Report

2 Literature Review and
Rationale for SAFTA
LITERATURE REVIEW
RTA and FTA objectives include: market access; investment
attraction; strengthening domestic policy reform
and positive signaling to investors; increased bargaining
power vis-à-vis third countries (a particularly strong
motivation in the case of Mercosur; the actual or potential
use of regional agreements for tactical purposes by
countries seeking to achieve multilateral objectives and
strategic objectives. (Slazar-Xirinachs, 2002)
RTAs, as frequently pointed out in the literature,
are measures that allow countries to ‘lock-in’ reforms,
both in trade and non-trade areas, and therefore function
as good commitment mechanisms, enhancing the
credibility of policy reform and sending positive signals
to global markets. But how effective RTAs can act as
commitment mechanisms depends on the credibility of
the threat of action if rules are broken. In the context
of SAFTA, since judicial and enforcement mechanisms
have not been explicitly spelt out given the national
sensitivities, member to member resolution of disputes
may be the best option.
Another positive link between RTAs and domestic
reforms occurs to the extent that RTAs accelerate
domestic reforms that reduce price distortions because
countries can no longer maintain substantial price
differentials when they open up their economies. In
other words, RTAs put pressure on countries to eliminate
domestic distortions that are incompatible with
free trade, and in this sense they serve as building blocks
towards multilateral liberalisation.
A third type of positive influence of RTAs on
domestic policy reform, for which there is a fair amount
of anecdotal evidence, is that these agreements have
induced positive behavioural changes in the traditionally
rent-seeking behaviour by the business communities.
In many countries, the prospect and the reality
of increased import competition has led the local
business communities to be more interested in reducing
domestic distortions in transportation costs, the costs
of telephone calls, electricity rates, and interest rates
that hinder their ability to compete with firms from
countries with which FTAs have been entered. SAFTA,
to the extent that it reduces rents for high tariff
protected intermediate products, will reduce costs for
downstream finished products manufacturers, and
make them more costs competitive both regionally and
globally. Regional trade agreements can therefore help
countries build on their comparative advantages,
sharpen their industrial efficiency, and act as a springboard
to integrate into the world economy.
In the context of RTAs, there have been several
studies that have examined the likely impacts of SAFTA.
However, the debates on rationale of SAFTA have
focused on its desirability, feasibility and implementation.
Jayatillake (2001) addresses the question of desirability
of SAFTA using a global computable general
equilibrium (CGE) model. The study identifies three
types of viewpoints on SAFTA (optimistic, pessimistic
and moderate) and supports the pessimistic view. The
study examines six conditions highlighted in the PTA
literature for the successful implementation of a PTA.
These are: geographical proximity; high pre-PTA tariffs;
high level of intra-regional trade; the existence of trade
complimentarily; differences in economic structure
based on competitiveness; and less political tensions
among member countries. Examining the conditions
in South Asia in the context of these prerequisites indicates
that the conditions required for creating a successful,
trade promoting PTA might be lacking in the region.
Further, the study uses a standard GTAP model to
evaluate the effect of SAFTA. Two opposite policy simulations
are performed, i.e. a unilateral trade liberalisation
scenario and a preferential trade liberalisation
scenario. The results show that while the impact of