Abstract The prospects and challenges of preferential trade liberalisation and regional integration in South Asia are analysed by analysing regional and international trade structures of South Asian countries through conventional trade measures such as commodity composition and direction of trade, and bilateral trade shares. Findings indicate that, with the existing low level of bilateral and intra-original trade shares and low trade with South Asian countries, the gains from free trade arrangements in this region are likely to be minimal. The region accounts for a very insignificant share of world trade but persistent high levels of tariff barriers. Thus, preferential trade liberalisation is more likely to bring about trade diversion than trade creation leading to more gains for large countries and more losses for small countries. Further, trade policies of individual countries are shaped more by political considerations than economic factors. Therefore, implementation of a free trade area and deriving benefits from it will be challenging
