New Zealand - India Free Trade Agreement: A Numerical Analysis

Proceedings of World Business and Social Science Research Conference

24-25 October, 2013, Novotel Bangkok on Siam Square, Bangkok, Thailand, ISBN: 978-1-922069-33-7

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New Zealand - India Free Trade Agreement: A Numerical Analysis

Shamim Shakur*

Stalemate at WTO’s Doha Round saw many member countries actively pursuing bilateral free trade agreements (FTA) that are easier to implement as “second-best” option to a multilateral free trade. New Zealand is at the forefront of this global race to sign bilateral trade agreements and India is not falling behind either. An FTA with India can be expected to bring much bigger benefits to New Zealand mainly because of India’s previous isolation and current economic boom. But the final verdict remains an empirical question that is the objective of this research. This objective is achieved by calculating some key indices as well as important economy-wide impacts of the proposed FTA, mainly from New Zealand’s point of view. Preliminary estimates suggest New Zealand can expect modest gains irrespective of continued growth of the Indian economy. Effects on trade balance within New Zealand’s main sectors are uneven with wool, forestry and raw minerals as likely big winners, but not for meat or dairy. Estimates on partner gains may pose some issues in future negotiations. Non-economic considerations need to be weighed against possible economic effects.

Keywords: New Zealand, India, free trade agreement JEL Codes: D58, F13, F17

1. Introduction That free trade is good for the freely trading nation (as well as the world) is the first and foremost tenet of trade theory. Liberalising trade increases welfare in the reformed nations by (i) improving allocative efficiency, (ii) better terms of trade and, (iii) technology transfer. The effect of a trade barrier is that it causes a bulge between domestic prices of goods within protected industries and their world prices. When this protection is removed, price would fall except under extreme assumptions (Metzler paradox), and import would rise, displacing domestic production in previously protected industries. Resources would be freed up from these sectors which can be reallocated to other, more efficient sectors in line with comparative advantage. This is how allocative efficiency gains are achieved in importing countries. For the exporting country, similar efficiency gains can be obtained by reallocation of resources to the freed-up sectors from removal of protectionist policies. While global gains from multilateral trade liberalisation are unambiguous, individual member country gains from bilateral trade liberalisation are not always so obvious. Bilateral Selective agreements remove barriers amongst partners, but raise common barriers against outsiders. The theory of economic integration captures these effects in terms of trade creation and trade diversion that typically arise out of the formation of a preferential trading arrangement such as a customs union. Trade creation results when the removal of barriers within the union creates new trade opportunities for the most efficient partner. Trade diversion occurs when such intra-union tariff removal plus a common tariff against third countries divert trade away from a more efficient third country to a union partner. _________________________________________________________________ Shamim Shakur, *School of Economics and Finance, Massey University, New Zealand and Visiting Professor of Economics, BRAC University, Bangladesh. Email:[email protected]



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While the former has the potential to improve welfare of the union members through allocative efficiency gains and consumer surplus gains within the union, the latter reduces welfare. The net effect on global welfare therefore will depend on the balance of the welfare gains and losses of trade creating and trade diverting consequences of selective tariff removals. Welfare gains and losses are measured in terms of gains and losses in real output of countries. It is an exercise in the theory of the second best as it is only universal free trade that offers the first-best Pareto optimum. The issue of bilateral trade becomes more contentious when the member countries are very unequal in size. In such cases, the large-country partner needs to be mindful of terms-of-trade loss from tariff removal. The smaller-country partner that is a price-taker need not worry of such terms-of-trade loss and likely to be the big winner in such arrangement. The present study examines one such bilateral trade liberalisation scenario, that of India-NZ FTA and computes their effects, ex ante, on the welfare levels of these two countries. India is rapidly becoming important to New Zealand. By March 2011, India was New Zealand‟s seventh largest export market and two-way trade was valued at NZ$1.2 billion. Talks on a possible New Zealand-India FTA began in April 2010; by August 2011, six negotiations meeting have been held between the parties. A formal signing of an FTA is expected before end of 2014. The remainder of the paper is structured as follows. The next section provides an overview of bilateral trade relations between India and New Zealand. The same section examines existing tariffs in place between the countries as well as their current trade policy. Section 3 reviews literature on customs union and gains from trade. In section 4, empirical analysis is undertaken to assess if New Zealand and India would form a beneficial trade partnership. Calculations of trade intensity and revealed comparative advantage indices as well as computable general equilibrium estimates are reported here. Section 5 concludes.

