On January 1, 2025, the Maldives finally implemented its free trade agreement (FTA) with China after it came into force seven years ago. The agreement was then heavily criticized by the opposition because it was passed in Parliament without much debate. India expressed its concerns, fearing that the FTA would allow Chinese goods to enter Indian markets. As China continues its talks regarding similar agreements with Bangladesh and Sri Lanka, India needs a coherent economic strategy to engage with its neighbours.
South Asian countries, adopting 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 Asian Free Trade Agreement (SAFTA) in 2006. However, factors such as protectionism, similar production base, para-tariffs, non-tariff barriers, inadequate infrastructure, high logistics costs and political mistrust have limited the effectiveness of these agreements. Other regional initiatives such as the BIMSTEC free trade agreement have also been delayed and negotiations have dragged on 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 its global trade.
China is competing for influence
In contrast, China has emerged as a major trading partner in the region, competing with India’s traditional economic influence. China signed an FTA with Pakistan in 2006, and over time, it has increased investment and trade ties with India’s smaller neighbours, becoming one of their top trading partners. Well-established supply chains, specialized manufacturing bases, production capacity and cheap goods have facilitated China’s economic expansion, in line with its geopolitical and geo-economic ambitions. Following the launch of the Belt and Road Initiative (BRI), China offered to sign FTAs ​​with Maldives, Sri Lanka and Bangladesh. For Beijing, these agreements will help boost cheap exports, accelerate BRI projects and reap economic benefits.
In South Asian countries, there is a growing demand to expand economic activities to address structural issues. They see FTAs ​​as an opportunity to access cheaper goods, reduce import costs, promote exports and local manufacturing, and reduce pressure on foreign reserves. For example, the Maldives has limited production capacity, faces rising import costs and low foreign reserves. Bangladesh is set to exit its least developed country status in 2026, resulting in the loss of preferential access to global markets. Having faced an economic crisis, Sri Lanka is also keen to expand its economic activities, as it considers this vital to its recovery. Bangladesh and Sri Lanka are negotiating FTAs ​​with China and have expressed interest in joining the China-led Regional Comprehensive Economic Partnership (RCEP).
India must use momentum
These countries have expressed keen interest in deeper economic integration with India, from which they hope to benefit from its economic growth and advancement. In recent years, South Asia has witnessed growth in land, maritime, waterways, air connectivity and border infrastructure as well as trade. For example, Maldives and Bangladesh are keen to negotiate FTAs ​​with India, while Sri Lanka intends to upgrade its existing FTA to an Economic and Technological Cooperation Agreement (ETCA). For its part, India views these FTAs ​​and connectivity efforts as a means to enhance its economic interdependence with its neighbours. India is currently working on over a hundred connectivity projects in the region, some of which are funded through concessional loans and grants.
However, India is concerned about Chinese FTAs ​​in the region. India fears that Chinese imports will flood South Asian markets, undermining local economies and eventually displacing Indian exports. Over the past two decades, India and China have been the top exporters to Maldives, Sri Lanka and Bangladesh, and trade has been growing steadily. Between 2010 and 2022, India’s exports to Sri Lanka increased from $2.5 to $4.6 billion, to Maldives from $126 million to $485 million and to Bangladesh from $3.5 to $9.4 billion. However, this increase pales in comparison to China’s significant growth in exports to Sri Lanka (from $1.2 billion to $3.5 billion), Maldives (from $60 million to $562 million), and Bangladesh (from $5.3 billion to $17.8 billion). This trend may further accelerate with the implementation of FTA with China.
abandon skepticism
Neither India nor China features in the top five export destinations for Maldives and Bangladesh. This status quo may change if the FTA with China is implemented. India also fears that if these FTAs ​​are signed, cheaper Chinese goods may enter India through its connectivity projects and FTAs ​​with neighboring countries. Due to this doubt, India has reportedly had to put on hold the talks on FTA with Bangladesh.
It appears that India’s concerns regarding the Chinese FTA have been completely addressed. At a time when countries are eager to expand their economic activities, India should take advantage of this momentum. New Delhi must realize that it can counter China’s economic progress in the neighborhood only by actively engaging with its neighbours. Instead of stalling FTAs, India should speed up negotiations, reduce protectionist measures and open up its markets to smaller countries. India’s strategy should focus on preventing the influx of Chinese goods into its markets as well as increasing connectivity and trade with its neighbours.
(The author is Associate Fellow, Neighborhood Studies, Observer Research Foundation)
Disclaimer: These are the personal opinions of the author
