Baysan _et al._ (2006) have argued that the economic case for any regional integration in South Asia has been relatively weak. They point to three important features of the South Asian economies that they believe make a regional FTA economically unattractive. Firstly, the economies are relatively small: despite its population (one-fifth of the world), the region‘s per-capita income is low, so its economic size remains small: less than 5 percent of the world‘s GDP, and just 0.4 percent if India is discounted. Since, as Baysan _et al._ contend, it is improbable that the most efficient suppliers to the member countries are located within the region, the probability that the FTA would be largely trade diverting is quite high. Secondly, they argue that the levels of protection among all South Asian countries, with the possible exception of Sri Lanka, are too high to make a regional arrangement practical. Third, they contend that when countries in an FTA are allowed to choose sectors to exclude from tariff preferences, domestic lobbies press to protect those sectors of their country that may not withstand foreign competition. The rules of origin, too, may be misused by bureaucrats to block imports if an inefficient domestic competitor is affected.

Baysan _et al._ ‘s first argument, however, may not apply to bilateral trade between India and Bangladesh, since India has been a major source of imports for Bangladesh, suggesting that India might be the most efficient import source for many products. Secondly, study has shown that tariffs in India are often redundant because competition between Indian producers is so intense that it forces down prices domestically, even to levels below world prices.<sup>8</sup> The third argument may stand, however, because the sensitive lists of SAFTA members are long.

Empirical quantitative studies on regional integration in South Asia differ significantly in terms of the methodologies employed. Broadly, three types of models have been used: (i) gravity models; (ii) partial equilibrium models; and (iii) CGE models.

Gravity models have been widely used to predict the impact of RTAs on bilateral trade flows,<sup>9</sup> and their findings have been mixed.<sup>10</sup> Srinivasan and Canonero predicted that the impact of SAFTA on trade flows would be small for India but much larger for the smaller countries. Coulibaly found net export creation, whereas Tumbarello and Hirantha found net trade creation from the South Asian Preferential Trading Arrangement (SAPTA). On the other hand, Hassan observed net trade diversion effects from SAPTA, and Rahman (2003) found that regional integration is unlikely to generate significant trade expansion in this region. Using an augmented gravity model, Rodríguez-Delgado found that trade liberalization under SAFTA might influence regional trade flows mainly by increasing India‘s exports and both Bangladesh‘s and Nepal‘s imports.

The advantage in partial equilibrium models<sup>11</sup> is that they are generally based on disaggregated data and are also flexible, which facilitates sector-specific study. However, they ignore general equilibrium interactions and thus cannot capture inter-sectoral effects on the economy.

> 8 See Pursell (2004) and World Bank (2004).

> 9 The gravity models basically try to explain bilateral trade flows with a set of explanatory variables, which in turn try to predict the impact of the arrangement on bilateral trade flows. Typically, the exercise involves estimating a bilateral trade-flow equation with bilateral trade (imports, exports, or total trade at the aggregate or sector level) as the dependent variable and country characteristics, such as the gross domestic products, population, distance, commonality of language or cultural ties and the existence of preferential trade arrangements, as independent variables. Once estimated, the equation can then be used to predict the impact of a union between country pairs that did not have such a union during the sample period.

> 10 See Srinivasan and Canonero (1995), Hassan (2001), Coulibaly (2004), Hirantha (2004), Tumbarello (2006), Rahman (2003), and Rodríguez-Delgado (2007).

> 11 The major partial equilibrium studies on RTA in South Asia have been Govindan (1994), DeRosa and Govindan (1995), Pursell (2004), and the World Bank (2006).

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