The inability of the World Trade Organisation (WTO) to broker a multilateral trading system acceptable to all its members sparked a rising interest in regionalism. The first wave of regionalism in the 1960s was divided along North-North and South-South trading arrangements. In the 1980s, the second regionalism wave evolved into a North-South trading arrangement. (1) However, in a post-Cold War setting, regional groupings have responded to the volatility of the multilateral trading system by increasing regional cooperation and trade and various trade-driven groupings emerged such as the North American Free Trade Area (NAFTA), Asia-Pacific Economic Cooperation (APEC) and the European Union (EU).
While South Asia has lagged behind other regions in creating a regional trade grouping, the formation of the South Asian Association for Regional Cooperation (SAARC) in 1985 was a step towards this direction. However, for economic and political reasons, SAARC has made relatively slow progress on expanding intraregional trade. The South Asian region contains a range of ethnic groups, religions and languages but governance has often centralized political power among a small elite, creating tensions by discounting the interests of the majority. (2) Various economic explanations have been presented to account for the inability of South Asian countries to trade more with one another. These range from South Asian economies producing similar types of goods, to government interference in economic development through the implementation of import substitution industrialization (ISI) policies and highly regulated economic policies. (3) The diversity of economies in terms of their size and complexities of using preferential trading policies has also contributed to slow intraregional South Asian trade. (4) Although cooperation among SAARC countries was supposed to be based on areas of mutual cooperation, with the exclusion of bilateral and contentious issues, it is the latter that have derailed SAARC meetings. For example, the postponement of the SAARC Heads of State Summit in 1999 followed renewed tensions between India and Pakistan. Similarly, both countries' preferential imports from each other declined significantly from 1996 to 1998 following the nuclear tests in 1998 and the Kargil conflict in 1999. (6) The way forward for SAARC to achieve greater regional economic cooperation will mean dealing with bilateral and contentious issues such as the Kashmir dispute. This paper attempts to examine the process of rapprochement between India and Pakistan over the divisive issue of Kashmir and what this would mean for SAARC as well as Pakistan's ambitions to strengthen its ties with ASEAN. In this context, political will and a change of mindset is crucial to resolve economic obstacles like the Kashmir dispute if the SAARC region does not wish to fall further behind economically. The changing mindset among South Asia's policy-makers was reflected by India's Prime Minister Atal Bihari Vajpayee who pointed out that the increasing economic globalization has been accompanied by the consolidation and emergence of vast new economic groupings (7) such as the Asia Pacific Economic Cooperation (APEC). India being the largest and most influential economy in South Asia has encouraged the economic integration of SAARC by providing greater concessions but the slow progress of a South Asia Preferential Trading Arrangment (SAPTA) has seen a shift in focus towards bilateral trading agreements between SAARC member countries. (8) India has also kept its options open by being willing to conclude bilateral Free Trade Arrangements with those countries within the region intent on "moving ahead" faster. (9) To this end, India has bilateral FTAs with Bhutan, Nepal and Sri Lanka (10) but would like to conclude other FTAs with Bangladesh and the Maldives. (11) Pakistan would be marginalized in these FTAs; therefore, it would be more...