Impact of SAFTA on South Asian Trade

Abstract

The formation of regional trading blocs has been a subject of many debates, particularly with respect to trade creation and trade diversion in static and dynamic senses. Our study discusses this issue by examining how South Asian Regional Free Trade Area (SAFTA) affects bilateral trade flows. Results show that formation of SAFTA has been associated with an increase in bilateral trade flows within its member countries as well as between member and non-member countries. These positive intra-bloc and extra-bloc effects imply that SAFTA could develop further into a trade creating regional bloc, thereby addressing the concerns of the skeptics that SAFTA will have substantial net trade diversion effects.