Download Download (PDF)

CESifo, a Munich-based, globe-spanning economic research and policy advice institution
Venice Summer Institute 2014
Venice Summer Institute
July 2014
REGIONAL MEGA-DEALS:
NEW TRENDS, NEW MODELS, NEW INSIGHTS?
Organisers: Gabriel Felbermayr and Mario Larch
Workshop to be held on 23 – 24 July 2014 on the island of San Servolo in the Bay of Venice, Italy
WELFARE IMPLICATIONS OF INDIA’S TRADE
LIBERALIZATION WITHIN ASIA
Rahul Arora and S. K. Mathur
CESifo GmbH • Poschingerstr. 5 • 81679 Munich, Germany
Tel.: +49 (0) 89 92 24 - 1410 • Fax: +49 (0) 89 92 24 - 1409
E-Mail: [email protected] • www.cesifo.org/venice
Welfare Implications of India’s Trade Liberalization within ASIA:
A General Equilibrium Assessment under Conjecture of Free Trade Area
by
Rahul Arora1 and S.K. Mathur2
Abstract
In the present study, an attempt has been made to evaluate the various trade policy
options for India within Asia by giving numbers to the welfare effect. To pursue the objective of
the study, CGE based assessment have been drawn by estimating the GTAP model for various
simulation scenarios under the conjecture of free trade area in goods only. The free trade area is
defined as the complete removal of taxes on imports of India from other Asian region and viceversa. All countries of Asia, except India, have been categorized into five new regions viz, South
Asia (SA), East Asia (EA), South East Asia (SEA), West Asia (WA) and Central Asia (CA). In all
the simulation scenarios, India has taken on one side and other Asian region(s) have been taken
on the other side. Welfare effects in terms of equivalent variation have been reported to compare
different policy options. The overall results reveal that in terms of welfare effect, India can gain
maximum if it will sign new trade agreements in goods with all Asian regions simultaneously.
The final simulation of Asian free trade area, in which all Asian regions including India have to
remove tariffs on each other’s exports in goods, provide maximum benefits to East Asia followed
by South East Asia, West Asia and Central Asia. It affects negatively to India and countries in
South Asian region.
Keywords: GTAP Model, General Equilibrium, Free Trade Agreements, India-Asia.
JEL Codes: F13, F14, F15, F53.
1
Ph.D. Student in Economics, Humanities and Social Sciences, Indian Institute of Technology Kanpur, India.
Email: [email protected].
2
Associate Professor of Economics, Humanities and Social Sciences, Indian Institute of Technology Kanpur, India.
Email: [email protected].
The present paper is accepted for presentation at CESifo workshop on ‘Regional Mega Deals: New Trends, New
Models, New Insights?’ held at Venice International University, San Servolo, Italy on 23 – 24 July 2014. The whole
event is sponsored by CESifo Group Munich.
1
Welfare Implications of India’s Trade Liberalization within Asia:
A General Equilibrium Assessment under Conjecture of Free Trade Area
1. Introduction
Since the inception of WTO in 1995, the foremost policy option used by the member
countries is the policy of Regional Trading Agreements (RTAs). Under Article XXIV of the
GATT, there is a provision of making RTAs which will authorize the member countries to
eliminate tariffs among themselves but maintain tariffs against countries outside the region.
Almost all countries in the world today are party to, or are in the process of negotiating, at least
one RTA. Asia has also seen a large number of trading agreements since the year 2000. Over the
years, the participation of Asian countries is also increasing. Countries’ consider these
agreements are the way to reduce tariffs and smooth trade in production networks. As per the
ADB statistic, in 2013, Asian countries have signed total 137 FTAs with other countries in which
113 are in effect. If we include the proposed and under negotiation agreements in this list then
the total number of agreements becomes 261.