2. Review India and NZ’s Trade Relations and Policies India is one of the fastest growing economies in the world, with growth averaging a rate of 9.5 percent between 2005 and 2007 and forecast growth of 8.6 percent for 2011. India has a modern economy with a large agricultural sector, diversified industry and a relatively large and sophisticated financial and service sector (NZTE, 2011). India is regarded a large-developing nation that, along with its coalition partners (notably China, Argentina and Brazil) is increasingly playing a vocal role in WTO trade negotiations.



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Table 1: India’s FTAs

FTAs already concluded by India

Agreement on Economic Cooperation between India and Finland

Agreement on South Asia Free Trade Area SAFTA

Asia Pacific Trade Agreement APTA

CECA between India and Singapore

Economic Cooperation Agreement between India and Malaysia

India Chile PTA

India Afghanistan PTA

India ASEAN Agreements

India Japan CEPA

India Korea CEPA

India MERCOSUR PTA

India Nepal Trade Treaty

India Sri Lanka FTA

India's Current Engagements in RTAs

ASEAN and India Free Trade Agreement (FTA) negotiations

India-Thailand Comprehensive Economic Cooperation Agreement (CECA)

Bay of Bengal Initiative for Multi-Sectoral Technical and Economic Cooperation (BIMSTEC)

India-Gulf Cooperation Council (GCC) FTA negotiations

India-SACU Preferential Trade Agreement (PTA) negotiations

India-MERCOSUR Preferential Trade Agreenent (PTA) Negotiations

India-Pakistan Trading Arrangement

India_EFTA Negotiations on broad based Bilateral Trade and Investment

Asia Pacific Trade Agreement (APTA)

India -New Zealand Free Trade Agreement

India-Canada Comprehensive Economic Partnership Agreement (CEPA)

India-Australia Comprehensive Economic Cooperation Agreement (CECA)

India-Indonesia Comprehensive Economic Cooperation Agreement (CECA)

In contrast New Zealand is a small- island economy of 4 million people. A unilateral tariff reductions policy for over two decades reduced simple average manufacturing tariffs from 6.9% in 1987 to less than 2.3% currently. As a result, the perception is that New Zealand is already very open and any further tariff reductions can come only through bilateral FTAs or successful conclusion to Doha Round. As a developed country, New Zealand belongs to OECD. More than 60% of New Zealand‟s export receipt is obtained from agricultural exports. As a member of the Cairns Group, New Zealand actively lobbies for agricultural trade liberalisation in its bilateral free trade initiatives as well as in WTO. Both India and New Zealand have been active in completing FTAs and in seeking new bilateral partners. These are summarised in Tables 1 and 2.



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Table 2: New Zealand’s FTAs

Agreements in Force

NZ-HK CEP entered into force on 1 January 2011

New Zealand-Malaysia Free Trade Agreement (MNZFTA 2010)

ASEAN-Australia-New Zealand Free Trade Agreement (AANZFTA) - 2010

New Zealand-China Free Trade Agreement (NZ-China FTA) - 2008

Trans-Pacific Strategic Economic Partnership (P4) - 2005

New Zealand-Thailand Closer Economic Partnership (NZTCEP) - 2005

New Zealand-Singapore Closer Economic Partnership (NZSCEP) - 2001

Australia-New Zealand Closer Economic Relationship (CER) - 1983

Agreements under Negotiation

New Zealand-Gulf Cooperation Council Free Trade Agreement

Expansion of the Trans-Pacific Strategic Economic Partnership (TPP)

New Zealand-Korea Free Trade Agreement (NZ-Korea FTA)

New Zealand-India Free Trade Agreement (NZ-India FTA)

New Zealand-Russia-Belarus-Kazakhstan Free Trade Agreement (NZ-RBK)

(source: mfat.govt.nz)

Figure 1:New Zealand-India bilateral trade (1996-2010)Data Source: Statistics New Zealand

0

100000

200000

300000

400000

500000

600000

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

NZL Export to IND NZ Import from IND IND Export to NZL IND Import from NZL

India is rapidly becoming important to New Zealand (see Figure 1 above). By March 2011, India was New Zealand‟s seventh largest export market and two-way trade was valued at NZ$1.2 billion. It is interesting to note that differences in cultural dimensions can hinder bilateral trade expansion. As an example, Indian perceptions of New Zealand, NZTE (NZ Trade and Enterprise) commissioned study in June 2010 concludes “It is disappointing for Indian business people to find that although New Zealanders are honest and trustworthy, they take a seemingly cold, transactional approach to business with an emphasis on profit, not relationship.”



