SAFTA and AFTA: a comparative welfare analysis of two regional trade agreements

The gravity model is one of the most successful empirical models in economics to evaluate the effects of several factors on international trade or bilateral trade flows. Many factors that are related to trade barriers can influence the bilateral trade between two countries. Regional trade agreements (RTAs) are important factors, which can pave the path of bilateral trades. In this paper, I use GEPPML estimator of Anderson et al. (Estimating general equilibrium trade policy effects: GE PPML. CESifo Working Papers-5592, 2015) to evaluate the counterfactual welfare effect of SAFTA and AFTA on member countries as well as on the non-member countries. After accounting for potential endogeneity of RTAs, removal of AFTA causes 3.08% real GDP loss for member countries, removal of SAFTA causes 6.36% real GDP loss for member countries, and joint agreement of SAFTA and AFTA brings 0.71 real GDP gains for member countries. In all scenarios, trade diversion effect is not remarkable.