India-Japan FTA in Goods: A Partial and General Equilibrium Analysis

Abstract

The present paper investigates the potential economic impacts of prospective India- Japan FTA in goods using partial equilibrium using SMART model and computable general equilibrium using GTAP model. The results reveal that both India and Japan’s consumer’s surplus will be increasing as result of this FTA. Hence, it is necessary that the competition policy shield consumers against possible abuse of potential dominant positions or against collusion from large importers and to ensure that the FTA delivers its potential benefits. However, the CGE analysis concludes that India-Japan FTA would result in welfare loss for India while positive welfare gains for Japan. Terms of trade improve significantly for Japan while deteriorates for India. India’s large welfare loss may also be due to ‘allocative inefficiency’ as well. Output and employment effects are mixed in both countries. This study also indicates that there is possibility of increase in bilateral exports. Further, the SSA results reveals that the welfare gains for Japan remain positive irrespective of parameter values while zero tariffs on imports from Japan may be welfare reducing for India. This study also highlights the possibility of the trade diversion in chapter 87, 84 and 48. Both countries may grant access mutually to number high tariff products without any danger of import surge. However, India may lose thirteen times more revenue compared to Japan. India must consider revenue loss and relook to alternative make up strategies. To this end, disaggregated analysis is essential to get definite response. We also note the dynamic nature of the global trading environment, with implementation of other preferential agreements likely to impact on the outcomes of India- Japan FTA in goods. Hence, the future research may be to identify non-tariff barriers, combined effect of multiple RTAs, investment opportunities and service trade in both markets.