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Table 3: India-New Zealand Relative Tariff Structure

Weighted average applied MFN tariff levels in India and NZ, 2009

Country Total Agricultural Industrial

New Zealand 1.68 % 1.06 % 1.72 %

India 12.73 % 41.56 % 10.69 %

Source: Based on the data from 2009 using Harmonised System Nomenclature Rev. 07.Market Access Map, International Trade Centre High selective tariff s (India):Prepared foodstuffs, beverages, spirits (56.88%), Vehicles (47.96%), Animal products (31.12%), Vegetable products (34.70%). High selective tariffs (NZ): Footwear (6.11% ), Textile (4.11%) Miscellaneous manufactured articles (3.38%)

Trade theory posits that countries will experience larger gains from FTA, the higher are their tariff rates prior to the agreement. From Table above, expect New Zealand to gain more market access from a proposed FTA. As agriculture accounts for a large share (about 60%) of New Zealand‟s merchandise exports, potential gains expected to be even higher. Moreover as Schiff (1999) adds that if the partner country (in this case India) continues to maintain high tariffs with outside nations, the home country (NZ) is likely to experience an improvement in its terms of trade by exporting at the higher tariff inclusive price. Hence, from their pre-FTA tariff structure, we can expect gains to NZ would be higher than that of India. Table 3 shows the overall average MFN tariff rates in New Zealand and India that are also split over agricultural and industrial products. Although New Zealand averages do conceal somewhat higher standard deviation because of selective discriminatory tariff in certain labour-intensive products (notably textile, clothing and footwear), these tariffs are considered relatively low by the WTO and much lower when compared to India. This suggests, (even before evaluating important indices that are reported in Appendix section), “a priori,” that the removal of remaining barriers to trade among these countries is more likely to bring significant welfare gains to New Zealand but not for India. Moreover, agricultural tariffs remain relatively very high in India– a potential source of gain to New Zealand as agriculture accounts for a large share of merchandise exports.

3. Literature Review The economic rationale for removing trade barriers of all kinds should be the fact that a country benefits from opening its own markets regardless of what policies other countries choose to pursue. The superiority of free trade over restricted trade, based on the comparative advantage of countries, is well entrenched in trade theory ever since David Ricardo‟s classic demonstration of it. The only exceptions in the form of a country exploiting its monopoly or monopsony power in trade by imposing an optimum tariff, or temporarily protecting a domestic (infant) industry are based on a particular set of special conditions. Free Trade Agreements that remove barriers amongst partners, but permit barriers against outsiders, are both a step forward and a step backward in terms of their overall impact on welfare. The theory of economic integration pioneered by Jacob Viner (1950) captures these effects in terms of trade creation and trade diversion that typically arise out of the formation of a preferential trading arrangement such as a bilateral free trade agreement. Trade creation



