ASEAN-India Free Trade Agreement: Evaluating Trade Creation and Trade Diversion Effects

ABSTRACT

The present study attempts to provide insight into the trade creation and trade diversion effects of ASEAN-India Free Trade Agreement in goods, which came into force in 2010. The paper applies a theoretically consistent gravity model and uses empirically robust procedures such as ordinary least squares and pseudo-Poisson maximum likelihood in order to analyze the ex post effects of the agreement at an aggregate level. The results reveal that standard gravity variables are statistically significant and report expected signs, yet a reduction in export flows has been observed following the implementation of the free trade agreement, giving rise to pure trade diversion effects.

KEYWORDS:

• ASEAN
• free trade agreements
• gravity model
• India

Notes

https://www.wto.org/english/tratop_e/region_e/region_e.htm.

WTO statistics on RTAs are based on notification requirements rather than on physical number of RTAs. Thus, for an RTA that includes both goods and services, WTO counts two notifications (one for goods and the other services), even though it is physically one RTA. These WTO figures reported here correspond to 460 physical RTAs (including goods, services, and accessions), of which 267 are currently in force.

http://asean.org/wp-content/uploads/images/2015/November/asean-india/Overview%20ASEAN-India%20 Dialogue%20Relations%20-%20November%202015.pdf.

http://ficci.in/ficci-in-news-page.asp?nid=11705.

http://www.mea.gov.in/aseanindia/20-years.htm.

Note: Here only the linear specification is shown. However, the same is estimated with PPML as a nonlinear specification.

That is, the relative trade costs each country faces with each of its partners.

The Baier and Bergstrand (2007) model with country-time along with pair fixed effects was also estimated, but it did not pass the RESET test; therefore, is not reported here.

The exporter-year and importer-year fixed effects are not included as they do not allow for estimating the intra-RTA and extra-RTA impact of the agreement, as it only captures change in country’s overall imports in a particular year. Therefore, TD dummy cannot be accounted for in the equation with these effects (Magee 2008).

These countries form the top 25 trading partners of India and accounted for around 74% of India’s total exports, around 82% of its imports, and 79% (approximately) of India’s total trade flows.