Trade impacts of South Asian Free Trade Agreements: The case of Sri Lanka

This article aims to examine the trade effects of the South Asian FTAs including regional and bilateral ones with a focus on Sri Lanka, by applying a gravity trade model as an analytical framework. The study specifically targets the following three FTAs: the South Asian Free Trade Agreement (SAFTA) enforced in 2006, the India-Sri Lanka Free Trade Agreement (ISFTA) in 2001, and the Pakistan-Sri Lanka Free Trade Agreement (PSFTA) in 2005. The outcomes of the gravity trade model estimation suggested that the trade creation effects were identified in the ISFTA, while those were not verified in the SAFTA, and that the PSFTA had the trade creation effects only on the Sri Lankan imports. Those results seems to reflect the differentials in the preferential tariff rates and in the presence of negative list among the individual FTA frameworks. In particular, ISFTA could have the predominant positive effects on Sri Lankan trade flows due to its lowest preferential tariff rates since the early stage of its enforcement, and thus the SAFTA effect might be crowded out at the current stage of Sri Lankan trade. Keyword: the South Asian Free Trade Agreement (SAFTA), the India-Sri Lanka Free Trade Agreement (ISFTA), the Pakistan-Sri Lanka Free Trade Agreement (PSFTA), the South Asian Association for Regional Cooperation (SAARC), and gravity trade model JEL Classification Codes: F13, F14, O53