Moribund SAFTA and trade policy options for South Asia

Abstract

In response to meager intra-regional trade flow South Asian countries formed their regional trade bloc SAFTA (South Asian Free Trade Area) in 2004 and made operational from 2006.Defying the rhetoric of the leaders and expectation of the masses, this bloc could not make any progress until now. Using panel data over the past thirty years from the seven member states and a random effect methodology that controls for endogenous predictors, the study shows that when gravity related and other variables are controlled for SAFTA turns out to be dysfunctional. The reasons for such failure can be attributed to the thin preferential margins on only a few number of tariff lines whose benefits are evaporated once complying with the rules of origin issue and complicated administrative procedure are taken into account. Moreover appearances of new generations of traded products (e.g. computing and telecommunications equipment) that are sourced from outside the region and changes of demand structure in favor of these commodities have made South Asian trade more outward oriented. Since the “free” trade bloc is not working in South, the paper concludes that alternative trade policy options like unilateral liberalization and seeking for multiple preferential agreements can buttress trade linked growth of the region.