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Trade Potential in SAFTA - An Application of Augmented Gravity Model

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  • Mustafizur Rahman

    (Centre for Policy Dialogue)

  • Wasel Bin Shadat
  • Narayan Chandra Das

Abstract

The present paper investigates the trade creation and trade diversion effects of a number of RTAs, with special focus on the SAFTA, by using a gravity model. Apart from the traditional gravity variables, the model is augmented by some other import variables (e.g. bilateral exchange rate, bilateral free trade agreement). To capture the individual country effect, along with the impact of overall RTA, a set of additional dummy variable has been introduced. The model developed in this paper is estimated by using panel data approach with country-pair specific as well as year specific fixed effects. Two stages estimation technique is deployed to arrive at the estimates. The first stage is estimated using Tobit Model, while OLS is applied in the second stage. The study finds significant intra-bloc export creation in SAPTA; however, at the same time there is evidence of net export diversion in the SAPTA. Bangladesh, India and Pakistan are expected to gain from joining the RTA, while Nepal, Maldives and Sri Lanka are likely to be negatively affected. Among the other RTAs covered under the present study, AFTA, NAFTA, SADC, MERCOSUR, CAN, EAC are associated with intra-bloc export creation and net export diversion. EU and Bangkok agreement (APTA) are found to be intra-bloc export diverting and net export diverting. BIMSTEC is found to be intra-bloc export diverting but there is no evidence of net export creation or diversion. Although none of the RTAs covered by the study was found to be net export creating, more than one third of the members of these RTAs are found to be positively affected by joining the RTAs.

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Bibliographic Info

Paper provided by East Asian Bureau of Economic Research in its series Trade Working Papers with number 22296.

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Date of creation: Jan 2006
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Handle: RePEc:eab:tradew:22296

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Keywords: Bangladesh; SAFTA; Augmented Gravity Model; Trade Potential;

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References

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  1. José Anson & Olivier Cadot & Antoni Estevadeordal & Jaime De Melo & Akiko Suwa-Eisenmann & Bolormaa Tumurchudur, 2005. "Rules of origin in North-South preferential trading arrangements with an application to NAFTA," Working Papers 156782, Institut National de la Recherche Agronomique, France.
  2. Souleymane Coulibaly & Lionel Fontagné, 2004. "South – South Trade: Geography Matters," Working Papers 2004-08, CEPII research center.
  3. Fukao, Kyoji & Okubo, Toshihiro & Stern, Robert M., 2002. "An Econometric Analysis of Trade Diversion under NAFTA," Discussion Paper Series a431, Institute of Economic Research, Hitotsubashi University.
  4. Elhanan Helpman & Marc Melitz & Yona Rubinstein, 2006. "Trading Partners and Trading Volumes," DEGIT Conference Papers c011_022, DEGIT, Dynamics, Economic Growth, and International Trade.
  5. Bergstrand, Jeffrey H, 1985. "The Gravity Equation in International Trade: Some Microeconomic Foundations and Empirical Evidence," The Review of Economics and Statistics, MIT Press, vol. 67(3), pages 474-81, August.
  6. Anderson, James E, 1979. "A Theoretical Foundation for the Gravity Equation," American Economic Review, American Economic Association, vol. 69(1), pages 106-16, March.
  7. Soloaga, Isidro & Alan Wintersb, L., 2001. "Regionalism in the nineties: what effect on trade?," The North American Journal of Economics and Finance, Elsevier, vol. 12(1), pages 1-29, March.
  8. James E. Anderson & Eric van Wincoop, 2003. "Gravity with Gravitas: A Solution to the Border Puzzle," American Economic Review, American Economic Association, vol. 93(1), pages 170-192, March.
  9. Egger, Peter, 2000. "A note on the proper econometric specification of the gravity equation," Economics Letters, Elsevier, vol. 66(1), pages 25-31, January.
  10. I-Hui Cheng & Howard J. Wall, 2005. "Controlling for heterogeneity in gravity models of trade and integration," Review, Federal Reserve Bank of St. Louis, issue Jan, pages 49-63.
  11. Jonathan Eaton & Samuel Kortum, 2002. "Technology, Geography, and Trade," Econometrica, Econometric Society, vol. 70(5), pages 1741-1779, September.
  12. Philippa Dee & Jyothi Gali, 2003. "The Trade and Investment Effects of Preferential Trading Arrangements," NBER Working Papers 10160, National Bureau of Economic Research, Inc.
  13. Inmaculada Martínez-Zarzoso & Felicitas Nowak-Lehmann, 2003. "Augmented Gravity Model: An Empirical Application to Mercosur-European Union Trade Flows," Journal of Applied Economics, Universidad del CEMA, vol. 0, pages 291-316, November.
  14. Hassan, M. Kabir, 2001. "Is SAARC a viable economic block? evidence from gravity model," Journal of Asian Economics, Elsevier, vol. 12(2), pages 263-290.
  15. Inmaculada Martínez-Zarzoso & Felicitas Nowak-Lehmann D., 2003. "Augmented gravity model: An empirical application to Mercosur- European trade flows," International Trade 0309019, EconWPA.
  16. Lucian Cernat, 2001. "ASSESSING REGIONAL TRADE ARRANGEMENTS: ARE SOUTH–SOUTH RTAs MORE TRADE DIVERTING?," International Trade 0109001, EconWPA.
  17. Bergstrand, Jeffrey H, 1989. "The Generalized Gravity Equation, Monopolistic Competition, and the Factor-Proportions Theory in International Trade," The Review of Economics and Statistics, MIT Press, vol. 71(1), pages 143-53, February.
  18. Laszlo Matyas, 1997. "Proper Econometric Specification of the Gravity Model," The World Economy, Wiley Blackwell, vol. 20(3), pages 363-368, 05.
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Citations

