Is SAFTA Desirable? Evidence from Static Theory

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.

Is South Asian Free Trade Area Desirable? Evidence from Dynamic Gravity Models

“…Their results indicated that all the standard gravity variables are significant and confirmed the existence of trade creation effects following SAFTA. Peiris et al (2017) investigated the trade creation and trade diversion effects of SAFTA, especially after controlling the political factors. The results of the study confirmed significant intra-bloc and extra-bloc trade expansions following the agreement.…”

“…Therefore, in order to estimate trade creation and trade diversion effects, two dummy variables are introduced accordingly. Following Peiris et al (2017), Magee (2008), Martinez-Zarsozo et al (2009), and Moinuddin (2013), several other commonly used sets of dyad variables are introduced to the standard gravity model. Country pair per capita GDP values are used to represent the income levels of respective countries.…”

“…However, several previous studies that used static gravity models, gravity models without lagged dependent variable, reported relatively higher trade creation magnitudes. For instance: Peiris et al (2017) indicates that intra-regional imports increase by 212%, intra-regional exports by 159%, and total trade by 267% as a result of SAFTA; Hirantha (2004) report a 377% of trade creation effect for SAPTA; Moktan Faculty of Management Studies, Sabaragamuwa University of Sri Lanka (2008) shows a 141% improvement in exports in the post SAPTA periods; Akhter and Ghani (2010) indicate that a hypothetical block among Pakistan, India, and Sri Lanka would improve trade by 30 times following SAFTA. Therefore, the results indicate that static gravity models tend to overestimate trade creation effects and thus intensify the requirement of including lagged effects of trade, especially when estimating the desirability of SAFTA.…”

“…Moreover, they confirm the existence of these positive trade diversion effects for APEC, EFTA, EU, and MERCOSUR. Hirantha (2004), Akhter and Ghani (2010), and Peiris et al (2017) also indicated the existence of extra-bloc trade expansions following South Asian trade agreements. The magnitude of this positive trade diversion effect also decreases as and when the model specifications are adjusted for trade persistence.…”

“…The magnitude of this positive trade diversion effect also decreases as and when the model specifications are adjusted for trade persistence. According to Peiris et al (2017), extra-bloc imports increase by 1061%, exports by 586%, and total trade by 662%. However, this study depicts significant reductions in extra-bloc trade expansions following SAFTA.…”