India, an emerging economy, also has an active participation in different trade groupings
within as well as outside Asia. As per the ADB statistics, India has also signed 13 FTAs which
are currently in force and in process of signing 21 new trade agreements. Among the effective
FTAs, 11 are within Asian countries. Baldwin (1993), in his Domino theory of regionalism,
explained the positive aspect of these trading arrangements. As per this effect, the potential loss
of non-members of an existing trading arrangement induces them to form new trading
arrangement or join the existing ones and this effect will further strengthened with multilateral
trade opening. The main idea behind this is to achieve the freer trade worldwide.
However, Bhagwati (1995) has shown his concern about this growth of regionalism with
his concept of ‘Spagheti Bowl’. According to him, the growing number of these agreements may
lead to a complex system of regulatory structures and preferences where market access for
products in one particular country will vary widely depending on their alleged origin. Due to
this, international trading system become chaotic and can increase the transaction cost to the
enterprises. Kuroda (2006) also support the same phenomena by explain the ‘Asian Noodle
Bowl’ effect of FTAs. To manage these negative effects Baldwin (2006) suggests that the FTA
2
mechanism should be more transparent under WTO which will lower the problem of managing
rules of origin. It is also argued that negotiation at MFN level can also cure this problem.
On this background, the present study attempts to evaluate the various new free trade
area options for India within Asia. While ignoring the existing trading arrangements, the paper
has divided the whole Asia into five groupings and tried to determine the welfare implications if
India will sign a new free trade agreement in goods with these Asian groupings individually as
well as in combinations. For accessing welfare effects under various simulation scenarios, the
study has used GTAP model, a multi-region, multi-sectoral CGE model to represent the whole
economy. With the help of various conjectures of free trade area, the study have also tested the
hypothesis of ‘larger grouping -larger gains’ within Asia.
To pursue the objective of the study, the whole study has been divided into five parts.
Section 1 introduced the main objective of the study and its reason of pursuing. It also briefly
highlights the similar studies conducted on other regions by using different simulation scenarios.
In Section 2, trade liberalization scenarios and data aggregations for the empirical analysis have
been presented. Section 3 explains briefly the methodological background of GTAP model used
in the study and its implications of tariff reforms. It also presents the way to measure welfare
effect in GTAP model. In Section 4, empirical results obtained after simulating various scenarios
have been presented and discussed. Section 5 concludes the whole study.
1.2 Literature Review
In the literature, there exist a number of such studies which made such an assessment by
taking India on one side and other country or regional grouping on the other hand. To the best of
our knowledge, the study found only three studies which can better support my objective in the
study to pursue this. Gilbert et al. (2001) apply the GTAP model and estimates the potential
welfare effect of nine different trading arrangements of countries/regions in the Asia-Pacific
region. They have reached at the conclusion that there exists significant welfare gains associated
with some of the new RTA proposals in the Asia-Pacific region. The extent of these gains would
be larger in case if the group is large and diverse.
Ghosh (2002) in his study analyze the implications of various potential regional trade
arrangements in the world using a general equilibrium approach. The study has simulated the
effect of trade integration by taking India on one side and other seven regions on the other side in
the simulation one by one. It has also used the non-cooperative Nash equilibrium framework to
3
show that small non-member nations are highly affected when a new regional trade agreement
has been signed and this is the main cause of concern. Small countries can gain more by joining
group of larger member nations. Similarly, based on the CGE assessment, Kitwiwattanachai, et
al. (2010) also tried to quantify the impacts of alternative free trade areas in East Asia. They
have compared bilateral agreements with one multilateral agreement of East Asia FTA and
reached on the conclusion that preferred strategy for countries in East Asia would be East Asia
FTA.
On the similar lines, the present study has chosen India and other five Asian groupings,
including all Asian countries, to compare the different trading arrangements under the
conjectures of free trade areas in goods only. For getting the new equilibrium value, complete
elimination of tariff rates on imports of goods have taken as a shock to the existing equilibrium
position.
