Over the past decade, globalisation and Asia's impressive economic performance, driven mainly by strong GDP growth in China and India, have created an unprecedented environment for the growth of intra-regional trade. Pakistan and Bangladesh have also registered impressively high growth rates, accompanied by significant reduction in poverty levels in both countries. All countries of Southasia have attempted – and, in some cases, succeeded – in concluding free trade agreements (FTAs) with each other. Significantly, the Southasian Free Trade Agreement (SAFTA) also took effect last year. Southasia is the world's fastest-growing region; over the past decade, its GDP growth has exceeded 7.5 percent. The political environment for regional cooperation and integration has improved markedly, and is reflected in SAARC's Islamabad and Dhaka Summit declarations. In addition, political pronouncements by Southasian leaders, coupled particularly with events of the past year, have raised expectations that the region could finally, to borrow a term from cricket, 'go for a six'.
While such are the expectations based on realistic appreciation of economic and political trends, there is no doubt that for the moment the economic advance does not touch all, nor is the trade scenario very rosy. While Southasia accounts for 23 percent of the world's population, its share of global GDP is only around two percent. In 2005, Southasia's share in world trade was only 1.5 percent, one quarter of Southeast Asia's share. Exports of goods and services accounted for only 19 percent of the region's GDP in 2005. Of this, only 6.7 percent was due to services, while the services sector as a whole accounted for more than half of Southasia's GDP. Foreign direct investment (FDI), meanwhile, is still only one percent of region-wide GDP.
Trade and investment flows have played a crucial role in the economic integration of other regions of the world, and they have the potential to do the same in Southasia. The realities on the ground with respect to trade among the region's neighbours are, however, still sobering; left to themselves, they could continue to deter regional economic integration. In terms of intra-regional trade and investment in goods and services, Southasia lags far behind other regions. Intra-regional trade here amounts to only 4.9 percent of total trade, compared to almost 24 percent in Southeast Asia. The ratification of SAFTA on 1 January 2006 did mark an important milestone for the SAARC organisation, and it stipulates that SAARC will reduce customs tariffs on goods to 0-5 percent by 2016. However, that the trajectory tariff concessions would take could not be agreed upon ahead of the upcoming 14th Summit in Delhi on 3-4 April has had a dampening effect on the cheerleaders for SAFTA, and on the new 'spirit'. Notably, even after SAFTA takes full effect, a complex web of obstacles to trade in the form of non-tariff barriers will remain.
There have been several studies on the economic gains that would accrue from SAFTA. Most indicate significant advantages to both India and 'smaller' countries, particularly Bangladesh and Pakistan. However, there is much variation across studies in the magnitude predicted for these advantages. Furthermore, these SAFTA gains are not large in either absolute or relative (to total exports) terms, because most models used in the free-trade policy simulations are constrained by the existing parameters – the current small volume of trade among these countries. As such, any computation of the response of trade to rapid GDP growth and liberalisation based on these volumes would not do justice to the potential impact from SAFTA.