Sectoral analysis of an Australia–India free trade agreement

Abstract

This paper analyses potential sectoral effects of Australia and India signing a free trade agreement. We construct a static applied general equilibrium model, and using a social accounting matrix, we calibrate it to match the Australian data sector by sector. We then perform a numerical experiment of removing all import tariffs between Australia and India. Additionally, we compare this benchmark case with one scenario where the tariffs are partially eliminated, and another scenario with more realistic trade elasticities. We quantify how trade liberalisation leads to falling consumer prices in the import sectors, increased production in the export sectors and aggregate welfare gains. Our analysis indicates a social welfare gain of around 0.4% which is robust to different estimates of trade elasticities, or in the case in which perhaps more realistically reflecting the recent episodes of free trade agreement we partially remove bilateral trade barriers.