Abstract

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

Authors and Affiliations