2. Trade Liberalization Scenarios and Data Aggregation
The general equilibrium analysis provides the effect of a particular policy shock on the
overall economy. It requires the detailed data on all macro economic variables and behavioral
parameters. Data should be in matrix form to represent the flows of all economic transactions of
an economy in a particular year. The present study has utilized GTAP 8 database for general
equilibrium assessment of various trade policy shocks. Following two sub-sections explain in
detail about the assumed policy shocks and data aggregations for the empirical analysis.
2.1 Simulation Scenarios
To pursue the objective of the study, total 28 simulations have been conducted under the
conjecture of free trade area in goods within Asia. Free trade area is defined as the removal of
taxes on imports of India from other Asian region and vice-versa. Except India, all countries of
Asia have been categorized into five new regions. These regions are: South Asia (SA), East Asia
(EA), South East Asia (SEA), West Asia (WA) and Central Asia (CA)3. In all the simulation
scenarios, India has taken on one side and other Asian region(s) have been taken on the other
side. Following three scenarios shows the complete picture of all simulations conducted for the
empirical analysis:
3
See Table 1 in section 2.2 for region’s aggregation.
4
1. In the first case, tariff on tradable goods has been eliminated on a reciprocal4 basis in
between India and other Asian region. These shocks include the formation of free trade
area with one of the Asian region. Due to five Asian regions, the total number of
simulations under this category becomes five;
2. The second case includes the elimination of all tariffs on goods traded on a reciprocal
basis with other Asian groupings in combinations of two, three and four. The sum total of
all combinations5 becomes 22;
3. Finally, the last simulation has assumed the Asian free trade area in goods traded. In this
case, every Asian country has to remove all the tariffs on goods traded in between them.
2.2 Data Aggregations for GTAP Analysis
For general equilibrium analysis, GTAP 8 database with 2007 reference year has been
utilized. This is the most suited database used to estimate the GTAP model. It is the latest
available database for general equilibrium analysis and includes data on various macro economic
variables, data on trade flows between countries, protection data, and other required data for
general equilibrium assessment. It provides data on 134 regions for all 57 GTAP commodities.
For simulation purposes, one has to aggregate regions and sectors as per the study requirements.
In the present study, 134 regions have been aggregated to 14 new regions and 57 total sectors to
4 new sectors. Table 1 and 2 provides the detailed information regarding the regional and
sectoral aggregation used for the empirical analysis.
4
5
Reciprocity implies that both countries have to liberalize trade simultaneously on the same set of conditions.
See Table 3, Column 1 in Section 4 for different combinations.
5
Table 1: Region’s Aggregations for GTAP Analysis
Description
S.N.
Region
Description
India
Australia, New Zealand,
8
Oceania
Rest of Oceania
Kazakhstan, Kyrgyzstan,
Canada, U.S.A, Mexico,
2
Central
9
North
Rest of former Soviet Union
Rest of North America
Asia
America
Russian Federation
Egypt, Morocco, Tunisia,
3
North
10
MENA
Rest of North Africa
Asia
China, Hong Kong, Japan, Korea,
Bangladesh, Nepal, Pakistan,
4
East
11
South
Taiwan, Mongolia, Rest of East Asia
Sri Lanka, Rest of South Asia
Asia
Asia
Cambodia, Indonesia, Lao PDR,
Armenia, Azerbaijan, Georgia,
5
South
12
West
Malaysia, Philippines, Singapore,
Bahrain, Iran, Israel, Kuwait,
East
Asia
Thailand, Vietnam,
Oman, Qatar, Saudi Arabia,
Asia
Rest of Southeast Asia
Turkey, UAE, Rest of Western Asia
Benin, Burkina Faso, Cameroon,
Austria, Belgium, Cyprus, Czech
6
SSA
13
EU 25
Cote d’Ivoire, Ghana, Guinea, Nigeria,
Republic, Denmark, Estonia, Finland,
Senegal, Togo, Rest of Western
France, Germany, Greece, Hungary,
Africa, Central Africa, South Central
Ireland, Italy, Latvia, Lithuania,
Africa, Ethiopia, Kenya, Madagascar,
Luxembourg, Malta, Netherlands,
Malawi, Mauritius, Mozambique,
Poland, Portugal, Slovakia,
Rwanda, Tanzania, Uganda, Zambia,
Slovenia, Spain, Sweden,
Zimbabwe, Rest of Eastern Africa,
United Kingdom
Botswana, Namibia, South Africa,
Rest of South African Customs
Argentine, Bolivia, Brazil, Chile,
Switzerland, Norway, Rest of EFTA,
7
Latin
14
Rest of
Colombia, Ecuador, Paraguay, Peru,
Albania, Bulgaria, Belarus, Croatia,
America
World
Uruguay, Venezuela, Rest of South
Romania, Ukraine, Rest of Eastern
America, Costa Rica, Guatemala,
Europe, Rest of Europe,
Honduras, Nicaragua, Panama, El
Rest of the World
Salvador, Rest of Central America,
Caribbean
Notes: MENA : Middle East and North Africa; SSA : Sub-Saharan Africa; EU 25 : European Union 25.
