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India lags China in South Asian trade despite Free Trade Agreements

In the last two decades, China has established itself as a major trade partner of South Asian countries. Beyond Pakistan, China entered Bangladesh as the top trading partner of South Asia in 2015 and strengthened trade and investment with Nepal, Afghanistan, Maldives and Sri Lanka. This primarily reflects the region’s strategic importance to China’s Belt and Road Initiative (BRI).

As of 2005, India and China were close to their total trade volume with South Asia. However, after 2005, China continued to expand its business, with a slight decline in South Asia in 2009 due to the continuing global financial crisis. In 2014, China’s trade reached an all-time high of $ 60.41 billion, while India traded around a third of the amount – $ 24.70 billion. Following the peak in 2014, the two countries saw trade declines with South Asia in 2015 and 2016.

China’s strong economic relations with Pakistan, in contrast to India’s minimal formal trade with its western neighbor, widen the differences in the trade versions of the two countries. Although China’s trade volume is consistently large, excluding Pakistan, the gap almost halves. This difference was attributed to the Sino-Pakistan Free Trade Agreement signed in 2006, which significantly increased trade between the two. The gap between India’s trade with the region is very small as Pakistan’s formal trade share is relatively small. Excluding Pakistan, the trade gap between India and China with South Asia is less than $ 12.87 billion in 2018.

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China’s trade with N8 neighbors is mainly export-driven, making it a top source of goods. Despite regional and bilateral free-trade agreements, India’s trade volume with its neighbors remains below the value of China, which has only one FTA in the region.

Sources: Riya Sinha and Naira Sarin for Brookings India; Excerpts from a policy brief published for the first time on Brookings India website

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