, India and Pakistan are
leading and often competing with each other in signing and negotiating
bilateral FTAs in the region and beyond. This rise of FTAs is an integral
part of understanding new regionalism process in South Asia. In this
context, it is worthwhile to deal with some key questions. Why do the
South Asian countries become interested about FTAs? How have FTAs
been featured in South Asian trade cooperation? To what extent has this
region progressed in trade cooperation? What are the consequences of
bilateral FTAs for regionalism in South Asia? Is it leading to new
economic bilateralism? These are the pertinent questions to be addressed
in this paper in order to understand the directions of South Asian
regional economic cooperation.
* Delwar Hossain, PhD. is Associate Professor of International Relations, University

of Dhaka.
2 Journal of International Affairs, Vol.11, Nos. 1 & 2, June & December 2007
Benefits and Dangers of PTAs/FTAs

South Asia’s shift towards the market economy since the early 1990s
under conditions of globalization has created the necessary environment for
trade cooperation in the region. Regional trade liberalization is seen as an
important step to generate a significant increase in intra-regional trade and
cross-border investment. The importance of an open trade environment in
explaining economic growth performance has been demonstrated in a variety
of studies covering both developed and developing countries (see the figure 1).
One conclusion to emerge from the literature is that openness to trade is
associated with higher rates of growth, or, conversely, that a lack of openness
to trade is correlated with poor growth performance (Dollar 1992; Krueger
1978; Krugman 1986; Edwards 1993; Harrison 1996). International trade
facilitates technology transfers, the exchange of information, and opportunities
to realize economies of scale, and trade agreements provide greater certainty
for trade policy generally especially in countries which have a history of
reversing moves towards high protectionism and subsequently towards
unilateral liberalization. As all of this reduces the risks of – or raises the returns
to – investment, greater volumes of investment provide one of the reasons for
the observed positive relationship between openness to trade and growth.
Undeniably, a more liberal trade policy does not explain everything about a
country’s economic growth rate. There are a variety of other important
explanatory factors like human capital, the type of investment undertaken,
political instability, the presence or absence of market distortions, diversification
away from a dependence on primary exports, and location.
Dynamics of Gains from
Free Trade
Dismantling barriers creates New investment flows

new investment opportunities increase export opportunities
but incurs adjustment and job and new scale and economies
loss for low-valued sectors through specialization.
Trade openness Countries Trade Increased productivity

requires new everywhere have liberalization and new
market to join a regional promises new competitiveness at the
discipline of trade bloc macro efficiencies firm and sector levels
Governments in high value added
Figure-1: Expected Gains from FTA Initiatives.

Source: Daniel Drache (2000).
The Politics of FTAs in South Asia 3
In South Asia, inter-state and intrastate conflicts, political and

economic instability, and deficient public service provision have also
been found to correlate negatively with growth. It is strongly believed
that regional trade liberalization through FTAs/PTAs form convergence
clubs and thus contributes to regional integration. With such
convergence clubs the poorer members can reap some of the gains from
trade via larger markets and improved efficiency, without exposure to
non-regional competition. In this process, they can catch up with richer
ones through the process of trade. It has been argued that all countries
which are open and integrated in the world economy are, in fact,
members of a convergence club (Sachs and Warner 1995: 41). Since the
conclusion of the 12th SAARC Summit in 2004 in Islamabad, South
Asia has started envisioning a South Asian Economic Union.
While these potential benefits provide incentives to advance with the
idea of FTAs/PTAs, it has also negative implications. According to
Panagriya, PTAs can have adverse impact on the outside countries and the
multilateral-trading system through five major channels: (i) terms of trade;
(ii) increased extra-union protection; (iii) fragmentation of the trading
system through what Bhagwati calls the spaghetti-bowl effect; (iv) the
stumbling blocks effect on multilateral liberalization; and (v) proliferation
of non-trade issues (2005). Bhagwati is particularly concerned about the
spaghetti-bowl effects with hundreds of different rules, "crisscrossing
preferences," and a "maze of discriminations"(Bhagwati 1995). The FTAs
are blamed to be an obstacle to global trading regime and a cause to trade
diversion. Hence, the rise of free trade does not automatically lead to
benefits for the region. It depends on a good mix of policies and how they
are pursued in real life situations.
South Asian Free Trade Agreement (SAFTA)
The major initiative for trade cooperation at multilateral level comes
through the establishment of the SAFTA. The ultimate aim of SAFTA is
to put in place a full-fledged South Asian Economic Union on the lines
of EU, however ambitious it might look. The signing of SAFTA was
dubbed a ‘milestone’ or a ‘historic’ event in the history of regional
economic cooperation in this region (Dawn, Karachi, 19 January 2004).
It becomes operational on July 1, 2006, upon the completion of 12
rounds of negotiations on Sensitive Lists, Rules of Origin, Revenue Loss
Compensation Mechanism for LDCs and technical assistance for the

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The Politics of FTAs in South Asia 1

THE POLITICS OF FTAs IN SOUTH ASIA: TOWARDS

* Delwar Hossain, PhD. is Associate Professor of International Relations, University

Benefits and Dangers of PTAs/FTAs

Dismantling barriers creates New investment flows

Trade openness Countries Trade Increased productivity

Figure-1: Expected Gains from FTA Initiatives.

In South Asia, inter-state and intrastate conflicts, political and

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