Trade between Australia and South Asia: Prospects for A Bilateral Free Trade Agreement

Abstract

South Asia consists of seven economies (India, Sri Lanka, Pakistan, Bangladesh, the Maldives, Nepal and Bhutan) that have been recognised as the South Asian Association for Regional Cooperation (SAARC) in terms of their attempt to enhance trade and investment. Australia has been given the observer status in SAARC. Australia has experienced a significant growth in trade with South Asia in recent years. For example, India has become the 4th largest export destination for Australia in 2009. An FTA between Australia and SAARC countries would enable both Australia and South Asia to strengthen further this trade and to benefit by taking full advantage of each other's relative competitive strength. This can be achieved by removing barriers to trade and investment on a bilateral basis which impose additional costs to producers and consumers. In this paper we analyse the prospects for forming an FTA between Australia and SAARC countries. We use the Global Trade Analysis Project (GTAP) model to evaluate benefits and costs for both parties of an FTA. While the analysis mainly focuses on macroeconomic and sectoral performance under an FTA, it also highlights the potential welfare gains, trade creation and trade diversion issues that are important to policy makers.