Source: Authors’ Elaboration.
S.N.
1
Region
India
Table 2: Sectoral and Factor Aggregations for GTAP Analysis
Sector Aggregation
Factor Aggregation
S.N.
Sector
S.N.
Factor
All Tradable Goods
Land
1
1
Utilities and Construction
Unskilled Labor
2
2
Transport and Communication
Skilled Labor
3
3
Other Services
Capital
4
4
Notes: In GTAP 8 database, 57 GTAP old sectors has mapped to 10 new sectors. In our study, we
further aggregate those 10 sectors to four sectors by aggregating first 7 sectors in one sector namely All
Tradable Goods. It includes Grains and Crops, Livestock and Meat Products, Mining and Extraction,
Processed Food, Textile and Clothing, Light Manufacturing and Heavy Manufacturing.
Source: Authors’ Elaboration.
6
3. Methodological Background
To get the general equilibrium assessment, the study has used GTAP model of global
trade. It is a multi-region computable general equilibrium model which includes the treatment of
private household behavior using non-homothetic Constant Difference of Elasticities (CDE)
functional form, international trade and transport activity and global savings/investment
relationships. In this model, bilateral trade is handled via the Armington assumption6. The GTAP
model7 is easily implemented by using General Equilibrium Modelling Package (GEMPACK), a
suite of economic modeling software, developed and provided by Centre of policy studies,
Monash University.
3.1 Implications for Tariff Reform in GTAP Model
In GTAP model, the effect of a trade policy shock such as reduction of tariff on imports
of commodity i from region r to s can be represented by changing the values of quantity
demanded and supplied with their prices. From the importer side (i.e. region s), with the
reduction in tariffs on imports of good i from region r to s, there will be a reduction in domestic
price of region r exports in the importing country. This price reduction has two immediate
impacts:
a) Firstly, it lowers the price of composite imports. This effect can also be seen in changing
terms of trade effect by change in price index of imports and exports; and
b) Secondly, it encourages agents’ in the importing country to alter their sourcing of imports
in favor of region r. One can termed this effect as a trade diversion effect i.e. diversion of
imports from expensive region to the cheaper one due to reduction of import tariffs. The
total increase in imports may greater than the diverted imports from other regions. If the
total increase in imports is greater than the diverted imports from non-member countries
to member country then the surplus imports is categorized into trade creation effect.
Hence, the trade effect of any preferential trade agreement is composed of trade diversion
and trade creation effect. The responsiveness of this shift in the model is dictated by the
value of elasticity of substitution among imports from different destinations. One can
6
As per this assumption, products of the same industry, produced in different countries are distinct but substitute to
each other. In GTAP model, elasticity of substitution between domestic and imported goods and elasticity of
substitution among imports of different destinations are defined in the Armington aggregation structure for all agents
in all the regions.
