How desirable is the South Asian free trade area? A quantitative assessment

The proliferation of preferential trading agreements (PTAs) in different regions of the world has been a significant development over the last two decades or so. South Asian countries are slowly moving towards a South Asia Free Trade Area (SAFTA) in recent years. The desirability of SAFTA has been questioned by some observers recently. Do necessary conditions exist for a successful PTA in South Asia? Will SAFTA create gains for its members or not? Is it better for South Asian countries to promote non-discriminatory trade liberalisation rather than promote SAFTA? Does SAFTA encourage unilateral trade liberalisation in the South Asian region? The main objective of this paper is to address some of the above questions, especially the desirability of SAFTA, using trade data and a global computable general equilibrium (CGE) model. From the existing empirical and theoretical studies, we have identified three viewpoints on the desirability (or viability) of SAFTA: pessimistic, optimistic, and moderate. Our discussion of the necessary conditions for forming a SAFTA, and the present political climate in South Asia seem to support the pessimistic view. Results from two policy scenarios (unilateral liberalisation and preferential liberalisation) confirm the pessimistic view by showing that unilateral liberalisation would benefit South Asia countries much more than preferential liberalisation. In fact, under preferential liberalisation, small countries in the region would gain little or even lose. 77 EAAE Seminar / NJF Seminar No. 325, August 17-18, 2001, Helsinki How desirable is the South Asian free trade area? A quantitative assessment Jayatilleke S Bandara and Wusheng Yu