On January 1, 2025, the Maldives finally implemented its Free Trade Agreement (FTA) with China after it was signed seven years ago. The opposition was then highly critical of the agreement, as it was passed through parliament without much debate. India expressed concerns, fearing that the FTA would allow Chinese goods into Indian markets. While China continues its talks with Bangladesh and Sri Lanka on similar agreements, India needs a coherent economic strategy to engage with its neighbors.
South Asian countries, which have embraced economic nationalism and protectionist policies, have cautiously opened their economies to regional trade. The India-Sri Lanka Free Trade Agreement (ISFTA) was implemented in 2000, followed by the South Asia Free Trade Agreement (SAFTA) in 2006. Factors such as protectionism, comparable manufacturing bases, para-tariffs, non-tariff barriers, inadequate infrastructure, high logistics costs and political distrust have limited the effectiveness of these agreements. Other regional initiatives, such as the BIMSTEC Free Trade Agreement, have also been postponed, dragging out negotiations for years. As a result, South Asia remains one of the least connected regions in the world, with regional trade accounting for less than 5% of global trade.
China is competing for influence
China, on the other hand, has emerged as a major trading partner in the region, competing with India's traditional economic influence. China signed a free trade agreement with Pakistan in 2006 and over time has increased investment and trade ties with India's smaller neighbors, becoming one of their most important trading partners. Well-established supply chains, discrete manufacturing bases, manufacturing capabilities and cheap goods have enabled China's economic expansion, in line with its geopolitical and geo-economic ambitions. After launching the Belt and Road Initiative (BRI), China offered to sign free trade agreements with the Maldives, Sri Lanka and Bangladesh. For Beijing, these agreements would help promote cheaper exports, accelerate BRI projects and create economic leverage.
There is a growing demand among South Asian countries to expand economic engagement to address structural problems. They see free trade agreements as an opportunity to gain access to cheap goods, reduce import costs, boost exports and local production and ease pressure on foreign reserves. For example, the Maldives has limited production capacity, faces rising import costs and low foreign reserves. Bangladesh will leave its least developed country status by 2026, which will result in the loss of preferential access to global markets. After experiencing an economic crisis, Sri Lanka is also keen to expand its economic activities, seeing it as essential to its recovery. Bangladesh and Sri Lanka are negotiating free trade agreements with China and have expressed interest in joining the China-led Regional Comprehensive Economic Partnership (RCEP).
India must use the momentum
These countries have also shown a strong interest in deeper economic integration with India, hoping to benefit from the country's economic growth and rise. In recent years, South Asia has seen a surge in land, maritime, waterways, air and border infrastructure, as well as trade. For example, the Maldives and Bangladesh are keen to negotiate a free trade agreement with India, while Sri Lanka plans to upgrade its existing free trade agreement to an Economic and Technological Cooperation Agreement (ETCA). For its part, India views these FTAs and connectivity efforts as a means to increase its economic interdependence with its neighbors. India is currently working on more than a hundred connectivity projects in the region, some of which are financed through concessional loans and grants.
However, India remains concerned about Chinese FTAs in the region. India fears that Chinese imports will flood South Asian markets, undermine local economies and eventually replace Indian exports. Over the past two decades, India and China have been the largest exporters to the Maldives, Sri Lanka and Bangladesh, with trade steadily increasing. Between 2010 and 2022, Indian exports to Sri Lanka grew from $2.5 to $4.6 billion, to the Maldives from $126 million to $485 million, and to Bangladesh from $3.5 to $9.4 billion. However, this growth pales in comparison to the significant increase in Chinese exports to Sri Lanka ($1.2 billion to $3.5 billion), the Maldives (less than $60 million to $562 million) and Bangladesh (from $5.3 billion to $17 .8 billion). This trend may further strengthen with the implementation of the FTA with China.
Let go of skepticism
Neither India nor China are among the top five export destinations for the Maldives and Bangladesh. This status quo could change if the FTAs with China are implemented. India also fears that if these FTAs are signed, cheap Chinese raw materials could enter India through its connectivity projects and FTAs with neighboring countries. This skepticism has led India to halt negotiations on the FTA with Bangladesh.
India's concerns over Chinese FTAs appear to have come full circle. At a time when countries are eager to expand their economic activities, India must capitalize on this momentum. New Delhi must realize that it can only counter China's economic progress in its neighbors by proactively engaging its neighbors. Instead of suspending free trade agreements, India should speed up negotiations, reduce protectionist measures and open its markets to smaller countries. India's strategy should focus on preventing Chinese goods from flooding its markets while improving connectivity and trade with its neighbors.
(The author is an Associate Fellow, Neighborhood Studies, Observer Research Foundation)
Disclaimer: These are the personal opinions of the author