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Trade Potential in SAFTA: An Application of Augmented Gravity Model

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  • Mustafizur Rahman
  • 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 Centre for Policy Dialogue (CPD) in its series CPD Working Paper with number 61.

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Length: 29 pages
Date of creation: Dec 2006
Date of revision:
Handle: RePEc:pdb:opaper:61

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Keywords: Trade potential; SAFTA; RTA; Gravity Model; Bangladesh; India; Pakisthan; Sri Lanka; Nepal; Maldives;

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References

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  1. Egger, Peter, 2000. "A note on the proper econometric specification of the gravity equation," Economics Letters, Elsevier, Elsevier, vol. 66(1), pages 25-31, January.
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Cited by:
  1. Raihan, Selim, 2012. "SAFTA and the South Asian Countries: Quantitative Assessments of Potential Implications," MPRA Paper 37884, University Library of Munich, Germany.
  2. Parakrama Samaratunga & Kamal Marunagoda & Manoj Thibbotuwawa, 2007. "Mapping and analaysis of the South Asian agricultural trade liberalization efforts," STUDIES IN TRADE AND INVESTMENT, United Nations Economic and Social Commission for Asia and the Pacific (ESCAP), 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).
  3. 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.
  4. 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, Centre for Policy Dialogue (CPD) 90, Centre for Policy Dialogue (CPD).
  5. Shahid Ahmed & Sushil Kumar, 2014. "Impact of Sensitive Lists under SAFTA: Quantitative Assessment using a Partial Equilibrium Modeling," 2014 Papers, Job Market Papers pah96, Job Market Papers.
  6. Pohit, Sanjib, 2013. "India-Pakistan Trade Liberalization: A CGE Modelling Apporach," MPRA Paper 45878, University Library of Munich, Germany.
  7. 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).
  8. 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.
  9. 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, Department of Economics, The Lahore School of Economics, vol. 16(1), pages 23-62, Jan-Jun.

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