Leaders of India, Pakistan and five other South Asian nations signed a draft agreement vowing to slash trade barriers starting from 2006, to boost growth in a region that is home to half the world's poor.
South Asian Association for Regional Cooperation countries, which also include Sri Lanka, Nepal, Bangladesh, Bhutan and the Maldives, also agreed to all but eliminate tariffs by 2016. That would bring to fruition the idea of a South Asian Free Trade Agreement that was envisaged in 1985, when the group was formed.
South Asia, home to a quarter of the world's people, is moving to emulate ASEAN and the EU. Trade between ASEAN nations makes up 63 percent of Southeast Asia's trade and intra-EU trade accounts for two-thirds of the trade of the 15 EU countries.
Trade among South Asian countries, 70 percent dominated by India, is barely 5 percent of the region's total.
"We have finally come to accept that if we do not close ranks our peoples will sink deeper into poverty and our countries will continue to suffer the consequences of discord and weakness in the fiercely competitive world," Bhutan's Prime Minister Lyonpo Jigmi Thinley said.
The signing ceremony, broadcast by Pakistan Television, came at the end of 12th SAARC summit in Pakistan's capital, Islamabad.
Under the planned trade agreement India, Pakistan and Sri Lanka, the region's largest economies, have until the end of 2012 to reduce tariffs to between zero and 5 percent.
Bangladesh, Bhutan, Nepal and the Maldives have until 2016.
Each country will be able to maintain a "sensitive list" of products on which tariffs won't be reduced.
"The accord will open up markets such as Pakistan that are not available today," said Sanjiv Bajaj, vice-president in charge of finance at Bajaj Auto Ltd, India's No. 2 motorcycle maker. "With duties coming down, our products would be cheaper in the other countries like Bangladesh."
Trade among the seven countries, home to more than 1.5 billion people, is an annual US$4 billion and may rise to US$14 billion once restrictions are removed, the Federation of Indian Chambers of Commerce and Industry estimates.
India has a free-trade agreement with Sri Lanka and open borders with Bhutan and Nepal, while Pakistan is negotiating free-trade deals with Sri Lanka and Bangladesh.
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