The Welfare Impact of Unilateral and Regional Trade Liberalization in South Asia: The Way Forward

Abstract

During the last couple of decades, trade policy reforms have been initiated in almost all South Asian countries with a view to integrating with the world economy and improving their growth prospects. This paper provides a quantitative assessment of the likely implications of trade liberalization in South Asian economies, using a multi-country CGE model with enhanced multihousehold framework. The study examines the impact of trade liberalization in South Asian countries on the economies of South Asia, with particular emphasis on trade and welfare impacts of unilateral trade liberalization and South Asian Free Trade Agreement (SAFTA). The findings revealed that, amongst the two trade policy options considered, unilateral trade liberalization ensures the highest welfare to all South Asian members in compared to SAFTA. Furthermore, the results indicate that overall household income will increase in all South Asian countries under both trade policy options considered though the gains are greater under the unilateral trade liberalization. The industry level projections indicate that, exports and imports increase significantly in all South Asian countries under unilateral trade liberalization than under the SAFTA both in the short-run and long-run. Thus, unilateral trade liberalization may be likely to expand the total trade in South Asia in the world market.