Implications of “South Asia Free Trade Agreement” (Safta) in Economic Development
Implications of “South Asia Free Trade Agreement” (SAFTA) in Economic Development
1. Introduction
Regional (or Free) Trade Agreements (RTA/FTA) are an attempt to achieve economic gains from the free flow of trade and investment between neighbouring countries. RTAs can lead to increased protection for exporters and reduced protection for importers. Reduced protection can lead to trade creation while enhanced protection increases trade diversion (Grossman and Helpman 1995). Trade diversion can lead to increased transaction costs for countries outside of the RTA, weakening the predictability and transparency of international trade relations and could lead to alterations in global trade due to trade and investment diversions (Hill, 2007). Over the last decade, the number of such RTAs has been steadily increasing, mainly due to slow progress of multilateral trade negotiations in the Doha round (Crawford and Fiorentino, 2005). SAFTA, formed in 2006, is an extension of SAPTA and SAARC towards free trade, to achieve economic benefits among the countries - Bangladesh, Bhutan, India, Maldives, Nepal, Pakistan and Sri Lanka. The level of intra-regional trade has been low in this region, and import tariffs have remained high, which does not encourage the success of an FTA (Bandara and Yu, 2003). This reports studies the implications of the SAFTA and its associated nations on global trade, global investment, production efficiency and greater integration of regional economies in the multilateral system.
2. Implications on Global trade
Research on the implications of SAFTA on global trade have been limited, however in general, Crawford and Fiorentino (2005) suggest that trading blocs do not hamper or ‘develop a fortress’ for trade outside the FTA or RTA. Hill (2007) thinks otherwise and cites from the example of EU as a fortress to global trade because the EU has created trade and investment only in certain politically sensitive areas. Thus RTAs cause problems in
1. Introduction
Regional (or Free) Trade Agreements (RTA/FTA) are an attempt to achieve economic gains from the free flow of trade and investment between neighbouring countries. RTAs can lead to increased protection for exporters and reduced protection for importers. Reduced protection can lead to trade creation while enhanced protection increases trade diversion (Grossman and Helpman 1995). Trade diversion can lead to increased transaction costs for countries outside of the RTA, weakening the predictability and transparency of international trade relations and could lead to alterations in global trade due to trade and investment diversions (Hill, 2007). Over the last decade, the number of such RTAs has been steadily increasing, mainly due to slow progress of multilateral trade negotiations in the Doha round (Crawford and Fiorentino, 2005). SAFTA, formed in 2006, is an extension of SAPTA and SAARC towards free trade, to achieve economic benefits among the countries - Bangladesh, Bhutan, India, Maldives, Nepal, Pakistan and Sri Lanka. The level of intra-regional trade has been low in this region, and import tariffs have remained high, which does not encourage the success of an FTA (Bandara and Yu, 2003). This reports studies the implications of the SAFTA and its associated nations on global trade, global investment, production efficiency and greater integration of regional economies in the multilateral system.
2. Implications on Global trade
Research on the implications of SAFTA on global trade have been limited, however in general, Crawford and Fiorentino (2005) suggest that trading blocs do not hamper or ‘develop a fortress’ for trade outside the FTA or RTA. Hill (2007) thinks otherwise and cites from the example of EU as a fortress to global trade because the EU has created trade and investment only in certain politically sensitive areas. Thus RTAs cause problems in
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