Trade Impact of the India-ASEAN Free Trade Agreement (FTA): An Augmented Gravity Model Analysis

Abstract

India signed a FTA with ASEAN in the year 2009 came into effect on 1 January 2010. The paper looks in to the trade impact of India ASEAN Free Trade Agreement using an augmented Gravity model using a panel data framework. The study used a balanced panel data set of 11050 bilateral trade for 650 country pair for 17 years. Different panel data estimation techniques such as Pooled OLS method (POLS), Maximum likelihood Estimation Method (MLE), Fixed Effect with Vector Disintegration (FEVD), Between Effect (BE) and Random Effect Method (RE) are applied to the dataset to arrive at appropriate modeling method. Fixed Effect with Vector Decomposition (FEVD) was found suitable for explaining the trade flow. The results show the possibility of greater trade between India and ASEAN countries through RTA. Since the initial tariff levels are higher in India compared to ASEAN, ASEAN is likely to gain more in the short term. For India to exploit the trade potential with ASEAN the FTA should be operationalized in the services and investment domain.