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Preferential trading in South Asia


  • Baysan, Tercan
  • Panagariya, Arvind
  • Pitigala, Nihal


The authors examine the economic case for the South Asia Free Trade Area (SAFTA) Agreement signed on January 6, 2004 by India, Pakistan, Bangladesh, Sri Lanka, Nepal, Bhutan, and the Maldives. They start with a detailed analysis of the preferential trading arrangements in South Asia to look at the region's experience to date and to draw lessons. Specifically, they examine the most effective free trade area in existence-the India-Sri Lanka Free Trade Area-and evaluate the developments under the South Asian Preferential Trade Area (SAPTA). The authors conclude that, considered in isolation, the economic case for SAFTA is weak. When compared with the rest of the world, the region is tiny both in terms of economic size as measured by GDP (and per capita incomes) and the share in world trade. It is argued that these facts make it unlikely that trade diversion would be dominant as a result of SAFTA. This point is reinforced by the presence of high levels of protection in the region and the tendency of the member countries to establish highly restrictive"sectoral exceptions and sensitive lists"and stringent"rules of origin."The authors argue that the SAFTA makes sense only in the context of a much broader strategy of creating a larger preferential trade area in the region that specifically would encompass China and the member nations of the Association of South East Asian Nations. In turn, the case for the latter is strategic: the pursuit of regionalism in the Americas and Europe has created increasing discrimination against Asian exports to those regions, which must inevitably affect the region's terms of trade adversely. An Asian bloc could be a potential instrument of changing incentives for the trade blocs in the Americas and Europe and forcing multilateral freeing of trade. Assuming that the SAFTA Agreement is here to stay, the authors suggest steps to ensure that the Agreement can be made more effective in promoting intra-regional trade, while minimizing the likely trade-diversion costs and maximizing the potential benefits.

Suggested Citation

  • Baysan, Tercan & Panagariya, Arvind & Pitigala, Nihal, 2006. "Preferential trading in South Asia," Policy Research Working Paper Series 3813, The World Bank.
  • Handle: RePEc:wbk:wbrwps:3813

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    References listed on IDEAS

    1. Timothy J. Kehoe, 2003. "An evaluation of the performance of applied general equilibrium models of the impact of NAFTA," Staff Report 320, Federal Reserve Bank of Minneapolis.
    2. Jayatilleke S. Bandara & Wusheng Yu, 2003. "How Desirable is the South Asian Free Trade Area? A Quantitative Economic Assessment," The World Economy, Wiley Blackwell, vol. 26(9), pages 1293-1323, September.
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    Cited by:

    1. Richard Pomfret, 2007. "Is Regionalism an Increasing Feature of the World Economy?," The World Economy, Wiley Blackwell, vol. 30(6), pages 923-947, June.
    2. Jose Daniel Rodríguez-Delgado, 2007. "Safta; Living in a World of Regional Trade Agreements," IMF Working Papers 07/23, International Monetary Fund.
    3. repec:asi:aeafrj:2017:p:1179-1196 is not listed on IDEAS
    4. A. Ganesh Kumar & Gordhan Kumar Saini, 2007. "Economic co-operation in South Asia: The Dilemma of SAFTA and beyond," Indira Gandhi Institute of Development Research, Mumbai Working Papers 2007-017, Indira Gandhi Institute of Development Research, Mumbai, India.
    5. McDonald, Scott & Robinson, Sherman & Thierfelder, Karen, 2008. "Asian Growth and Trade Poles: India, China, and East and Southeast Asia," World Development, Elsevier, vol. 36(2), pages 210-234, February.
    6. Ahmed, Saira & Ahmed, Vaqar & Sohail, Safdar, 2010. "Trade agreements between developing countries: a case study of Pakistan - Sri Lanka free trade agreement," MPRA Paper 29209, University Library of Munich, Germany.
    7. Institute for International Trade, 2006. "A Comparative Analysis of Trade Facilitation in Selected Regional and Bilateral Trade Agreement," Working Papers 1706, Asia-Pacific Research and Training Network on Trade (ARTNeT), an initiative of UNESCAP and IDRC, Canada..
    8. Hossain, Sharif M., 2009. "South Asian Free Trade Area: Implications for Bangladesh," MPRA Paper 18517, University Library of Munich, Germany.
    9. Namra Awais, 2016. "Was the SAFTA (Phase II) Revision Successful? A Case Study of Bangladesh’s RMG Exports to India," Lahore Journal of Economics, Department of Economics, The Lahore School of Economics, vol. 21(1), pages 151-182, Jan-June.

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    Free Trade; Trade Policy; Trade Law; Economic Theory&Research; Trade and Regional Integration;

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