IMPACT OF FTAs ON TRADE FLOWS: A STUDY OF THE INDIA– SRI LANKA FREE TRADE AGREEMENT

The current global business environment has undergone a significant change in the last few decades driven by changes in the patterns of trade and investment flows. This has been accompanied by a strong wave of regional economic integration in the world economy, visible through the increasing number of RTAs (regional trading agreements) in different parts of the world. Economic integration in the South Asian region has seen characterized by multilateral trade liberalization, alongside regional, sub-regional and bilateral liberalization. This paper examines the impact of the India Sri Lanka Free Trade Agreement (ISFLTA) on trade flows between the two countries. The study uses the gravity model in a panel data estimation using the Weighed Least Squares Method for the period 1990-2014. The results provide evidence that the FTA has promoted trade between the countries. It was found that the FTA has created large trade creation effects. There is no diversion effect of exports of other South Asian countries to India and Sri Lanka. Larger trade creation effects that exceed the diversion effects indicate the welfare gains from the free trade agreement between India and Sri Lanka.