Abstract:
South Asian Free Trade Area (SAFTA) depicts a huge potentiality in expanding intra-regional trade
leading to a net trade creation for the region. Yet, prevailing inter-state political disputes and inner-state
conflicts within the region tend to hinder intra-regional trade. Lack of prior studies that concentrate on
these political factors when assessing the desirability of South Asian trade agreements motivates the
present study. Thus, this study investigates the trade creation and trade diversion effects of SAFTA after
controlling for political factors. In this regard, an augmented gravity model is employed over the period
2003 to 2013. Static linear panel estimation methods of pooled ordinary least square, random effects, and
fixed effect methods are used in arriving at the results. Results confirm the desirability of SAFTA with the
presence of significant intra-bloc and extra-bloc trade expansions. Further, SAFTA shows a significant
anticipation effect as trade expansions are significant even prior to its implementation and they continued to
be significant until 2012. Also, this study empirically confirms the deleteriousness of the region’s political
factors in expanding trade.
