India’s neighbours may be the answer to Trump’s tariffs—but it will be a tough win
The South Asian Association for Regional Cooperation (SAARC)—a bloc of eight countries including India, Pakistan, Bangladesh, and Nepal—has not met since 2014. It may be the time to make efforts to revive the group and promote trade with them.
India’s exports are heavily dependent on the US, and are currently under threat due to high tariffs. But hidden in numbers is another simple story: the region that could boost Indian exports is not across the Pacific, but across its borders. India barely trades with its neighbours and leaves value on the table every year, even before new global barriers emerged.
India’s trade with its neighbours—Pakistan, Bangladesh, Nepal, Afghanistan, Bhutan and Sri Lanka—was $30 billion in FY25, accounting for only 2.7% of total trade. Worse, trade with all neighbours except Bhutan has declined since 2021, even as global trade has remained stable. The reasons are several: terror attacks, political tension, domestic unrest, limited infrastructure, tariff and non-tariff barriers and lack of integration.
Since exports to the US came under threat, Indian prime minister Narendra Modi has embraced Vladimir Putin and Xi Jinping while negotiating treaties with the European Union and Australia.
But even as India courts partners elsewhere, it would do well to look closer to home. South Asia, home to a quarter of the global population, is one of the world’s least economically integrated regions. Intraregional trade is just 5% of South Asia’s total, versus 48% in East and Southeast Asia and 66% in Europe.
Using 2015 statistics, the World Bank had estimated in 2018 that removing tariffs and infrastructural barriers within South Asia could triple the regional trade volume at the time, from $20 billion to $60 billion. It has not updated this ‘gravity’ model to account for regional changes in the last decade, but a naive extrapolation to GDP and trade figures in 2025 implies that South Asia could stand to gain $50-60 billion in trade volume from liberalization.
This is approximately 50% of India’s total trade with the US. Robert Lawrence, professor of international trade at Harvard University, calls this a “lost opportunity," noting “regional trade has tremendous potential that should be exploited."
However, despite the possible gains, regional cooperation has withered under geopolitical stress. The South Asian Association for Regional Cooperation (SAARC)—a bloc of eight countries including India, Pakistan, Bangladesh, and Nepal—has not met since 2014. A South Asian Free Trade Area (SAFTA) was established in 2006, but in practice it remains cheaper for India to export to Brazil than to Pakistan. Average tariffs remain high and over a third of trade volume is restricted through ‘sensitive lists,’ per a World Bank report published in 2019.
Invisible barriers
Non-tariff barriers also proliferate. For instance: India and Pakistan share a 3,000-km land border, but only have one open crossing at the Attari land port through Wagah, pushing most cargo into costly sea routes. There too, cargo movement has fallen 86% since 2019 after terror attacks in Jammu and Kashmir resulted in border closures.
“The case for regional integration has become stronger because the global trading environment is so much more volatile," said Sanjay Kathuria, the lead author of the World Bank report and now Senior Fellow at the Centre for Social and Economic Progress (CSEP).
Academics, policymakers, and businesspersons are increasingly coming around to this idea. Last month, the International Monetary Fund (IMF) urged all Asian countries to cut trade barriers in response to US tariffs. In September, panelists from Bangladesh, Nepal, and India reiterated this vision during a seminar organized by CSEP.
They stressed the importance of reforming existing tariff regimes and creating more robust regional supply chains by diversifying beyond basic goods like textiles.
India’s trade with its neighbours may look small on paper, but the statistics may be hiding larger realities. An analysis by Global Trade Research Initiative, a Delhi-based think tank noted that despite continued tension with Pakistan, nearly $10 billion of Indian goods were rerouted to Gulf countries, relabelled, and exported to Pakistan last year, which is over 20 times the official export figure.
A vast informal trade signals the region’s latent potential. If goods can move profitably through third countries, they could do so more efficiently across land borders, and benefit both economies, instead of the intermediaries.
This is not to say reviving SAFTA will be easy. Trust is a scarce commodity in our region, still scarred by the history of Partition and battling present-day domestic instability. Bangladesh, Nepal, and Sri Lanka have all seen government changes in the last two years. The Pahalgam terror attacks in 2025 brought India and Pakistan closest to the brink of war since 1999. “It’s hard to get trade without peace, but you don’t need to start with free trade agreements. Dismantling non-tariff barriers will also go a long way," says Lawrence.
Limited options
And India’s other options aren’t ideal either. BRICS remains unstable—India and China are managing a fragile peace around contested borders, while China and Russia are net exporters to India. These are unlikely to be corridors where India will make up the lost trade with the US.
A reset with the US will take time and require concessions on India’s trade redlines. Bilateral deals with the EU, Britain and Australia are constrained by distance and the complexity of goods demanded by richer markets. For instance, India’s export volumes to Bangladesh and the UK are comparable, but it sends cotton yarn and fabrics to Bangladesh and complex machinery to the UK. South Asia is “low-hanging fruit," says Kathuria.
Lawrence is in agreement: “Regional trade is different from global trade —similar cultures, traditions, and preferences regionally mean you can get more diversified trade than with advanced economies around the world."
As the regional hegemon, India has the option of laying the groundwork for regional re-integration, potentially by reengaging with a moribund SAARC. The political appetite for this does exist. At the UN General Assembly this year, Muhammad Yunus, Bangladesh’s interim leader, called for a revival of SAARC for “shared development."
The US tariffs may have opened up a political window of opportunity that should be utilized for more regional cooperation. Navigating geopolitical tensions, regional unrest, and limited infrastructure will test India’s leadership in the region.
The author is a graduate student in policy and business at Harvard University.
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