Impact of AIFTA on Agriculture Trade Creation & Trade Diversion: Gravity Model Analysis

Abstract

The prime objective of the paper is to estimate the trade creation and trade diversion effect of ASEAN-India Free Trade Agreement (AIFTA) on member’s agricultural trade. The model includes 50 countries with five major FTAs and estimated with panel data regression over the period 2005-2014. We used OLS (Ordinary Least Square) and PPML (Poisson Pseudo-Maximum Likelihood) estimation method to accomplish the above-said objective. The PPML method deals with hetroskedasticity bias encountered as usual OLS method. Further, the paper has included two dummy variables Time and Country-specific effect which control the endogeneity bias in explanatory variables. The paper found that PPML results are more promising than the conventional method (OLS). Further, estimate reveals purely trade creation effect for AIFTA, MERCOSURE, and EU_15 under time fixed effect model. Under the time and country fixed effect model; AIFTA, SAPTA, and NAFTA found trade creation. In contrast, the paper also noticed purely trade diversion effect for SAPTA and EU_15 and MERCOSURE under time fixed and time and country fixed effect model respectively. The study noted that FTAs are not hampering but positively associated with the free multilateral trade.