Abstract:
This study investigates the desirability of the South Asian
Free Trade Area (SAFTA), considering its potential in
generating trade creation and trade diversion effects by
controlling the trade persistence, which is often ignored
by the previous studies. In this regard, dynamic gravity
models on South Asian imports, exports, and total trade
are used over the period from 2003 to 2013. Results of
the two-step system GMM estimator confirmed the
desirability of SAFTA with the presence of significant
intra-bloc and extra-bloc trade expansions. Further,
SAFTA depicted a significant anticipation effect as trade
expansions were significant even one year prior to its
implementation, and they continued to be significant
until 2009. Further, this study empirically confirms the
potential of SAFTA in mitigating the region’s political
tension, especially when implementing the trade strategy.
Thus, it is recommended to bring SAFTA to its full
potential by further reducing tariffs and removing
sensitive lists.