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results when the removal of barriers within the union creates new trade opportunities for the most efficient partner. Trade diversion occurs when such intra-union tariff removal plus a common tariff against third countries divert trade away from a more efficient third country to a union partner. While the former has the potential to improve welfare of the union members through allocative efficiency gains and consumer surplus gains within the union, the latter reduces welfare. The net effect on global welfare therefore will depend on the balance of the welfare gains and losses of trade creating and trade diverting consequences of selective tariff removals. Welfare gains and losses are measured in terms of gains and losses in real output of countries. It is an exercise in the theory of the second best as it is only universal free trade that offers the first-best Pareto optimality. It is perhaps because of lack of progress at WTO‟s Doha Round that prompted many member countries to actively pursue such bilateral FTAs that are easier to implement. Wonnacott and Lutz (1989) extended Viner‟s concepts in the context of FTAs to identify situations when trade creation is likely to be large and trade diversion small. The authors then provided a number of criteria which if met may suggest ex ante, if an FTA is more likely to be welfare improving than reducing. The current research reviews such statistical indices and applies it to the proposed NZ-India Free Trade Agreement. By observing the relative prices of goods within the protected countries and their world prices – the difference being a measure of the tariff equivalence – one can capture the effect of the removal of a trade barrier. When a tariff (or some other trade barrier) is removed, the import of the good in question usually rises, and its price falls in the previously protecting country, while its output and price rise in the countries that are its more efficient producers. Resources will be removed from these sectors in the importing countries and reallocated to other, more efficient, uses, giving rise to allocative efficiency gains there. Similar efficiency gains in the exporting country will result from more resources being devoted to the freed-up sectors. The decline in the import price will lead to an increase in consumption, and a corresponding gain in consumer surplus in the importing country adding to the welfare improvement it experienced from allocative efficiency gains. The trade balance of the exporting countries will improve in respect of the freed-up sectors – another source of potential gains for them. The exercise involving the measurement of welfare changes in terms of consumer surplus requires capturing the pure substitution effect, i.e. the substitution of imports for import substitutes prompted by the change in relative prices, while the consumers‟ real income was held constant. The income effect of the price change is thus netted out. Typically, the assumption is made that the income effects are relatively unimportant (Corden 1975), and it is not necessary therefore to derive a compensated demand curve for estimating the welfare changes in terms of substitution effects alone. In common with a number of other studies in this area (Khan 1997, Martin 1997), this paper uses the equivalent variation to measure the changes in welfare. This Hicksian concept is embedded in the ordinal approach to the measurement of consumer surplus, and is closely related to the concept of compensating variation alluded to above.

4. Data, Methodology and Model We employ two commonly used indices in order to look at broad trends in trading patterns between India and New Zealand, these are; trade intensity and revealed comparative advantage indices.1 Finally we employ preliminary computable general equilibrium estimates

1 For example used by Pitigala, N. (2005), Michaely, M. (2004), Yeats, A. (1998)



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of potential welfare gains from a FTA between these countries. The objective of this research is to employ pre-FTA to make an ex-ante assessment of the agreement from each partner perspective. We accessed annual data over 1996-2010 from UNCOMTRADE covering commodity trade only. Trade intensity index (TII) If negotiating countries have an intensive trading relationship, an FTA would simply reinforce the underlying trade patterns and provide less scope for welfare reducing trade diversion (Pitigala 2005; p.12). TII uses the volume of trade data between member countries (see Appendix for index calculation formulae). TII>1 suggests home country exports more than would be expected given partner country‟s share of world imports. These TII‟s are calculated for NZ exports to India and vice versa and reported in Table 4. We observe high (and rising) intensity of New Zealand‟s exports to India, but not vice versa. It should be noted that on its own TII is not enough to conclude that an FTA would necessarily be welfare enhancing for either partner. Rather it only suggests that observed actual trade between New Zealand and India has been increasing on its own momentum, and that an FTA could potentially reinforce this trading pattern, rather than lead to significant trade diversion.

Table 4: TII (1996-2010)

Period TII's - India to NZ TII's - NZ to India1996 0.205850419 2.2249821281997 0.222730391 2.2831133791998 0.188820226 3.2203391581999 0.149681479 2.9170080752000 0.129503304 2.4002239912001 0.135470995 2.2306247282002 0.116275361 2.3977419642003 0.120578233 2.0512189722004 0.090269067 2.3381097732005 0.089084572 2.8940512382006 0.255561932 4.2252070372007 0.048316014 3.1687585332008 0.043099122 2.1919254572009 0.052697206 3.008626312010 0.040305524 4.374993268

Source: UN COMTRADE and own calculations

Revealed comparative advantage indices

While TII forms is an important criterion for building momentum to bilateral trade volumes, the literature also suggests that the partners must be competitive world producers of underlying tradable goods (and services) in order to lessen the risk of trade being diverted to a higher cost partner. The revealed comparative advantage (RCA) index, developed by Balassa (1965) is a commonly used method of analysing one nation‟s export structure relative to the structure of world exports and can point to commodity groups in which a country has a comparative advantage. RCA is the ratio of the industry‟s share in the country‟s exports relative to its share in world trade. RCA>1 means the reporting country is specialised in exporting selected industry‟s products. These indices were estimated for the 2010 year using the formula stated



