Knowledge Note

The South Asia Free Trade Area (SAFTA) came into effect in 2006, but free and unfettered trade is still a work in progress. Drawing from theory and evidence, this note looks at how all countries, especially the smaller ones, can gain from mutual trade liberalization. Consumers, exporters, and producers, the three key players in this debate, all stand to gain from multilateral trade. Consumers enjoy lower prices, more product variety, and better quality goods. Exporters obtain access to much larger markets and sourcing opportunities for key inputs. Producers are incentivized to become more efficient, increase their sizes and scales via access to a bigger market, gain cheaper and higher quality inputs, and receive more foreign direct investment (FDI). As an example of how smaller South Asian nations can reap significant benefits, the US-Mexican asymmetry case study is presented, demonstrating how Mexico rose to become the world's thirteenth largest economy after joining NAFTA. Given that the South Asia region is in the process of making SAFTA effective, nations that hold out from the process could suffer by being "innocent bystanders," which is a welfare loss faced by a country that does not fully participate in a regional agreement being created around it.

About the Presenters

Sanjay Kathuria

Sohaib Shahid