Economic co-operation in South Asia: The Dilemma of SAFTA and beyond

Abstract

This paper attempts to evaluate the Pareto optimality of SAFTA for all the member states. Besides, the welfare optimality of three other alternative sets of coordinated trade policies that go beyond SAFTA has also been studied here. These include (a) extended preferential trading between SAFTA and three other major trading blocs (ASEAN, NAFTA and EU27), (b) coordinated full trade liberalisation (carried out unilaterally or as part of a multilateral agreement) by South Asian countries, and (c) SAFTA plus a customs union (two variants with 5% and 10% CET). The analysis, using the standard static GTAP model, shows that the welfare basis for establishing SAFTA or for deeper trade policy coordination is not very strong. Nor is it obvious that cooperation among the South Asia would be forthcoming given the anticipated welfare impacts.