Intra Regional Trade Analysis: Three Decades of Regionalism and Future Implications

Abstract

Introduction: Trading blocs (EU, NAFTA, ASEAN, SAARC) are believed to bridge the gap between high and low income countries by implementation of equal partnerships, reinforced economic development and maintenance of balance of trade amongst participating nations. However, the advantages accrued by NAFTA and EU surpass those of the developing Asian nations. This disparity warrants careful examination in order to ensure equal gains from regionalism phenomenon.

Objectives: The primary objective of this study is to focus on South Asian Association for Regional Cooperation (SAARC), a region that shows very slow integration compared to other trade associations. For this purpose, a comprehensive panel data empirical investigation of SAARC in the context of economy size, geographical distances, language, ethnicity, common border and regional trade agreements (RTA) is conducted for a period of 1985 – 2015.

Methods: The aspect of the size of trading economies and the distance between them is a point most accurately addressed by the gravity equation. The gravity model is a robust econometric analysis that portrays international trade scenario accurately. Likewise, the augmented gravity equation with the incorporation of gravity variables (i.e. GDP of trading partners taken as proxy for masses and bilateral distance of capital cities taken as proxy for distance), trade agreements (regional and bilateral), inflation rates, exchange rates, and additional social indicators (common border, ethnicity and language) demonstrate predictive properties that support the concept of “economic geography” thus producing analytical results that highlight international trade flows and their welfare impacts on the integration processes of SAARC.

Results: GDP_i (GDP of source country) and GDP_j (GDP of destination country) and distance between the capitals of the trading partners are proven to be statistically significant, Once total trade is taken as dependent variable. Upon inclusion of social, cultural and trade related factors which include ethnicity, language, border and regional trade agreement, added variables are all positively significant. Results reveal that intra SAARC transactions are impacted by economy size and distance. Further specific examination of factors on exports and imports within SAARC show that, economy sizes of source and destinations, geographical distance, existing inflation rate and exchange rate and trade openness enhance exports/imports. For exports in particular effectiveness of common language, common border, ethnicity and regional trade agreement was established while level of imports has been found to be impacted by only two factors i.e. common border and ethnicity.

Conclusion: Depending upon the structure of concerned economies appropriate policy mechanism may be developed to enhance their trade, exports and imports within region over a period of time. Additionally, it is suggested that among these regions, under certain trade agreements, total trade, total exports and total imports can be increased for their growth and developmental processes