Analysis of Welfare Effects of South Asia Free Trade Agreement (SAFTA) on Pakistan’s Economy by Using CGE Model

Abstract

The current research investigates the Welfare impact of SAFTA on the economy of Pakistan in general and South Asia in perspective. This research analyzes the potential economic costs and benefits of Pak-India trade in exporting various consumer goods. The first scenario is when normal trading relation with India will be restored; it means that both countries will give the MFN (Most Favored Nations) status to each other. In the second scenario, the SAFTA will be operative and there will be free trade between India and Pakistan and both countries will remove all tariffs and custom duties from each others’ imports. The Global trade analysis GTAP model is used to analyze the possible impact of SAFTA on Pakistan in a multi country, multi sector applied General equilibrium frame work. After employing the simplified static analysis framework, the analysis based on simulations reveals that current demand for Pakistani Basmati Rice and other consumer items like leather and cotton-made garments will expand after the FTA and consumer surplus will increase. The drop in the domestic prices of Rice will increase the production of many downstream industries, which will have pleasant multiplier effects on the economy of Pakistan. The government may reduce MFN tariffs on industrial dates before implementing the FTA. A key rule of multilateral trade system is that the reduction in trade barriers should be applied on a most-favored nation basis (MFN) to all WTO members the countries which are part of the SAFTA.. The only exception to the MFN principle built into the GATT legal framework is the provision for reciprocal free trade within customs unions and free trade areas (GATT article XXIV). The objectives of the present study are to analyze and quantify the potential economic cost and benefits of the prospective trade between India and Pakistan to consumers, producers and government of the two countries. The export of Rice, leather and cotton-made garments may be conducted by two scenarios, i.e. when normal trading relations between Pakistan and India will be restored and when there will be a free trade between Pakistan and India in the presence of South Asian Free Trade Agreement (SAFTA). Results based on this research reveal that on SAFTA, grounds, there will be net export benefits in Pakistan’s economy.