Report

Executive Summary
OBJECTIVE
This study provides an in-depth assessment of the likely
changes induced by South Asian Free Trade Agreement
(SAFTA) on South Asian countries and on the region
as a whole. The emphasis of the analysis is based on
three criteria:
• Whether the trade affected areas are already under
stress or boom
• Whether significant economic impacts are likely to
be linked to trade measures
• Whether there are likely to be cumulative impacts
that could be significant
The study undertakes both quantitative and
qualitative assessments of the outcomes of SAFTA.
Economic modeling has been used to assess the
quantitative impacts of SAFTA. The analysis of the
impact is preceded by the analysis of changing
competitiveness and complementarity among SAFTA
member countries. The change in inter-industry and
intra-industry trade over time among the member
countries is also examined. An attempt has been made
to assess the likely consequences of SAFTA on effective
additional market access (EAMA) that member
countries may obtain. The impact of various SAFTA
scenarios is simulated on variables such as prices,
income and welfare at the regional level as well as at
the country level. Further, the study examines the
impact of deepening of SAFTA by including investment
cooperation and trade in services. This is done by
analysing the impact of SAFTA on inward foreign direct
investment (FDI) flows into the region and possibility
of rise in intra-regional FDI flows. The study includes
analysis of the benefits that would accrue from
transport and trade facilitation under four identified
infrastructure projects, viz., road, air, rail, and port
enhancement for the region.
Deepening integration in South Asia to include
trade in services and possibilities of mutual recognition
agreements (MRAs) with respect to some sub-sectors
in services has been examined. An in-depth analysis
has been undertaken for identifying restriction on trade
in services like health and related services, higher
education, tourism and travel-related services,
telecommunication services and construction and
related services.
Along with the benefits of SAFTA, an important
cost of SAFTA, which is revenue loss for the member
countries, has been examined in detail. Simulations for
different scenarios have been undertaken to estimate
the extent of revenue loss for each member country.
Besides providing a prognosis, the study will help
in the formulation of concrete policy measures to ensure
greater gains while mitigating potential negative
impacts. The study also aims to lead to the development
of ideas for technical assistance and on issues of cooperation.
It provides economic and social assessments
using analytical tools and rational causal chain analysis.
METHODOLOGY AND KEY RESULTS
Various econometric methodologies have been used by
the study to arrive at its quantitative results. The tools
of analyses include revealed comparative advantage
(RCA) indices; complementarity indices; intra-industry
trade indices; panel data estimations; gravity model
estimations; simulations using smart simulations and
global trade analysis project (GTAP) modeling. The
GTAP model provides sophisticated analysis of
possible direct effects of SAFTA including various
feedback effects across several sectors and countries.
The modeling results offer valuable quantitative
information. The fact that some of the policy
scenarios have already been set, and implementation
has commenced, adds to the greater precision with
which the GTAP model can be used as a predictive tool. 1
To estimate the gains by transport facilitation, benefit
1
The latest GTAP 6.02 (limited release) version has been used. The advantage of this version is that it includes Pakistan, the
second largest economy in the region, as a separate entity. In the earlier version 6.00, Pakistan was clubbed with ‘Rest of