GTAP Resources: Resource Display
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"Welfare Effects of South Asian Free Trade Area (SAFTA)" by Raihan, Selim and Mohammad Razzaque Abstract In trade literature the welfare effects of any regional trading arrangement (RTA) are analysed using two concepts: trade creation and trade diversion. If trade creation dominates, the formation of a free-trade area will enhance welfare. Studies based on the partial equilibrium gravity model to estimate the welfare gains from regional trading arrangements (RTAs) are methodologically flawed. The left hand side of the gravity equation is the bilateral trade not the welfare. Also, the impact of the RTA is captured by introducing dummy variables in the equation which is a very weak methodology. Furthermore, gravity models are partial equilibrium analysis, not a general equilibrium analysis; therefore, they fail to take into consideration the inter-sectoral and inter-regional linkage effects. Therefore, gravity models can not actually estimate the trade creation and trade diversion impacts of RTAs. Using the global general equilibrium model, namely the GTAP model, our research has estimated the trade creation and trade diversion aspects of the total welfare effects of SAFTA scenarios. It appears that a full implementation of SAFTA will lead to welfare gains for India, Sri Lanka and rest of South Asian countries, though Bangladesh suffers from welfare loss. Bangladesh’s welfare loss is mainly driven by the negative trade diversion effect. However, trade diversion for Bangladesh and possibly for other LDCs under SAFTA is inevitable. Bangladesh and other LDCs in South Asia will have to raise their export share into the Indian market substantially in order to increase welfare through positive terms of trade effect. Export diversification in this regard is very important. Technical assistance to Bangladesh and other South Asian LDCs to diversify their export basket can be a vital agenda. It should also be noted that the Special and Different Treatments for the LDCs under SAFTA are not sufficient, especially maintaining the sensitive list for some of the critical products by India will not help the South Asian LDCs to increase their export share. Simulation results also suggest that the negative trade diversion effect can be undermined by some associated unilateral trade liberalisation measures in Bangladesh. |
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Public Access  GTAP Resource 2251 (307.0 KB) Replicated: 0 time(s)Restricted Access No documents have been attached. Special Instructions No instructions have been specified. |
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Last Modified: 9/15/2023 2:05:45 PM
