Is SAFTA Desirable? Evidence from Static Theory

T.U.I. Peiris, M. Azali, M.S. Habibullah and A. Hassan

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.

Keywords: Trade Integration, SAFTA, Political Factors, South Asian Trade, Static Linear Panel Models