Econometric Analysis of the India-Sri Lanka Free Trade Agreement*

This paper investigates whether the IndiaSri Lanka Free Trade Agreement (ISLFTA) has had trade creation or trade diversion effects on the rest of the world. Using data on tariffs at the six-digit level of the Harmonized System classification for the period 1996 to 2006, the methodology of the present paper follows a study on the North American Free Trade Agreement by Romalis (2005) We use the commodity and time variation in the tariff preferences allowed under ISLFTA to identify its effect on sourcing of different products from the control country to the ISLFTA region. Using a fixed effects model, we find that the ISLFTA has had small trade creation effects in the control countries.