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1 Introduction<br />
THE CONTEXT<br />
South Asia comprises eight economies – Afghanistan,<br />
Bangladesh, Bhutan, India, Maldives, Nepal, Pakistan<br />
and Sri Lanka – which are members of the South Asian<br />
Association for Regional Cooperation (SAARC).<br />
Afghanistan is the newest entrant to SAARC. The seven<br />
SAARC countries concluded the South Asian Free Trade<br />
Agreement (SAFTA) on 6 January 2004 which marked<br />
the consolidation of their efforts to pursue and greater<br />
economic integration in the region.<br />
The objectives of the treaty are sought to be<br />
achieved in the following ways:<br />
• Eliminating barriers to trade and facilitating crossborder<br />
movement of goods.<br />
• Promoting conditions of fair competition and<br />
ensuring equitable benefits, taking into account<br />
their respective levels and patterns of economic<br />
development<br />
• Creating effective mechanisms for the implementation<br />
and application of the agreement, for its joint<br />
administration and the resolution of disputes<br />
• Establishing a framework for further regional<br />
cooperation to expand and enhance mutual<br />
benefits.<br />
While the steps towards regional cooperation began<br />
with the setting up of SAARC, it did not cover issues<br />
specifically pertaining to greater trade and economic<br />
cooperation. Initially, SAARC’s focus was confined to<br />
nine areas of regional cooperation which included<br />
transport, communication, science and technology,<br />
education, culture, health, population, sports and arts.<br />
However, with the rise in regional agreements and<br />
economic cooperation around the world and the<br />
reforms in the region towards liberalisation, there was<br />
increased consensus on the need to deepen economic<br />
relations and specifically increase trade integration<br />
among economies in South Asia. This led to the signing<br />
of the South Asian Preferential Trading Agreement<br />
(SAPTA) in 1993 at the seventh SAARC summit held<br />
in Dhaka. SAPTA came into force in December 1995<br />
after the first round of negotiations was concluded in<br />
April 1995. Though concessions were agreed on a large<br />
number of products under this agreement, there was<br />
no substantial increase in trade under this agreement.<br />
The idea of creating SAFTA came about at the 19th<br />
session of the SAARC Ministerial Council in December<br />
1995. The SAFTA was duly signed on 6 January 2004<br />
during the 12th SAARC Summit.<br />
This study aims to provide an in-depth assessment<br />
of the likely changes induced by SAFTA on South Asian<br />
countries and South Asia region as a whole. The emphasis<br />
of the analysis has been based on three criteria:<br />
• Whether the trade-affected areas are already under<br />
stress or boom<br />
• Whether significant economic impacts are likely to<br />
be linked to trade measures<br />
• Whether there are likely to be cumulative impacts<br />
that could be significant<br />
An assessment of the economic rationale of SAFTA<br />
is made and likely consequences of various tariff reduction<br />
scenarios on the region as a whole and on individual<br />
member countries of SAARC is computed. The<br />
impact of SAFTA on variables such as trade, inflows<br />
and outflows of investments, production, prices, revenues,<br />
income and welfare has been estimated. The<br />
impacts of SAFTA on trade and foreign direct investments<br />
into the region have been estimated using the<br />
gravity model and panel data estimations. The study<br />
also examines the revenue implications for the region<br />
and assesses the possibilities of whether trade creation<br />
and consequent revenue generation will offset losses<br />
due to reductions in tariffs. The implications of SAFTA<br />
for less developed countries (LDCs) of the region, in<br />
particular, have been examined.<br />
Econometric modelling has been used to assess the<br />
quantitative impacts of SAFTA. Different econometric/<br />
statistical techniques, like revealed comparative<br />
advantage (RCA); complementarity index; intraindustry<br />
trade (IIT) index; computable general