Post on 08-Apr-2015
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.