Why geography does not work to SAFTA’s benefit

CATR analysis shows that trade within the SAFTA region is still largely geared towards primary commodities, necessitating a change in policy approach towards encouraging technology transfer, skill upgradation and facilitating the rise of regional conglomerates.

• Growth in intra SAFTA trade remained slightly higher than that with rest of the world in last five years. Intra-SAFTA exports grew by 8.7%, while SAFTA’s exports to the rest of the world surged by 6.4%. While, the percentage point difference between intra-SAFTA import growth and the rest of the world was only one for the said time period.
• Statistically, intra-SAFTA trade growth might seem to outweigh SAFTA’s trade growth by some margin.
• As a regional trading bloc, SAFTA is unable to statistically justify intra-regional trade. Log of GDP also did not explain intra-regional imports of all and primary commodities. But in the case of intra-regional exports for primary commodities log of the GDP of SAFTA is significantly explaining the intra exports of primary commodities.
• For high end technological products, SAFTA economies are dependent on developed nations. It would not be incorrect in saying that apart from reducing the import tariff rates within SAFTA members, no other significant policy steps are implemented like technology transfers from developed countries to SAFTA nations.

South Asian Free Trade Area (SAFTA) is among the classical trade agreements, which were framed with an objective to escalate and promote trade and investment among eight SAARC (South Asian Association for Regional Cooperation) countries, with four of them belonging to LDC (least developed country) category. This bloc is criticised for a considerably deficient intra-regional trade.

For instance, Pitigala (2005) argued that SAARC countries might not facilitate a sudden increase in intra-regional trade because of weak trading relations among these nations. To analyse this critique, let’s compare the trade figures of intra SAFTA and with SAFTA and rest of world.

Source: ITC Trade Map, figures in US$ million

Table 1: SAFTA’s intra trade and trade with rest of world

Source: CATR calculations, figures in US$ million.

This table suggests that growth in intra-SAFTA trade remained slightly higher than that with rest of the world in the last five years. For instance, intra-SAFTA exports grew by 8.7%, while SAFTA’s exports to rest of the world surged by 6.4%. On the other hand, the percentage point difference between intra-SAFTA import growth and that with rest of the world was only one for the said time period.

Yes, statistically, intra-SAFTA trade growth might seem to outweigh SAFTA’s trade growth by some margin. But is this margin enough to justify trade flows happening through free trade agreements, where tariff rates are almost negligible for majority of the tariff lines? The answer may be ambiguous, which we will try to clarify using partial regression model, which is used in many studies of United Nations Conference on Trade and Development (UNCTAD). There are two partial regression models, one is for intra-regional exports and another for intra-regional imports.

Table 2: Partial regression results of intra-regional SAFTA trade

Note: Here Log_Intra X= log of intra exports, Log_ROW_exp = exports with the rest of the world, Log_GDP = log Gross domestic product of SAFTA, RTA_dummy = dummy variable takes the value one for the period 2006 and onwards zero otherwise, Time is a simple time trend, log_Intra M is intra imports, Log_ROW_exp refers to imports with the rest of the world, and and are white disturbance terms. Time period is considered for conducting this partial regression analysis is from 1995 to 2019; *, ** and *** indicate significance at 1, 5 & 10% respectively

Four regressions are run for two categories of commodities; one is for all commodities and another for primary commodities for SAFTA. For intra imports of all commodities, imports to the rest of the world turned significant at 10% level of significance. By this it can be concluded that intra-import share is significantly influenced by rest of world exports. Another significant variable is the time factor with a positive sign showing that value of intra imports proliferates with respect to time at 1% level of significance.

For primary products, the value of intra imports is influenced by imports to rest of the world and time variable, both significant at 5% level of significance. Coefficient of imports to the rest of the world is coming out to be 0.014 and 182.44 for time variable. This means that for the given time frame, intra imports for primary commodities escalated rapidly as compare to intra imports for all the commodities.

For intra exports, the situation is anomalous compare to intra imports, as only rest of world exports are significant in explaining intra exports. For all commodities, rest of the world exports are significantly explaining intra exports at 5% level with its coefficient value of 0.0416. Intra exports for primary products are also elucidated only by exports to rest of the world at 5% level of significance with its coefficient value 0.016; and by log of SAFTA’s GDP at 10% level of significance with the coefficient value of 0.313.

Value of coefficient of exports with rest of the world is less for primary products with respect to all commodities as members of SAFTA have a comparative advantage for primary products, chiefly for agricultural commodities whose demand elasticity is less than one.

From this model, it can be established that SAFTA as a regional trading bloc is unable to statistically justify the intra trade, and log of GDP too does not explain intra imports of all and primary commodities. But in the case of intra exports for primary commodities log of the GDP of SAFTA is significant.

Henceforth, for high end technological products, SAFTA economies are dependent on developed nations. It would not be incorrect to say that apart from reducing import tariff rates within SAFTA members, no other significant policy steps are being implemented like technology transfers from developed countries to SAFTA. This is why the contribution of value-added technical product in intra-SAFTA trade is low. Also, SAFTA’s major imports from the rest of the world comprise of highly processed value-added products.

Table3: Imports of Intra SAFTA and from rest of the world.

Source: ITC Trade Map, 2020

SAFTA members are having comparative advantage, broadly on similar products, which has its own limitations. Thus, it is high time, that government of SAFTA countries discuss and bring up issues like gaining skills, streamlining of NTMs and facilitate setting up large manufacturing conglomerates within the region. This was a strategy deployed successfully by ASEAN countries, by establishing common rules for manufacturing within the region.