The Maldives’ Free Trade Agreement with China: Regional Implications and Economic Strategies
On January 1, 2025, the Maldives formally implemented its long-anticipated free trade agreement (FTA) with China, an accord that was established seven years prior but had faced substantial criticism and opposition. Rapidly pushed through the Maldivian parliament with little debate, the agreement raised alarms in India, which expressed concerns regarding potential Chinese goods flooding Indian markets. This crucial development comes at a time when China is actively negotiating similar deals with Bangladesh and Sri Lanka, prompting India to rethink its economic strategy for engaging neighboring South Asian countries.
Economic Isolation in South Asia
The backdrop to this situation is one of economic nationalism and protectionist policies that have haunted South Asia for decades. The India-Sri Lanka Free Trade Agreement (ISFTA), enacted in 2000, and the South Asian Free Trade Agreement (SAFTA) initiated in 2006 are notable examples of attempts to foster regional economic integration. Unfortunately, their effectiveness has been stunted by several factors. Protectionist measures, similar production bases across different countries, para-tariffs, and non-tariff barriers, coupled with inadequate infrastructure and high logistics costs, have reinforced the challenges of fostering regional trade. Today, South Asia stands as one of the least connected regions globally, with intra-regional trade accounting for less than 5% of its total global trade.
The Rise of Chinese Influence
In stark contrast, China is emerging as a dominant force in South Asia’s economic landscape, steadily competing with India’s historical economic influence. With an FTA already in place with Pakistan since 2006, China has enhanced investment and trade relationships with smaller South Asian nations, positioning itself as a primary trading partner. The establishment of established supply chains and lower manufacturing costs has enabled China to extend its influence in the region. Through its Belt and Road Initiative (BRI), China has been keen to form FTAs with the Maldives, Sri Lanka, and Bangladesh to bolster its trade initiatives, promote export opportunities, and increase its economic leverage.
A Need for Economic Reinvention
Given the pressing economic challenges, South Asian countries are recognizing the crucial importance of expanding economic engagements. FTAs are seen not merely as agreements but as gateways to accessing cheaper goods, reducing import bills, enhancing exports, and ultimately alleviating pressure on foreign reserves. The Maldives, with limited production capacity and soaring import costs, is particularly positioned to benefit from such arrangements. Meanwhile, Bangladesh anticipates the loss of preferential access to global markets as it graduates from least-developed country status in 2026. Similarly, Sri Lanka views FTAs as vital to its recovery from an economic crisis.
Strategically, countries like Bangladesh and Sri Lanka are keen on negotiating FTAs with China while also expressing interest in joining waves of Chinese-led economic pacts such as the Regional Comprehensive Economic Partnership (RCEP). This signals a shift towards deeper economic integration and a collective regional strategy that could alter the economic dynamics in South Asia.
Opportunities for India
In this landscape of changing tides, India has the opportunity to regain and enhance its foothold in South Asia. Many regional partners are demonstrating a desire for greater economic integration with India, envisaging long-term benefits from engaging with an economy that is on the rise. Infrastructure projects across land, maritime, air, and waterways have significantly bolstered relationships, creating a network of opportunities. The Maldives and Bangladesh are seeking an FTA with India, while Sri Lanka aims to upgrade its existing agreement to include aspects of economic and technological cooperation.
India perceives these economic engagements as routes to stimulate dependence among its neighbors. Currently undertaking over a hundred connectivity projects funded through concessional loans and grants, India is strategically positioning itself as a partner of choice.
Addressing Indian Concerns
Nevertheless, India’s apprehensions about the potential repercussions of Chinese FTAs linger. There are fears that a surge in Chinese goods could undermine local economies and disrupt the delicate balance of exports in the region. Calculated growth in trade from both India and China over the past two decades underscores this stark reality. Between 2010 and 2022, trade figures reveal a significant shift, with Chinese exports climbing dramatically compared to India’s more modest increases.
India faces a critical decision point. As it stands, neither India nor China dominates the export market for countries like the Maldives and Bangladesh. This could quickly change with the implementation of the FTAs with China. If such agreements become a reality, India could see its markets flooded with affordable Chinese goods through its connectivity programs. Alarmingly, this trepidation has led to a reported pause in India’s own FTA negotiations with Bangladesh.
An Urgent Call for Proactivity
India’s concerns regarding Chinese FTAs encapsulate a broader narrative of caution and skepticism. Yet in this age of heightened economic collaborations, India must recognize the urgency of engaging its neighbors more proactively. Rather than stalling FTAs, India should expedite negotiations, laying down a framework that encourages open markets for smaller countries. To counterbalance the Chinese economic footprint, India must bolster trade and connectivity ventures while simultaneously implementing measures to safeguard its own economic interests.
In conclusion, as South Asia stands on the threshold of significant economic transformations, proactive engagement and strategic cooperation will determine the region’s future. India, with its vast potential and established ties, has the opportunity to shape a more interconnected South Asian landscape, transforming challenges into opportunities in the process.