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in the Appendix section and the results reported in Table 5. In addition to New Zealand RCA‟s, Table 5 shows the importance of each product grouping calculated as the average share of India‟s national imports. These measures show that in certain products New Zealand has high RCA but low market share (meat, fish, Albuminoids) in Indian imports. In others (dairy, wool, Raw hides, skins and leather), New Zealand has high RCA and high market share, but very low volume. As one would expect, New Zealand maintains high RCA index in dairy and milk preparations, meat, wool, pulp and products of animal origin. Overall New Zealand‟s RCA evidence points to higher prospects of trade creation than to diversion effects resulting from an FTA with India.

Table 5: RCA Estimates for New Zealand

Product code Product label

New Zealand's exports to India

India's imports from world

NZ's share in India's imports

New Zealand's RCA

TOTAL All products 640117 220290676 0.290578345

'04Dairy products, eggs, honey, edible animal product nes 111734 184338 60.61365535 45.5

'51Wool, animal hair, horsehair yarn and fabric thereof 31496 323399 9.739052996 20.1

'41Raw hides and skins (other than furskins) and leather 22433 723712 3.099713698 5.9

'47Pulp of wood, fibrous cellulosic material, waste etc 9690 1055894 0.917705755 6.4

'08Edible fruit, nuts, peel of citrus fruit, melons 7838 683459 1.146813488 7.8

'35Albuminoids, modified starches, glues, enzymes 584 224265 0.260406216 18.1

'22 Beverages, spirits and vinegar 479 344333 0.139109525 4.9

'05 Products of animal origin, nes 233 13556 1.718796105 17.4

'21 Miscellaneous edible preparations 151 113499 0.13304082 4.8

'19Cereal, flour, starch, milk preparations and products 104 51996 0.200015386 6.9

'03Fish, crustaceans, molluscs, aquatic invertebrates nes 48 10696 0.448765894 5.8

'02 Meat and edible meat offal 0 3120 0 18.3

Sources : ITC calculations based on COMTRADE statistics for 2010

Computable General Equilibrium (CGE) model estimates General equilibrium models are best-suited to capture linkages among economy-wide sectors as well as to identify the sources of gains from trade. To add robustness to our analysis, we use the Global Trade Analysis Project (GTAP) computable general equilibrium model (Hertel 1997) to quantify the impacts of a potential bilateral FTA between India and New Zealand. GTAP incorporates detailed inter-industry linkages for respective economies. Products are differentiated by country of origin, allowing bilateral trade to be modelled, and bilateral international transport margins are incorporated and supplied by a global transport sector. The model is solved using GEMPACK (Harrison and Pearson 1996). The Version 7.1 GTAP database released in May 2010 is used in this research to make projections to 2020 (see Dimanaran and McDougall, 2005). Detailed description of GTAP database and its companion CGE model can be found in Hertel (1997). Selections of GTAP CGE result are reported in the following tables to answer two specific questions:



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1. Does India‟s economic growth matter to New Zealand (and to India)? 2. Does an FTA with India matter to New Zealand (and to India)?

RegionIndian growth

(6%)

Indian growth

(9%)

New Zealand12.5

(0.01)

28.1

(0.03)

India436626.9

(68.1)

747735.3

(116.6)

World (exc. India)21557.3

(0.05)

39672.4

(0.10)

TABLE 6 – Welfare Changes under Alternative Indian

Growth Scenario

SOURCE: GTAP simulationsGains are equivalent variation (EV) estimated in million US dollar

Welfare as a percentage of GDP shown in parentheses

∆ Exports

(percent)

∆ Imports

(percent)

∆ Price

(percent)

∆ Output

(percent)