7
For detailed reading on GTAP Model, See Hertel (1997).
7
measure the trade effect by looking at the figures of change in quantity of imports from
different sources.
However, from the exporters’ side, due to decrease in prices in importing region, after the tariff
reform, market prices of the exportable rises in the exporting country due to increase in demand.
Since, there is no change in border tax, pfob8 rises by same amount. The pcif 9 further depends
upon the changes in price index of international transport services. If price of transport services
declines then pcif will rise but not as the same amount as pfob.
3.2 Welfare Effect in GTAP Model10
In GTAP model, measurement of economic welfare depends upon household’s own
consumption expenditure, government consumption expenditure (government spending on
public goods and services) and net national savings which will benefit his future consumption.
Any distortion in the model has an effect on these variables and thus, affects economic welfare
of a region. In other words, welfare change in the GTAP model is measured by change in
aggregate utility, due to any distortion, specified over per capita private household consumption,
per capita government spending and per capita savings. The estimation of GTAP model provides
the regional equivalent variation (EV) measure which represents the welfare effect in this model.
From the household point of view, it measures the cost to the household of the same bundle of
goods, before and after a given policy shock. In other words, it is the difference between the
expenditure required to obtain the new level of utility at initial prices and the initial expenditure.
Consider two policy options: the existing one with prices p0 and income m0 and a policy shock
with price p1 and income m1; then the equivalent variation can be expressed as:
EV   ( p0 ; p1 , m1 )   ( p0 ; p0 , m0 )   ( p0 ; p1 , m1 )  m0
...(1)
where µ(q; p, m), called money metric indirect utility function, measures how much income the
consumer would need at prices q to be as well off he would be facing price p and having income
m. For GTAP model, McDougall (2001) obtained the EV associated with a perturbation to the
GTAP model as follows:
EV  YEV  Y
8
...(2)
Pfob is exporter price which includes the actual cost of the product, transportation cost, insurance, freight up to the
port of loading. The extra cost is borne by the exporter.
9
Pcif is faced by importer while receiving the goods at his port. It includes insurance cost and freight charges from
exporters’ port to importers port and has to bear by the importer.
10
See Huff and Hertel (2000) and Berrittella (2004) for more detail.
8
where YEV is the expenditure required to obtain the new level of utility at initial prices, that is
equal to  ( p0 ; p1 , m1 ) in (1), whereas Y is the initial expenditure, that is, m0 in (1).
Differentiating (2) we get:
dEV  0.01YEV yEV
... (3)
where yEV is the percentage change in YEV required to achieve the current actual utility level, in
which the prices are fixed.
Hence, for a closed economy, single region model, this welfare measure includes the
allocative efficiency effect due to change in endowments, various taxes such as tax on output,
use of endowment, intermediate goods, private household consumption, government
consumption etc. The change in one of these factors will lead to change in the equilibrium
quantity and termed as allocative efficiency effect. However, in a multi-region model, this
measure of welfare change is also affected by distortions from trade taxes (export and import).
Due to these distortions, the measure of welfare change also includes the changes in regional
terms of trade. Hence, the welfare measure in a multi-region GTAP model consists of allocative
efficiency effect, terms of trade and investment-savings effect.
The allocative efficiency effect consists of changes in equilibrium quantity due to
changes in various taxes (such as tax on output of any good, tax on use of any endowment in any
industry, tax on use of intermediate input in any industry, tax on private household consumption
and government consumption of any good, trade taxes (export and import) on any good),
changes in endowments, changes in regional terms of trade and changes in relative price of
savings and investment (Investment-Saving) (Huff & Hertel, 2000). Further, the terms of trade
effect refers to the changes in price index of exports and imports in a post simulation
environment. Finally, saving and investment term does not contribute to welfare changes but
both investment and savings appear in welfare decomposition. This is because investment sales
generate income but do not enter into regional utility while savings enter regional utility but does
not generate current income (Nag and Sikdar, 2011).
