Two events have dominated the headlines in South Asia in July 2006. First, implementation of the South Asian Preferential Trade Agreement (SAFTA) concessions from 1 July and; second, the 7/11 Mumbai blasts. These events established the regional nature of both the trade and the terror networks. While regionalism thrives on economies of scale and comparative advantages, terrorist networks, like multinational corporations, have their linkages, operations and financing transcending country borders. The post-7/11 investigations have established that Pakistan sponsored terrorist groups are carrying out their sinister designs in India, using Nepal and Bangladesh as entry and exit points. These two events bring to the fore the contradictions existing between the pro-regional trade groups, who would like to see greater interdependence and peace in South Asia, and the anti-regional conflict maintaining groups, who see their interests being promoted by perpetuation of higher levels of conflict and mistrust in South Asia.

Regional cooperation and economic interdependence weakens the rationale for maintaining high levels of military preparedness and defence expenditure and adversely affects groups thriving on persisting conflict situations. Jacob Viner notes that barriers to international economic activity stimulate conflicts of interest and contribute to political-military discord. Unfortunately, such reactionary groups are the ruling powers in Pakistan, which prefer conflict to trade; their very existence have been dependent on perpetuating the myth of a continuing Indian attempt to destroy Pakistan's existence. Invoking external dangers keeps internal dissent at bay. These entrenched interest groups fear that regionalization and greater Indo-Pakistan bonhomie will adversely affect their domestic coalitions and erode their privileges. Therefore, moves towards mutual cooperation have repeatedly been sabotaged. It is not a coincidence that cordial Indo-Pakistan relations and momentum in SAARC was followed by the 7/11 outrage.

Under SAFTA, countries are required to extend tariff concessions on all products except those figuring in their sensitive list. Pakistan extended such concessions to all SAARC countries except India. For imports from India, Pakistan has limited concessions only to items figuring in the bilateral positive list. This "positive list approach" violates the SAARC spirit. Apropos, Pakistan has not yet extended Most Favoured Nation (MFN) status to India, in violation of WTO principles.

Ironically, increased trade and economic relations with India would benefit Pakistan and ameliorate its near "failed state" status. The Pakistani claim that opening up trade will only benefit India, due to the huge trade surplus in its favour, does not bear scrutiny. Since, the turn of the century, direct bilateral trade is hovering around 45 million USD, although trade through third countries is estimated to be much higher. A State Bank of Pakistan (SBP) study estimated that if Pakistan opened up, bilateral trade volume could take a ten-fold jump over a relatively short time span, as only 2% of the total trade potential has been achieved between the two countries. Pakistan could achieve net savings of USD 400 to 900 million by directly importing from India. Incidentally, the quantum of trade deals between SAARC countries remains limited to around 4.5% of their total trade flows, as against around 60% and 46% inter-country trade density between the countries of European Union and NAFTA respectively.

Although, SAFTA would benefit all its members, Pakistan has linked the resolution of political disputes with free trade between India and Pakistan. This demonstrates that some groups in Pakistan do not want to see the SAARC as a success story, since its charter clearly prohibits the discussion of bilateral issues in this multilateral forum.

Further, Pakistan's involvement in the Mumbai blasts has revealed the sinister designs of its entrenched interest groups. India has, rightly, hardened its stance by clarifying that the peace process, initiated in January 2004, would be derailed if Pakistan does not stop aiding and abetting cross-border terrorism. Cooperation has to be a two way street. Pakistan needs to crack down on terrorism by acceding to the Indian request to deport Dawood Ibrahim and Hizb-ul Mujahideen chief Syed Salahuddin and ban Jamaat-ud-Dawa, the political wing of Lasker-e-Toiba. By postponing the Foreign Secretary level talks, India wants to send a signal that it will not take things lying down. Patience should not be perceived as weakness.

Helping India by severing the links that Indian terrorist groups have established in Pakistan and ending cross-border terrorism, Pakistan can place the peace talks firmly on track. On the economic front, Pakistan can extend the SAFTA concessions to India and send a positive signal to promote cooperation between SAARC members. By refusing to accede to the Indian demands on the political and economic fronts, Pakistan has proved that its offer to help investigate the Mumbai blasts or promote regional cooperation in South Asia is only lip service to impress international public opinion. Pakistan has to take a firm stand on whether to promote beneficial trade or detrimental conflict to end the uncertainty prevailing at the current juncture.

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