Dairy -0.57 -1.85 -0.26 -0.23

Meat -3.06 -2.26 -0.29 -1.78

Wool 25.43 -4.09 0.12 8.30

Other Animal Prod. 0.52 -1.78 -0.31 -1.08

Horticulture 0.73 -0.31 -0.26 0.58

Rice -1.02 -0.19 -0.26 0.23

Cereal 1.61 -0.89 -0.28 -0.10

Bev. & Tobacco 0.00 -0.36 -0.22 0.06

Other Food -0.38 -0.47 -0.20 -0.02

Forestry 16.79 1.40 1.68 3.98

Fisheries 0.69 -0.07 -0.06 0.11

Raw Min. & Metals 13.67 0.70 1.94 6.46

TCF Products -5.77 -0.29 -0.41 -3.09

Wood Products -1.02 -0.25 -0.04 -0.33

Min. & Metal Manu. -0.81 0.00 0.30 -0.32

Other Manufactures -2.40 -0.22 -0.17 -0.95

Services -0.45 -0.01 -0.32 0.00

Total -0.13 -0.11

Table 7: Effect of Indian economy growing at 9% on NZ’s main tradable sectors

SOURCE: GTAP simulation. Trade changes are wrt. NZ’s global trade- not bilateral trade with India



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Welfare

(EV mill

US)

Welfare

(% of GDP)

Allocative

Efficiency

Terms of

Trade

I-S

Effect

New

Zealand103.0 0.11 15.142 89.791 -1.931

India -28.9 -0.00 -7.25 -20.519 -1.175

World -26.111 -0.00 -25.997 -0.117 0.003

SOURCE: Model simulation

All bilateral tariffs are eliminated in this scenarioGains and losses are in million US dollar

I-S effect = contribution due to changes in prices of investment goods and savings

Performance impacts on NZ economy from NZ-India FTA

TABLE 8 – Decomposition of Potential Welfare Changes to New

Zealand and India resulting from FTA

All of the above tables point to favourable outcomes to New Zealand from forming an FTA with India. One important reason why so many countries aspire for an FTA with countries like India or China is their phenomenal economic growth. However, our estimates in Table 8 provide a rather weak support for such an argument. India‟s high economic growth would benefit India enormously but would mean little to New Zealand if the latter wishes to benefit from India‟s fortunes by merely forming an alliance. A high level of Indian growth would also bring mixed fortunes to New Zealand‟s main tradable sectors. Wool, forestry, raw Minerals and metals would experience biggest increases in outputs, price and trade balances. On the downside, textile, clothing and footwear (TCF) products would experience biggest decline in outputs, price and trade balances. Dairy, meat and other manufactures would also experience decline in these categories, albeit to a much lesser extent. Potential welfare gains to New Zealand are modest, but positive (Table 8). Most of these gains are derived from terms-of-trade improvements. Gains to India are less clear and are neutral at best. For India, welfare loses stem from terms-of-trade deterioration that is expected for the large trading partner from a bilateral trade liberalisation.

5. Summary and Conclusions Superiority of multilateral trade over its bilateral counterpart is established in trade theory literature, but FTAs are becoming very popular. The reason for such a second-best option is rooted in slow progress at WTO‟s Doha Round that is currently “deadlocked.” WTO reporting of FTA notifications is increasing exponentially such that by 2012, some 489 FTAs/RTAs have been notified to the GATT/WTO (wto.org). Because of their conflicting trade creation and diversion effects, FTAs are both a one-step forward and a step backward from free trade. This also means that overall welfare impacts of FTAs, in general are uncertain. In this research we assessed the impacts of one such (proposed) bilateral FTA between India and New Zealand. Simple numerical estimates in terms of popular trade indices and CGE estimates using GTAP data were employed for this purpose. In general, results obtained in the research provide adequate support to the wisdom of forming a free trade alliance between India and New Zealand. This support is based on trade intensity



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indices, RCA analysis and an examination of existing tariffs in effect between these countries. The general equilibrium results of respective welfare gains or losses are somewhat contentious than this. Estimates here demonstrate that New Zealand is a clear and big winner but a small negative outcome is predicted for India. Being a large economy by many-folds when compared to New Zealand, India‟s losses are statistically insignificant (virtually zero) as a percentage of its GDP. However, if one considers a possible “negative list” of items that typically characterise FTA negotiations, then India‟s welfare would fall further. In the end, a final free trade agreement may remain a hard sell for New Zealand purely on economic grounds.

