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 the South Asian nations. Beyond Pakistan, China has made inroads into South Asia by becoming Bangladesh’s top trading partner in 2015, and bolstering trade and investment with Nepal, Afghanistan, the Maldives, and Sri Lanka. This mainly reflects the region’s strategic importance for China’s Belt and Road Initiative (BRI).

Until 2005, India and China were close in their overall trade volume with South Asia. However, after 2005, China consistently increased its trade with South Asia, barring a slight dip in 2009 because of the global financial crisis. In 2014, China’s trade reached a high of $60.41 billion, whereas India traded approximately a third of the amount — $24.70 billion. Following the peak in 2014, both countries saw a decline in trade with South Asia in 2015 and 2016.

China’s strong economic ties with Pakistan, as opposed to India’s minimal formal trade with its western neighbour, increases the gap in both countries’ trade volumes. Though China’s trade volume is consistently larger, excluding Pakistan, the gap narrows to almost a half. This gap is attributed to the China–Pakistan Free Trade Agreement signed in 2006, which increased trade significantly between the two. The corresponding gap between India’s trade with the region is much less because Pakistan’s formal trade share is relatively small. Barring Pakistan, the gap between India’s and China’s trade with South Asia in 2018 is relatively low at $ 12.87 billion.

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

Source: Riya Sinha and Niara Sareen for Brookings India; excerpts from a policy brief first published on Brookings India’s website