Abstract
South Asian Free Trade Area (SAFTA) depicts a huge potentiality in expanding intra-regional trade leading to a net trade creation for the region. Yet, prevailing inter-state political disputes and inner-state conflicts within the region tend to hinder intra-regional trade. Lack of prior studies that concentrate on these political factors when assessing the desirability of South Asian trade agreements motivates the present study. Thus, this study investigates the trade creation and trade diversion effects of SAFTA after controlling for political factors. In this regard, an augmented gravity model is employed over the period 2003 to 2013. Static linear panel estimation methods of pooled ordinary least square, random effects, and fixed effect methods are used in arriving at the results. Results confirm the desirability of SAFTA with the presence of significant intra-bloc and extra-bloc trade expansions. Further, SAFTA shows a significant anticipation effect as trade expansions are significant even prior to its implementation and they continued to be significant until 2012. Also, this study empirically confirms the deleteriousness of the region’s political factors in expanding trade.
Highlights
This study investigates the desirability of South Asian Free Trade Area (SAFTA) with reference to the Static Theory of Trade Integration
Since the central objective of this study is to evaluate the static efficiency of SAFTA, trade creation and trade diversion effects are estimated
Results confirmed the presence of significant intra-bloc and extra-bloc trade expansions following SAFTA
Summary
This study investigates the desirability of South Asian Free Trade Area (SAFTA) with reference to the Static Theory of Trade Integration. Trade creation leads to welfare rising as trade shifts from a high cost supplier. Trade diversion lowers the welfare as it leads to shift trade from a low-cost supplier non-member country to a high cost supplier member country. According to Static Theory a RTA is considered desirable with the presence of net trade creation effects and undesirable with the presence of net trade diversion effects. This phenomenon is greatly researched worldwide, empirical concentration on South Asian RTAs is still unsatisfactory
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