The India-ASEAN Free Trade Agreement: How Will Indian Industries Be Affected?

Abstract

In this paper we apply the gravity model to international trade transactions between India and the ASEAN countries. The model is applied to all HS 6-digit codes for which trade between India and ASEAN takes place. The estimated equation is then used to simulate the trade impact under the alternative scenario of a Free Trade Agreement (FTA) between the two countries. The results of these simulations are then presented to find out the possible impact of the India ASEAN FTA on individual industries. Initially the analysis was done at the 2 digit HS level. However we found that the same set of industries at the two digit level will be both favourably and adversely affected due to the FTA. This necessitated disaggregation at the 6 digit, where individual industries in ASEAN that will be able to increase their export to India and the ones for which export by India will increase could be separated. The main conclusion is that intermediate goods will be more affected (both adversely and favourably for India) than final goods. Other conclusions include the fact that about fifty percent of the 6 digit products have insignificant tariff elasticity or the elasticity coefficient (even simple correlation between the rate of tariff and import) is of the wrong sign. The implication is obvious: tariffs do not matter at all for a major part of the industries and for them the agreement has no significance. In fact some of the most debated commodities fall in this category. For many of them though tariff rates have steadily increased overtime so has imports imparting a wrong sign to the tariff elasticity which means that reasons other than tariffs determine their imports and there is no point in putting them in the sensitive or exclusion list.