References Balassa, B. (1965), “Trade liberalisation and revealed comparative advantage”, The

Manchester School of Economic and Social Studies 33(2), 99-123. Corden, W.M. (1975), „The Costs and Consequences of Protection: A Survey of Empirical

Work‟, in P.Kenen (ed.), International Trade and Finance, Cambridge University Press, Cambridge.

Harrison, W.J., Pearson, K.R. (1996). “Computing Solutions for Large General Equilibrium Models using GEMPACK,” Computational Economics 9, 83-127.

Hertel, T.W. (Ed) (1997), Global Trade Analysis: Modeling and Applications, Cambridge University Press, Cambridge and New York.

Khan, F.C. (1997), „Household Disaggregation‟, in J.E. Francois and K.A. Reinart (eds.), Applied Methods for Trade Policy Analysis, Cambridge University Press, Cambridge.

Martin, W. (1997), „Measuring Welfare changes with Distortions‟, in Francois, J.E. and Reinert, K.A. (Eds.). Applied Methods for Trade Policy Analysis, Cambridge University Press, Cambridge.

Michaely, M. (2004) Trade Liberalisation and Trade Preferences, Ashgate Publishing, Aldershot.

Pitigala, N. (2005) What Does Regional Trade in South Asia Reveal about Future Trade Integration? Some empirical evidence, World Bank Policy Research Paper No. 3497, World Bank.

Schiff, M. (1999) Will the Real “Natural Trading Partner” Please Stand Up?, World Bank Policy Research Working Paper No. 2161, August.

Statistics New Zealand, (2005) New Zealand External Trade Statistics, June 2005, accessed from:http://www.stats.govt.nz/NR/rdonlyres/126E9F25-1F92-4095-8BBF-5199E7E4A65E/0/NZETSJun05.pdf on 29/10/05.

Viner, J. (1950) The Customs Union Issue, Carnegie Endowment for International Peace, New York.

Wonnacott, P., Lutz, M. (1989) „Is There a Case for Free Trade Areas?‟, in Schott, J.J., (1989), Free Trade Areas and U.S. Trade Policy, Institute for International Economics, Washington DC.

Yeats, A.J. (1998) What Can Be Expected from African Regional Trade Agreements? Some Empirical Evidence, World Bank Policy Research Working Paper 2004, World Bank.

http://www.stats.govt.nz/NR/rdonlyres/126E9F25-1F92-4095-8BBF-5199E7E4A65E/0/NZETSJun05.pdf%20on%2029/10/05

http://www.stats.govt.nz/NR/rdonlyres/126E9F25-1F92-4095-8BBF-5199E7E4A65E/0/NZETSJun05.pdf%20on%2029/10/05



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Appendix 1: 1.1 Trade intensity index The TII is defined as the home country‟s (i) exports to a foreign country j as a proportion of total home country exports divided by the foreign countries imports as a proportion of world imports (net of home country imports). This is set out in the formula below:

)( iw

j

i

ij

ijMM

M

X

XTII

Where:

ijTII is the trade intensity index for home country i‟s exports to partner country j.

)/( iij XX is the value of country i‟s exports sent to country j as a proportion of country i‟s total

exports.

)]/([ iwj MMM is country j‟s total imports divided by world imports net of country i‟s imports.

An index value greater than one suggests country i exports to country j more than would be expected given j‟s share of world imports, while an index less than one suggests these countries trade less than would be expected. 1.2 Revealed comparative advantage (RCA) index The index is calculated with the following formula;

wi

k

w

k

iik

XX

XXIRCA

/

/

Where;

ikIRCA is the index of revealed comparative advantage for country i in commodity k; k

w

k

i XX / is the ratio of country i‟s exports of commodity k to world exports of commodity k;

wi XX / is the ratio of country i‟s total exports to total world exports.

The resulting figure is then multiplied by 100, where a commodity with an RCA index greater than 100 suggests a country has a comparative advantage in the production of this product (greater than average specialisation in the product), while an index less than 100 points to a comparative disadvantage (less than average specialisation in the product. An RCA equal to 100 suggests neither a comparative advantage nor disadvantage (an average level of specialisation in the product relative to the rest of the world).

New Zealand - India Free Trade Agreement: A Numerical Analysis

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