An India–China FTA

Abstract

In a recent visit to India the Chinese president, Hu Jintao, proposed closer economic relations between China and India, possibly a India–China free trade area (FTA). These two economies have been experiencing rapid growth during the last couple of decades and in recent years trade between these two nations has grown spectacularly. This article analyzes the implications of a possible India–China FTA on trade flows, real output and investment both at the aggregate and industry levels in India, China, the rest of Asia, the North American and European economies using a multi-sector, multi-region dynamic computable gen-eral equilibrium (CGE) model. Our simulation results suggest that the overall economic gains to India and China would be modest. The distribution of the economic gains, however, depends on the speed of elimination of the bilateral tariffs. China gains more if the tariffs are eliminated immediately, whereas India gains more from gradual liberalization. India’s exports to China could expand by almost 57 per cent, while imports from China could increase by over 240 per cent implying an increased bilateral trade deficit. Output in each sector in India would increase. Sectors such as clothing, leather, textiles and motor vehicles and parts would gain the most in India.