Regional Trade Agreements:

Impact on India’s Exports

By Shantanu Krishna

Part A: Introduction

Part B: Research Objective

Part C: Methodology

Part D: Findings and

Analysis

Part E: Conclusion

STRUCTURE OF PRESENTATION:

A.) INTRODUCTION TO TRADE BLOCS:

•Regional Trade Blocs: Actions by the governments to liberalize or facilitate trade on a

regional basis by reducing the trade barriers ( tariff and non-tariff barriers).

•Came into force due to many reasons:

a) To open up markets for greater wealth creation amidst unstable world economic

environment.

b) Security & political interests

c) Desire to enhance productivity and deepening market driven integration

d) Integration of foreign markets increasing the market base for companies coming

from smaller countries willing to expand.

e) Inability of the Multilateral agreements like DOHA ROUND to resolve global trade

issues.

INTRODUCTION TO TRADE BLOCS-Contd.

Impact on Multilateral System-Trade Creation and Trade Diversion impact:

Key Variables Trade Diversion/ Trade Creation Sample Studies

Objective of formation of a trading

bloc-ASEAN, APEC &

EU

Can be Trade Diversion/Trade Creation-

‘Endogenous trade bloc theory’

Levy(1997)

Higher trade costs Higher chances of trade diversion effect Prabir De(2007)

Lesser resource country Leads to trade creation with countries of closer

proximity.

Francois (March 2007)

Domestic reforms in individual

countries-Greece, Portugal & Spain

Trade Creation Mashayekhi et al. (2005)

Formation of RTA Trade diversion Chang and Winters (2002)

Trade with non-members having

smaller distance

Trade creation (Lee and Shin (2006) &

Frankel(1997)

Other factors ( Economic Conditions

of both nations)

Trade creation Estevadeordal et al. (2008)

No increase in tariff rates from non

member countries

Trade Creation Panagariya and Findlay

(1996)

B.) OBJECTIVE SET FOR THE RESEARCH:

Examine the impact of Regional trade agreements and other factors on India’s exports

by taking into account three major export regions for India, ASEAN, NAFTA and EU.

Reason of Selection of trading bloc:

Source: export-import bank of India, www.commerce.nic.in

Region/Year 1996 2000 2008

ASEAN 07% 07% 11%

NAFTA 21% 23% 12%

EU 27% 24% 22%

Total 55% 54% 45%

C.) METHODOLOGY:

•Two methodologies two evaluate the factors affecting exports of India in particular :

• Measuring the income elasticity of demand for imports.

Income Elasticity Approach

• Measuring Non RTA factors affecting exports.

Gravity Model

Approach

C.) METHODOLOGY-Contd.

1. Income Elasticity Approach:

For 3 periods-(Pre-Integration, Post-Integration &Current Period) & 5 key sectors-

(Apparel, Pharmaceutical products & Electrical machinery, Articles of leather &

articles of iron & Steel).(APPENDIX 1)

Income Elasticity = Growth rate of Imports from India by Jth region

Growth rate of GDP of jth region

Where j= ASEAN, NAFTA and EU

2. Gravity Approach: Measuring impact of Non-RTA factors

Xitj = α + β1 GDPit + β2 GDPit

j + β3 t

Where, j is any one region among ASEAN, EU, NAFTA

t: time period in year comprises the Current Period

GDPit- Independent variable: India’s GDP in the year t

GDPitj- Independent variable: GDP of country i in region j

Xitj –Dependent variable: Country is a member of region j or in other words this is an

extra-area import by ith country of jth region.

D.) FINDING AND ANALYSIS:

Income elasticity's of import demand for the 3 regions for pre-integration, post-

integration and for the current period:

1. I.E of imports from India increases

maximum for current integration

period for EU (7.92)

2. For NAFTA and ASEAN, the value

remains low to 4.8 and 4.83.

Thus, EU coming out as the

largest importer of Indian

goods for 5 different

commodities

(APPENDIX 1)

D.) FINDING AND ANALYSIS-MODIFIED

GRAVITY MODEL

To Analyze the NON-RTA factors responsible for India’s exports: Out of EU, a

dependent variable country (Xitj), UK is chosen.

For equation Xitj = α + β1 GDPit + β2 GDPit

j + + β3t +uit,

Correlation & Regression Analysis between 2 variables, i.e.

India’s exports to UK (Xitj) and India’s GDP (GDPit ) yields the following result in

APPENDIX 2.

Correlation & Regression Analysis among 2 variables, i.e.

India’s exports to UK (Xitj) and UK’s GDP (GDPit

j ) yields the following result in

APPENDIX 3.

D.) FINDING AND ANALYSIS-INDIA’S IMPORTS

India’s exports to UK more than the exports of the world and vice-versa for imports.

However, export trend lesser consistent (Std. dev.=1651.82) than the import trend

(Std. Deviation=832.65), suggesting an un-even increase in the export trend of

India to UK due to other factors.

Also, a strong relation between the exports and imports is observed (r2=.95,

p=.00<.05) .

E.) CONCLUSION:

Regional trade blocs essential for smaller countries to extend their trade potential

and can act as a stepping stone for Multilateralism to prosper-Need for OPEN

REGIONALISM

There are a number of factors affecting the export potential of a country:

Imports to the home country

GDP of the target country

Income elasticity of demand of imports

Domestic reforms imperative for trade growth, even with countries in a

trade bloc-Case of Greece, Portugal & Spain in the EU.

Time that includes other Miscellaneous factors like :

1.State of world economy amidst recession

2. Issues like agriculture subsidies & NAMA

3.Huge disparity among the developed & the developing countries

4.Flow of welfare, i.e. from developing to developed or vice-versa

5.Objective of trade bloc formation.

APPENDIX-1

RTA RTA Formation

Pre-

Integ.

Post-Integ.

Current Period

ASEAN 1992 1985-91 1992-98 2000-08

NAFTA 1994 1987-93 1994-2000 2000-08

EU 1993 1986-1992 1993-1999 2000-08

BACK

Commodity Post Integration

Current

Apparels of Leather -3.31 +1.89

Pharmaceutical +.831 -2.45

Electrical machinery -7.2 2.41

Article of Leather -2.24 .678

Articles of Iron & Steel +1.54 -1.12

Source: UN’s Comtrade & IMF’s World Economic Outlook Database

Correlation is significant at the 0.05 level (2-tailed).

Model R R2 Adjusted

R2

Std. error of

the estimate

1 .821 .674 .619 988.0426

REGRESSION ANALYSIS:

CORRELATION ANALYSIS:

APPENDIX-2

Predictors: (Constant), India's GDP

BACK

APPENDIX-3

Model R R2 Adjusted

R2

Std. error of

the estimate

1 .878 .771 .733 826.7599

Predictors: (constant), UK GDP

Scatter plot showing positive trend among the

two variables

BACK

APPENDIX-4

APPENDIX-4 BACK

Regression Equation:

Indiaexports= -3365.64 + 3.63*UKGDP

A small increase in the GDP of the country’s GDP lead

to a much larger increase in the India’s exports that is

consistent with the greater impact of GDP of UK on

India’s exports.