Dimensions of Changing Directions of Trade: A System Dynamics Framework

Abstract

This paper analyzes the change in direction of trade, shift in goods traded and the factors contributing to such shift between India and Canada. These have been analyzed through use of Shift-Share and Constant Market Share analysis. The analysis of bilateral trade between the two countries indicates that the commodity mix changes from time to time. The constant market share (CMS) analysis shows that the world trade has little effect on India while the reverse is true for Canada. Thus the shift in trade between the countries can be attributed to world trade effect, competitiveness and market distribution effect. It further elaborates and reviews the research done in the field of trade and identifies the dimensions that govern the trade dynamics. It proposes a causal model that substantiates and explains the cause and effect of various dimensions ultimately impacting the trade between the two countries. The System Dynamics model takes into account the different perspectives of international trade namely, free trade, fair trade, conflict, national and global economy, endowments, trade-balance and externalities. The various policies that undergo change as a result of interplay of these dimensions include monetary and fiscal and trade policies (tariff and non-tariff barriers). The model reveals five loops. The properties of these loops have been explained identifying them as positive and negative loops. The paper concludes by proposing a framework that would enable the planners to frame, execute and review bilateral trade agreements such as the Comprehensive Economic Partnership (CEPA) under formulation between India and Canada, keeping in view the outcome of proposal to allow FDI in retail sector in India and failure of different trade treaties such as US-Korea trade treaty initiated in 2007.