4. Empirical Results
General Equilibrium (GE) analysis of any trade policy provides results on a number of
macro-economic variables. The beauty of the GE analysis is that change in tariff rates does not
only affect imports and exports but it also has an impact on other sectors of the economy through
9
linkage effect. This linkage in case of GTAP model is already explained in section 3.2. In the
present section, comparison of the alternative simulation scenarios has been done on the basis of
welfare effect only. In GTAP, welfare effect can be explained with the help of estimated value of
equivalent variation.
4.1 Welfare Effects
Table 3 provides the money value of welfare effect to all Asian regions including India
resulting from a given trade policy shock. Column 1 clearly shows the type of a shock assumed
during simulation. Aggregated results on welfare effect show that India will gain maximum if it
will make a free trade area in goods with South Asia followed by Central Asia individually. This
effect will further strengthen if both will come in one simulation scenario (India+SA+CA).
Further, in simulations including India with three more Asian regions, the welfare effect will
increase if India signed free trade agreements with countries of South Asia, South-East Asia and
West Asia (see India+SA+SEA+WA). The inclusion of countries from East Asia will add more
to the welfare effect and finally if India will also sign one more trade agreement with Central
Asia, with four already signed trade agreements with four other Asian regions, then welfare
effect becomes highest.
Finally, the last simulation, in which every Asian region including India is committed to
remove tariff rates on each other exports, provides the negative welfare effect to India to the tune
of approximately $US 297 million.
10
Table 3: Welfare Effects in Terms of Equivalent Variation
$US Million
India with
India
CA
EA
SEA
SA
WA
1902.23
- 8.94
- 209.46
- 98.35
- 350.04
- 231.64
SA
- 1945.65
- 9.50
5593.09
- 503.25
- 29.24
- 838.90
EA
- 1014.53
4.8
- 1188.19
7631.64
- 70.77
- 997.12
SEA
1395.26
3.88
1279.77
469.37
98.75
6160.74
WA
12.74
43.95
- 4.32
- 1.99
- 0.31
- 12.19
CA
9.90
-18.69
5417.95
-604.08
-497.77
-1072.24
SA+EA
953.19
-4.51
-1395.61
7569.80
-587.20
-1233.65
SA+SEA
515.94
-12.74
-1484.80
-570.06
-576.37
5971.68
SA+WA
1914.70
35.32
-213.61
-100.32
-351.07
-243.81
SA+CA
-792.31
-4.21
3523.49
6326.73
-84.80
-1568.59
EA+SEA
-1199.90
-14.45
3626.64
-857.92
-116.91
4660.67
EA+WA
-1918.06
26.93
5583.57
-504.57
-29.56
-848.57
EA+CA
163.32
-2.59
-2184.48
6260.85
-149.60
4218.54
SEA+WA
-984.18
38.61
-1192.06
7624.10
-71.07
-1006.12
SEA+CA
-1365.82
31.88
-1283.50
-470.73
-99.03
6145.23
WA+CA
1176.04
-13.67
3350.35
6262.42
-678.45
-1806.48
SA+EA+SEA
717.89
-23.46
3454.54
-960.35
-677.80
4470.56
SA+EA+WA
20.02
18.07
5408.59
-605.38
-498.53
-1081.89
SA+EA+CA
982.97
29.64
-1399.31
7562.25
-587.86
-1242.63
SA+SEA+CA
2101.93
-11.69
-2388.18
6195.73
-748.25
4026.18
SA+SEA+WA
544.88
23.34
-1488.35
-571.40
-577.07
5956.17
SA+WA+CA
3410.87
-21.35
1851.92
5182.32
-814.87
2958.71
SA+EA+SEA+WA
1212.39
15.63
3343.10
6256.84
-678.99
-1814.09
SA+EA+SEA+CA
753.92
7.34
3447.11
-961.32
-678.36
4458.24
SA+EA+WA+CA
2139.16
17.13
-2391.68
6190.25
-748.74
4014.79
SA+SEA+WA+CA
1522.78
12.72
2017.04
5245.81
-159.86
3143.34
EA+SEA+WA+CA
3451.40
3.85
1845.70
5178.10
-815.30
2949.17
SA+EA+SEA+WA+CA
-297.05
24.82
31844.31
9149.10
-1207.10
4583.22
Asian FTA
Notes: SA: South Asia; EA: East Asia; SEA: South-East Asia; WA: West Asia; CA: Central Asia.
