Implications of “South Asia Free Trade Agreement” (Safta) in Economic Development

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Implications of “South Asia Free Trade Agreement” (SAFTA) in Economic Development

1. Introduction

Regional (or Free) Trade Agreements (RTA/FTA) are an attempt to achieve economic gains from the free flow of trade and investment between neighbouring countries. RTAs can lead to increased protection for exporters and reduced protection for importers. Reduced protection can lead to trade creation while enhanced protection increases trade diversion (Grossman and Helpman 1995). Trade diversion can lead to increased transaction costs for countries outside of the RTA, weakening the predictability and transparency of international trade relations and could lead to alterations in global trade due to trade and investment diversions (Hill, 2007). Over the last decade, the number of such RTAs has been steadily increasing, mainly due to slow progress of multilateral trade negotiations in the Doha round (Crawford and Fiorentino, 2005). SAFTA, formed in 2006, is an extension of SAPTA and SAARC towards free trade, to achieve economic benefits among the countries - Bangladesh, Bhutan, India, Maldives, Nepal, Pakistan and Sri Lanka. The level of intra-regional trade has been low in this region, and import tariffs have remained high, which does not encourage the success of an FTA (Bandara and Yu, 2003). This reports studies the implications of the SAFTA and its associated nations on global trade, global investment, production efficiency and greater integration of regional economies in the multilateral system.

2. Implications on Global trade

Research on the implications of SAFTA on global trade have been limited, however in general, Crawford and Fiorentino (2005) suggest that trading blocs do not hamper or ‘develop a fortress’ for trade outside the FTA or RTA. Hill (2007) thinks otherwise and cites from the example of EU as a fortress to global trade because the EU has created trade and investment only in certain politically sensitive areas. Thus RTAs cause problems in balanced development of world trade due to trade diversion especially if such preferential agreements do not consider multilateral liberalisation attempts. More specifically, in relation to SAFTA, among other nations, India and Pakistan together account for about 1-2% of global textile trade, which is quite less to be able to seek even joint concession in global markets. However, through increased and progressive bilateral trade, these nations can deal with other blocs more strongly (Jain, 1999). Thus, it is possible that exports to NAFTA and EU may drop and exports to other South Asian countries may increase leading to increased transaction costs for them such as bargaining and lobbying. Consequently, imports from South Asian countries may also increase. India, which is the most economically developed nation in the SAFTA group, may gain from this scenario (Bandara and Yu, 2003). Jain (1999) argues that this however depends on the trade bloc’s external tariffs; and that the higher such tariffs, the higher the transaction costs will be for outside exporters to trade with SAFTA countries as compared to trading among the members of SAFTA. At a broad level, Pigato et al (1997) used the global CGE model using the Global Trade Analysis Project (GTAP) to assess the effects of SAPTA on global trade and found that SAPTA will create welfare gains for its member countries. Thus, the outcome of current limited research seems to suggest that the impact of SAFTA on global trade will be marginal with greatest benefit to India, even though it may create some trade diversion effects causing complexities to India’s global trade scenario.

3. Implications on Global investment

In general, RTAs seem to have a positive impact on global investment particularly in countries with low costs of labour, which can get access to larger and more developed markets in the bloc. For instance in the NAFTA, Mexico’s membership gained it good FDI inflows from US and Canada (Crawford and Fiorentino,...
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