Exploring Reciprocal and Non-reciprocal Policies of Market Access for SAARC Countries

Abstract

This study examines the effect of trade agreements on the bilateral export flows of South Asian Association for Regional Cooperation (SAARC) countries. For empirical estimation, we applied a structural gravity model using the Poisson pseudo-maximum likelihood estimator on annual data from 2000 to 2019. Our approach, following recent developments in gravity trade literature, incorporates domestic sales alongside international trade to fully account for multilateral resistance to trade. The findings show that free trade agreements (FTAs) play a significant role in facilitating trade among SAARC countries, particularly in exporting raw materials and intermediate goods. In contrast, extra-bloc trade largely depends on preferential market access through programmes such as the generalized system of preferences (GSPs) scheme of the European Union. However, preferential tariff schemes designed for the least developed countries have no discernible impact. Surprisingly, no trade facilitation role is evident in the exports of capital goods. Based on these findings, the study offers policy guidance on how the structure of a trade agreement impacts trade connectivity within and beyond the bloc as well as export composition. Well-designed agreements with comprehensive tariff line coverage can facilitate exports of high-value-added products. Moreover, to effectively leverage the trade benefits enabled by GSP arrangements, developing countries must enhance their institutional capacities to ensure compliance with the social, environmental and other prerequisites outlined by GSPs.