Risks to the Sri Lankan Garment Industry from Trade Diversion Effects of NAFTA
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Date
1997
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Abstract
The analysis of trade diversion in the various studies has been carried out using different methodologies such as the partial equilibrium model, the international trade linkages system, indices of trade similarities between different pairs of countries, gravity models, etc. The results vary from study to study and are not comparable. Trade diversion can also be analysed by examining the price competitiveness of the main export of a non-member country to the regional bloc, using a comparative static framework. Such analysis can always be combined with an analysis of additional factors to assess the medium-term impact of the regional bloc on the non-member country. This approach will be used in the present study to examine the impact of NAFTA on the Sri Lankan economy, examining in particular the trade and investment diversion impact on the garment sector — Sri Lanka’s largest foreign-exchange earner and its main exporter to the NAFTA region.
It concludes that all in all, NAFTA does not appear to pose a serious threat to Sri Lankan
garment exporters. Moreover, there are indications that the US may not restrict its trade liberalisation with its regular trading partners in the medium term because of NAFTA. This allows at least four years for Sri Lankan garment exporters to adjust to the changing situation and rectify the existing shortcomings in the sector.
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Keywords
NAFTA, Trade diversion, Sri Lanka, Garment industry