Evaluating the Intra–regional Exports and Trade Creation and Trade Diversion Effects of Trade Agreements in SAARC Countries

Abstract

Notwithstanding the persevering endeavours of South Asian Association for Regional Cooperation (SAARC) countries to enhance economic cooperation and intra–regional trade, contentions exist amongst analysts on the objective that has remained rather elusive for over two decades. Against this backdrop, this article investigates the impact of trade agreements amongst SAARC countries on intra–regional exports by employing an augmented gravity model and a pooled panel data for the period 1980–2005. Empirical tests find scant evidence of the impact of trade agreements on exports in the pre–SAARC and pre–South Asian Preferential Trading Arrangement (SAPTA) periods, but discern a statistically significant and positive impact in the post–SAARC and post–SAPTA periods. Further tests suggest a clear evidence of trade creation above and beyond the catalytic effect of SAPTA, but only for those countries that have trade agreements in place, while the reverse is true for those that do not have such agreements. Also, the increased exports in the latter half of the period under consideration emanates as a combined effect of SAPTA as well as the delayed impact from the existing bilateral trade agreements amongst the member states.

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