Source: Authors’ Calculation.
4.2 Decomposition of Welfare Effect
Table 4 decomposes the welfare effect of a policy shock into further three effects. These
effects are, allocative efficiency effect, terms of trade and investment-saving effect.
11
Table 4: Decomposition of Total Welfare for India
Simulation
Allocation
Scenario
India with
805.62
SA
58.87
EA
2289.52
SEA
574.83
WA
11.73
CA
881.18
SA+EA
3132.93
SA+SEA
1378.87
SA+WA
817.30
SA+CA
3744.08
EA+SEA
2047.78
EA+WA
80.76
EA+CA
4450.41
SEA+WA
2312.55
SEA+CA
597.64
WA+CA
4580.20
SA+EA+SEA
2849.21
SA+EA+WA
902.86
SA+EA+CA
3155.71
SA+SEA+CA
5266.83
SA+SEA+WA
1401.47
SA+WA+CA
7369.92
SA+EA+SEA+WA
4606.94
SA+EA+SEA+CA
2876.20
SA+EA+WA+CA
5294
SA+SEA+WA+CA
6594.83
EA+SEA+WA+CA
7398.73
SA+EA+SEA+WA+CA
5992.58
Asian FTA
Source: Authors’ Calculations.
Terms of
Trade
InvestmentSaving
$US Million
Total
Welfare
922.08
(-) 1504.58
(-) 2580.56
(-) 1521.80
2.30
(-) 567.85
(-) 1638.88
(-) 591.94
924.21
(-) 3456.92
(-) 2421.56
(-) 1498.55
(-) 3268.69
(-) 2573.17
(-) 1514.88
(-) 2509.26
(-) 1484.86
(-) 562.05
(-) 1631.73
(-) 2328.48
(-) 585.25
(-) 2846.88
(-) 2500.10
(-) 1476.09
(-) 2318.87
(-) 3778.27
(-) 2836.02
(-) 5004.73
174.53
(-) 499.94
(-) 723.50
(-) 448.28
(-) 1.29
(-) 320.40
(-) 540.87
(-) 270.98
173.19
(-) 1079.47
(-) 826.12
(-) 500.26
(-) 1018.41
(-) 723.56
(-) 448.58
(-) 894.90
(-) 646.47
(-) 320.78
(-) 541
(-) 836.42
(-) 271.33
(-) 1112.17
(-) 894.45
(-) 646.19
(-) 835.97
(-) 1293.79
(-) 1111.31
(-) 1284.90
1902.23
(-) 1945.65
(-) 1014.54
(-) 1395.26
12.74
9.90
953.19
515.94
1914.70
(-) 792.31
(-) 1199.90
(-) 1918.06
163.32
(-) 984.18
(-) 1365.82
1176.04
717.89
20.02
982.97
2101.93
544.88
3410.87
1212.39
753.92
2139.16
1522.78
3451.40
(-) 297.05
The positive value of allocative efficiency in a post simulation environment indicates that
economy is getting benefit from a new policy shock. As per the definition, allocative efficiency
is achieved with maximum social welfare. In this situation, economy produces only those goods
which are desirable. Results reveal that the allocative efficiency will definitely improve if India
will sign a trade agreement with any of Asian region, individually or in combination. The value
12
of allocative efficiency with 27th simulation is maximum which reveals that India will gain
maximum in terms of allocation of resources and changes in domestic production activities if it
will sign the trade agreements in goods with all Asian regions simultaneously.