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Cited by:
  1. Raihan, Selim, 2011. "Economic Corridors in South Asia: Exploring the Benefits of Market Access and Trade Facilitation," MPRA Paper 37883, University Library of Munich, Germany.
  2. Mustafizur Rahman & Towfiqul Islam Khan & Ashiqun Nabi & Tapas Kumar Paul, 2010. "Bangladesh's Export Opportunities in the Indian Market: Addressing Barriers and Strategies for Future," CPD Working Paper 90, Centre for Policy Dialogue (CPD).
  3. Parakrama Samaratunga & Kamal Marunagoda & Manoj Thibbotuwawa, 2007. "Mapping and analaysis of the South Asian agricultural trade liberalization efforts," STUDIES IN TRADE AND INVESTMENT, in: Studies in Trade and Investment - AGRICULTURAL TRADE - PLANTING THE SEEDS OF REGIONAL LIBERALIZATION IN ASIA, volume 60, pages 33-74 United Nations Economic and Social Commission for Asia and the Pacific (ESCAP).
  4. Mamoon, Dawood & Paracha, Sohail & Mughal, Hammad & Ayesha, Anam, 2011. "Pakistan's trade competitiveness & complementarities in South Asia," MPRA Paper 31369, University Library of Munich, Germany.
  5. Pohit, Sanjib, 2013. "India-Pakistan Trade Liberalization: A CGE Modelling Apporach," MPRA Paper 45878, University Library of Munich, Germany.
  6. Nazia Gul & Hafiz M. Yasin, 2011. "The Trade Potential of Pakistan: An Application of the Gravity Model," Lahore Journal of Economics, Department of Economics, The Lahore School of Economics, vol. 16(1), pages 23-62, Jan-Jun.
  7. Raihan, Selim, 2012. "SAFTA and the South Asian Countries: Quantitative Assessments of Potential Implications," MPRA Paper 37884, University Library of Munich, Germany.
  8. Md. Joynal Abdin, 2009. "An Analysis of SAFTA in the Context of Bangladesh," Bangladesh Development Research Working Paper Series (BDRWPS) BDRWPS No. 6, Bangladesh Development Research Center (BDRC).

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