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

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.