Further, the second effect measures the ratio of an index of country’s exports prices to an
index of import prices. The positive value represents the gains to the country’s concerned.
Results reveal that in case of terms of trade effect, except with South and Central Asia, India’s
terms of trade will become negatively affected in all other simulation scenarios and thereby
lower the welfare effect in total. Finally, GTAP model estimation also provides the price value of
investment and saving in a post simulation environment. Investment sales generate income but
do not enter into the regional utility while savings enter regional utility but do not generate
current income (Nag and Sikdar, 2011). Results show that if India will sign a trade agreement
with South Asia then and only then price of investment goods will increase relative to the
savings.
5. Conclusion
The present study is an attempt to evaluate the relative welfare effect of trade
liberalization policy of India within Asia by calculating the welfare effects from CGE based
assessment. For empirical analysis, GTAP model has been estimated using GEMPACK suite
under various simulation scenarios. In all simulations, free trade area is defined as the removal of
taxes on imports of India from other Asian region and vice-versa. Welfare effects in terms of
equivalent variation have been reported to compare different policy options.
The overall conclusion emerges from the present analysis is that in terms of welfare
effect, India can gain maximum if it will sign new trade agreements with all Asian regions
simultaneously. Final simulation of Asian free trade area in goods will provide maximum
benefits to East Asia followed by South East Asia, West Asia and Central Asia. It affects
negatively to India and countries in South Asian region.
***********
13
References
Baldwin, R. E. (2006). Managing the Noodle Bowl: The Fragility of East Asian
Regionalism.
Graduate
Institute
of
International
Studies,
Geneva.
https://www.sussex.ac.uk/webteam/gateway/file.php?name=7.pdf&site=261.
Berrittella, M. (2004). Methods for Decomposing Welfare Changes in the GTAP Model.
Technical Note. http://users.ictp.it/~eee/seminar/berrittella_23.03.04_nota.pdf.
Bhagwati, J.N. (1995). US Trade Policy: The Infatuation with FTAs. Columbia
University Discussion Paper Series 726, Columbia University, New York.
Ghosh, M. (2002). The Revival of Regional Trade Arrangements : A GE Evaluation of
the Impact on Small Countries. Journal of Policy Modeling, 24(2002), 83-101.
Gilbert, J., Scollay, R. & Bora, B. (2001). Assessing Regional Trading Arrangements in
the Asia-Pacific. Policy Issues in International Trade and Commodities, Study Series No. 15,
United Nations.
Hertel, T.W. (1997). Global Trade analysis: Modeling and Applications. An Edited
Book, Cambridge University Press.
Huff, K.M., & Hertel, T.W. (2000). Decomposing Welfare Changes in GTAP Model.
GTAP Technical Paper No. 5.
Kitwiwattanachai, A., Nelson, D. & Reed, G. (2010). Quantitative Impacts of Alternative
East Asia Free Trade Areas: A Computable General Equilibrium (CGE) Assessment. Journal of
Policy Modeling, 32(2010), 286-301.
Kuroda, H. (2006). Toward an Asian Economic Community. Speech at the Jeju Summer
Forum, International Management Institute, Federation of Korean Industries. Mentioned in
Kawai, M. & Wignaraja, G. (2009). The Asian Noodle Bowl: Is It Serious for Business?. ADBI
Working Paper Series 136, Asian Development Bank Institute.
McDougall, R. (2001). A New Regional Household Demand system for GTAP. GTAP
Technical Paper No. 20.
Nag, B. & Sikdar, C. (2011). Welfare implication of India-ASEAN FTA: An Analysis
using GTAP Model. IIFT Working Paper No. EC-11-06.
Sharma, S.K. & Kallummal, M. (2012). A GTAP Analysis of the Proposed BRICS Free
Trade Agreement. Working Draft, 15th Annual Conference on Global Economic Analysis,
New Challenges for Global Trade and Sustainable Development, Geneva, Switzerland.
14