The paper evaluates the South Asia Free Trade Agreement (SAFTA) within the global structure of overlapping regional trade agreements (RTAs) using a modified gravity equation. First, it examines the effects of the Trade Liberalization Program which started in 2006. SAFTA would have a minor effect on regional trade flows and the impact on custom duties would be a manageable fiscal shock for most members. Second, the paper ranks the trade effects of other potential RTAs for individual South Asian countries and SAFTA: RTAs with North American Free Trade Agreement (NAFTA) and the European Union (EU) dominate one with the Association of South East Asian Nations (ASEAN).
The member states of the South Asian Association for Regional Cooperation have set as a target the achievement of an economic union by 2020. Reaching this goal will require greater levels of monetary cooperation. How should this be achieved? Data from South Asia suggest that member states have minor trade linkages and face asymmetrical patterns of shocks. This paper concludes that, absent a clear road map for monetary cooperation, the present process must be structured so as to be harmonized with the level of regional economic integration.