What Does Regional Trade in South Asia Reveal about Future Trade Integration? Some Empirical Evidence

Abstract

In 1995 the seven South Asian countries - Bangladesh, Bhutan, India, the Maldives, Nepal, Pakistan, and Sri Lanka - initiated a multilateral framework for regionwide integration under the South Asian Preferential Trade Agreement (SAPTA). In a recent initiative, members agreed that SAPTA would begin the transformation into a South Asian Free Trade Area (SAFTA) by the beginning of 2006, with full implementation completed between 2009 and 2013. The impetus toward regional preferential trading arrangements and greater regional economic integration raises many important issues, both for the South Asian region as a whole and for the individual countries. Pitigala uses the trading partners hypothesis as the empirical criterion to assess the potential success of a South Asian trading bloc. Using various definitions of the natural trading partner hypothesis - based on trade volume, geographic proximity, and the complementarity approaches - the author demonstrates that the South Asian countries can be characterized only moderately as natural trading partners. This characterization is, however, largely a consequence of previous impediments to trade among regional members. The author further demonstrates through additional statistical measures - including revealed comparative advantage indices, trade concentration, and trade competition profiles - that the trade structures that have evolved among the South Asian Countries may not facilitate a rapid increase in intra-regional trade. But there is evidence that previous unilateral trade liberalization efforts in the South Asian countries have already had a positive impact in boosting both intra- and extra-regional trade. Continuing the process of unilateral liberalization, in parallel with regional integration, would aid the South Asian countries to continue to diversify their still narrow export bases and potentially evolve new comparative advantages and complementarities that could facilitate the successful implementation of SAFTA. This paper - a product of the Trade Team, Development Research Group - is part of a larger effort in the group to analyze regional integration and trade policies.