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Gains from the India–GCC Free Trade Agreement: A General Equilibrium Analysis
Abstract
This chapter uses the Global Trade Analysis Project (GTAP) model to explain the relative benefits of India aligning with Gulf Cooperation Council (GCC) countries. We use a GTAP-8 database to handle the general equilibrium model of 19 regions over 15 commodity groups. The discussion endeavors to analyze the expected gains from the India–GCC trade agreement, which has been signed but has not been put into effect. From our analysis, we conclude that India will be a net loser while GCC countries will be net gainers under this free trade agreement (FTA). The loss to India will appear on the current account because of unfavorable terms-of-trade with GCC countries. The same loss will be reflected as a welfare loss, and Indian policy planners are advised to work in the direction needed to convert the expected losses into substantial gains.
The trade relations between India and the Gulf Cooperation Council (GCC) countries have been intensified during the last two decades. The GCC has emerged as one of the largest trading partner of India. This article attempts to investigate the result of tariff liberalization on welfare, output, employment and the potential trade flows between India and the GCC region using the GTAP-model. The study reveals that tariff liberalization has positive effects on India and GCC countries, with no or nominal negative effect on the rest of the world. Overall results show that India’s trade relation with GCC countries is increasing continuously, but still there is a lot of untapped potential to bring the welfare gains for both trading partners. Finally, the study concludes that the proposed economic integration in terms of FTA between India and GCC will be mutually beneficial and welfare enhancing, and a case of a win–win situation.
JEL Codes: F1, F13, F14, F17
Purpose
The present study is an attempt to evaluate the impact of the proposed India-China free trade agreement (FTA) in goods trade on both countries under a static general equilibrium framework.
Design/Methodology/Approach
The study has utilized the Global Trade Analysis Project (GTAP) model of world trade with the presence of skilled and unskilled unemployment in the world. For analysis purposes, 57 GTAP sectors, representing the whole regional economy, have been aggregated into 43 sectors and 140 GTAP regions, representing the whole world, have been aggregated into 19 regions. The study has also used the updated tariff rates provided by the World Trade Organization for better results.
Findings
The preliminary analysis using trade indicators depicted that by utilizing their own comparative advantage, both of the countries can maximize their gains by exporting more to the world. The simulation results from the GTAP analysis revealed that a tariff reduction in all goods trade would be more beneficial for both the countries than the tariff reduction in each other's specialized products. All other regions lose in terms of shifting the Indian imports towards China in a post-simulation environment. Regions with a significant loss are: the European Union (28 members), Southeast Asia, the Unites States, Japan, Korea, West Asia, and the European Free Trade Association (EFTA).
Originality/Value
The disaggregated sector-wise analysis has been performed using the latest available GTAP database, version 9.
The GTAP final demand system has some known defects: the computation of the equivalent variation is not exact; with non-standard demand parameters, the equivalent variation may be grossly in error; the decomposition of the equivalent variation contains a nuisance term. We find a further defect, that the upper-level demand equations are invalid. We revise the model to remove these defects.