China’s Developing Silk Road Trade Relations with SAARC

CDE Op-Ed Commentary

One aspect of the proposed China Silk Road that is not often factored into the route is that of India, and especially the South Asian Association for Regional Cooperation (SAARC) trade bloc. In fact, SAARC has long been of high interest and importance to the Chinese, who tried to join a few years ago and were rebuffed.

SAARC’s members, which essentially comprise the entire Indian sub-continent, include India, Afghanistan, Bangladesh, Bhutan, Maldives, Nepal, Pakistan and Sri Lanka.  The body also includes, as observers, Australia, China, the European Union, Iran, Japan, Mauritius, Myanmar, South Korea and the United States. South Africa has also participated unofficially in meetings, which must have generated some interesting side-line conversations about cricketing ties. 

Sporting events aside, the SAARC bloc is also one of the world’s most powerful – its collective economy is the world’s third largest after China and the United States, yet it remains relatively unheralded, mainly as it is dominated by India, which accounts for some 80 percent of the collective wealth. Nonetheless, an awakening by India of the economic potential that SAARC offers alongside China is now being recognized. As I noted in a previous article, “What China Wants From India – Manufacturing Capacity”, a new spirit of cooperation, rather than competition, is now required by China. Frankly speaking, the CCP needs India to provide China’s population with inexpensively manufactured goods. With Chinese wages already 3-5 times more expensive than those in India, it needs those supply chain routes well and truly opened. That means investing in corridors from India to China by both land – Bangladesh and Myanmar – and sea – Sri Lanka.

Bangladesh is already in this position, and has taken away large chunks of China’s textiles manufacturing capacity. In 2013, there were approximately 5,000 garment factories in Bangladesh, employing about 4 million people, mostly women, all part of Bangladesh’s US$19 billion-a-year industry, export-oriented ready-made garment (RMG) industry. Bangladesh is second only to China, the world’s second-largest apparel exporter of western brands. China is currently negotiating with Bangladesh over a Free Trade Agreement, another sign of how important China views trade ties with members of the SAARC bloc.  

Myanmar is proving more difficult to integrate into the supply chain: it is both far more behind in infrastructure and has extremely challenging terrain. Yet as I identified in my recent book about China’s New Economic Silk Road, routes are being developed that will connect the Myanmar West coast seaport of Kyaukphyu through to Ruili, on the border with Yunnan Province. Talk is still on-going about recreating portions of the old Stilwell Road, connecting India with China from Ledo. This is one of the reasons Myanmar has recently requested an upgrade of its SAARC observer status to that of full member. Myanmar already has a Free Trade Agreement with China via the ASEAN-China FTA, and I compared business costs between China and Myanmar in the article “The Cost of Business in Myanmar Compared With China”.

Sri Lanka, meanwhile, is developing additional deep water capacity at its Colombo Port, which is being heavily invested in by China. India is doing the same at the Jaffna Port, with the idea being that Sri Lanka ultimately operates as a transshipment area for good transiting between the two countries. That includes repackaging and container consolidation facilities, and is one of the reasons Sri Lanka and China have been busy negotiating a Free Trade Agreement, expected to be signed off later this year. Sri Lanka already has preferential trade relations with India through their mutual SAARC membership, as well as the Indo-Sri Lanka Free Trade Agreement (ISFTA), which covers over 4,000 products and came into full effect in 2008. 

Of related interest is the development of India and Pakistan being offered full membership of the Shanghai Cooperation Organization, with Iran set to follow. As a China-led initiative, their Shanghai Cooperation Organization membership further cements the belief that China has in SAARC nations. Although China may not be a SAARC member, its observer status of this unique organization is certainly leading it to include SAARC members in its search for inexpensive imports, regional security and increased India-China trade flows. The countries in-between can be expected, after time and infrastructure development have been realized, to do rather well in facilitating China-India bilateral trade from 2020 onwards.  

Chris Devonshire-Ellis
 is the Chairman of Dezan Shira & Associates, a full service foreign direct investment practice with 28 offices across ASEAN, China and India. The practice advises foreign investors in these markets with research, legal advisory, tax advisory and related business services, including due diligence, compliance, accounting, payroll and related assistance. Please email to asia@dezshira.com  or visit our website at www.dezshira.com .

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