China and South Asian regionalism: Balancing the economic dynamics

South Asian regionalism is governed mostly by the Saarc. Over its 29 years of existence, Saarc has some achievements to its credit, but in economic areas like trade and investments, Saarc's record remains far from satisfactory. Intra-regional trade still accounts for only 6 % despite 10 years of regional trade stimulus by Sapta and 8 years by Safta. This is in comparison with intra-regional trade at 25% in Asean, 44% in NAFTA, and 66% in EU. Intra-regional trade in services is very low and the progress of South Asia Trade in Services (SATIS) that came into operation in 2010 has been uneven and slow. Further, intra-regional investment remains at below 5% and the smaller South Asian countries have not fully exploited the growing Indian market.
Existing literature shows that Japanese FDI in the 1980s played a crucial role in stimulating intra-regional trade in Asean. This happened via industrial components and the final products manufactured and assembled under Japanese FDI in various Asean countries. In this process, the investment-trade nexus received a stimulus to generate more and more intra-regional trade in Asean. South Asia was expecting a similar wave of Japanese investment in the 1990s to stimulate the regional trade; however, it never took place as the Japanese considered the South Asian region as too risky to do business in. When Indian investment was flowing out in the 2000s, there was an expectation that the neighbouring countries would benefit from large Indian investment and thereby stimulate intra-regional trade, but this too did not take place. Most Indian FDI went to destinations outside South Asia.
Since mid-2000s, the South Asian region has witnessed a wave of Chinese financial assistance coming in for infrastructure development activities, viz., ports, roads, power plants, bridges, etc. In some South Asian countries like Sri Lanka, China has overtaken traditional donors and occupied the number one position with high engagement in post-war infrastructure development activities. China has been engaged in a number of bridge development projects in Bangladesh and power plants, communication, and road development in Pakistan. It has played a key role in developing sea ports in Pakistan (Gwadar), Bangladesh (Chittagong), and Sri Lanka (Hambantota). Such development work has gone a long way in enhancing the production base, supply capacity, and local connectivity of some South Asian countries. It was due to the weak supply capacity, inter alia, that some South Asian countries failed to tap the growing Indian market via Safta or the existing FTAs.  Chinese financial assistance will thus indirectly contribute to stimulating more intra-regional trade in Saarc.
The financial assistance based entry of China to South Asia has some similarity with FDI based entry of Japan to East Asia, but  the former based on infrastructure projects takes time to deliver results in terms of increasing intra-regional trade due to the long gestation period of such projects, whereas FDI stimulating trade is of short gestation. Thus, from a Saarc regional perspective, Chinese financial assistance, in the absence of other large donors, is a stimulant for regional integration.
China's involvement in the South Asian region has taken place via various channels over the years. A few examples are: (a) seeking 'Dialogue Partner' status in the Indian Ocean Rim Association in 2000 (where India, Sri Lanka, and Bangladesh are members); (b) seeking membership in the Asia Pacific Trade Agreement (APTA) in 2001 (where India, Sri Lanka and Bangladesh are members); (c) seeking 'Observer Status' in Saarc in 2007; (d) initiating the annual Kunming Trade Fair for South Asian trade promotion in 2007; and (e) initiating a dialogue with some Saarc countries to revive both the land and the maritime Silk Routes in 2013 and early 2014. These involvements in one way or another have allowed China to closely observe the South Asian region and increase its economic power in terms of trade and investment in the region, so much so, that today China is a larger trading power of the region compared to India (Daily Star, op-ed, June 12).
Although it is debatable, it appears that India became active in the Saarc only after the bilateral economic ties between other South Asian countries and China started growing in importance. India's unilateral gestures such as: (1) granting duty free market access to the Indian market for all Saarc LDCs in 2008, (2) unilaterally reducing the Indian 'Negative List' to 25 items under Safta in 2011, (3) donating  $100 million to the 'social window' of the Saarc Development Fund in 2010, etc., can be considered as some manifestations of this. In other words, China's engagement has brought in some dynamics to the region.
Overall, China's involvement in the region has brought positive results in economic terms to Saarc. However, the political and security dimensions of this involvement cannot be overlooked by the smaller South Asian countries. For centuries, South Asian countries have grown under the shadow of India and any external influence in the Indian geo-political space can be a concern for India. Already, there is a perception in India that China is engaged in encircling India with its naval presence by a “String of Pearls.” Thus, smaller South Asian countries, while reaping the benefits of Chinese engagement in the region, also need to do a prudent balancing act so that the geo-political scales are not tilted too much to disturb the regional power. This then remains the challenge for India's neighbours in the coming years.

The writer is the Executive Director of the Institute of Policy Studies of Sri Lanka.