Post on 21-Feb-2023
EX ANTE ASSESSMENT OF POSSIBLE
EU-INDIA FTA: A GTAP ANALYSIS
Prof. Somesh Mathur
Rahul Arora
Ankit Jain
2014, November
INTRODUCTION
EU-India trade relations have advanced enormously over the last decade. The European Union and
India benefit from a longstanding relationship going back to the early 1960s. India and the EU
signed their first bilateral trade agreements in 1973. The most recent co-operation agreement was
signed in 1994 and an action plan was signed in 2005. As of April 2007, there have been
negotiations about a free trade agreement between the two which is anticipated to benefit both the
economies largely.
Current Statistics
Here are some statistics which defines the current situation of the EU and India worldwide.
1. GDP and Population: EU’s total share in world GDP accounts to almost 17.25% while
India accounts for nearly 6.64 % of the world’s GDP. Also the share in global population
of the EU and India is nearly 7.02% and 17.5% respectively.
2. FDI: During the financial year 2013-14 (i.e. during April 2013-March 2014), India has
received FDI equity inflows of US $ 24.30 billion which represents an 8% increase over
the FDI equity inflows of US$ 22.42 billion received during the corresponding period
(April 2012-March 2013) of the previous financial year (2012-13) but is very less
compared to big economies like USA, EU, China etc. The data on FDI inflows and outflows
is important for the discussion on FTA between the two as the nature of current deal heavily
depends on the restrictiveness of FDI.
3. Import Protection: Due to agreements with various countries on tariff reduction for various
commodities, the levels of import protection in India has decreased. India has low levels
of import protection from EU than the US and on the other hand the EU has high levels of
import protection for Indian imports than the rest of the world imports. As can be seen from
Table 1.1 in the Appendix, the highest levels of import protection by India occurs in
Primary sector and in that for Beverages and Tobacco products, Sugar and Vegetables,
Fruits and Nuts and Processed Foods. For EU, the most protected sectors are again the
Processed Foods as in Sugar and in Agriculture it is Cereals, Grains etc.
Also for both India and EU, the Services sector is highly protected. Construction is the only
service in which both show low levels of protection. Also the total share of the highest
protected goods is less than 1.5 % of EU imports from India.
Trade Statistics
India is the eighth trading partner of EU accounting for nearly only 0.3% of European Foreign
Direct Investment, albeit provides India's largest source of investment. The EU is India’s largest
trading partner accounting for approximately € 72.7 billion in trade in goods and € 23.7 billion in
trade in services as of 2013.
TABLE 1: EU-India Trade 2011-2013, € billions
Year Trade in goods Trade in services
EU imports EU exports Balance
EU
imports EU exports Balance
2011 39.9 40.6 0.7 11 11.8 0.8
2012 37.4 38.5 1.1 10.7 11.8 1.1
2013 36.8 35.9 -0.9 11.2 12.5 1.3
Source: Eurostat Comext - Statistical regime 4
We can see that India’s major importing commodities from EU includes Pearls, Stones, and
Jewelry etc. (around 24%), Nuclear Reactors and Appliances (17.23%) and Electric Machinery
and Equipment, Medical Apparatus and Organic Chemicals (16.3%). And India’s major exporting
commodities include Mineral Fuels and Mineral Oils etc. (14.75%), Pearls, Stones, and Jewelry
etc. (6.75%) and Organic Chemicals (6.19%).
Based on all this information we can make the aggregation in different regions and commodities
to get the best results from GTAP Model.
GTAP Model
Although there are several general equilibrium models to evaluate the impact of the proposed
India-EU FTA but we use GTAP model for this purpose as it is the simplest and most organized
model. In this section is a brief overview of the GTAP model used in this assessment. The Global
Trade Analysis Project (GTAP) model was first formulated by Hertel in 1997. This is the most
widely used CGE model for the analysis of various trade policies. The GTAP model is multi-
region, multi-sector, computable general equilibrium model, with perfect competition and constant
returns to scale. The GTAP Model also gives a wide range of closure options, including
unemployment, tax revenue replacement and fixed trade balance closures, and a selection of partial
equilibrium closures. The model contains particular production and utility functions and assumes
that prices will adjust to clear all the markets. The factors included in the GTAP database are land,
skilled and unskilled labor, capital and natural resources. The benchmark year for this CGE
analysis is 2007.
Based on this current situation of the two economies, this study examines the possible effects of
the proposed EU-India FTA on several sectors and overall welfare, macroeconomic, and trade
variables using GTAP model and database.
LITERATURE REVIEW
Not much work (Ex Ante) has been done on the ongoing negotiations of EU-India FTA although
the negotiations first started in April 2007. But many researchers have worked on different FTAs
using different models to study the possible impact of any FTA between two or more economies.
Francois and Norberg (2008) used CGE framework projected through 2014 along with the
discussions of FDI patterns and restrictions. They conclude that the overall effect for India is
positive under all the scenarios and small but positive effects for EU countries too over the long
run. On the other hand there are negative effects on the rest of the world, and in that mainly the
developing ones. Achterbosch, Roza and Kuiper (2008) did a quantitative assessment of the EU-
India FTA. They also used the GTAP model and database, a global general equilibrium model
using 2004 as the base year. They predicted that the FTA would be in the interest of both the
partners. They also emphasize on the point that EU-India FTA delivers little scope for achieving
efficiency gains through adjustments to the pattern of International Specialization. They conclude
by saying that India can probably search other FTA partners as the only sector in which growth
purpose is fulfilled is the Agriculture sector. Decreux and Mitaritonna (2007) used the CEPII’s
CGE model (MIRAGE). For the initial protection level they have used the MAcMap database on
tariffs. They considered two scenarios, first, in which protection on services is cut by 10 % and
second in which it is cut by 25 %. They concluded that the overall impact on both the economies
would be positive, may it large or small.
On a separate remark, the studies of India’s FTA with other big economies like BRICS and
ASEAN also uses general equilibrium analysis. Sachin Kumar Sharma (2012) studied the BRICS
FTA using GTAP model and database with 2004 as the reference year. Nag and Sikdar (2011)
worked on the India-ASEAN FTA using the same computable general equilibrium model.
The present study seeks to fulfill the same for the EU-India FTA by using a general equilibrium
methodology which would help to assess the possible impact of the FTA on its members and other
countries.
DATA & METHODOLOGY
As discussed earlier in the introduction part, this assessment is carried out using the GTAP model
and database which is a multi-region model and assumes perfect competition, constant returns to
scale and profit and utility maximizing conduct. The overall structure and functioning of GTAP
model is explained in Hertel (1997). For this study we have done region and commodity wise
aggregation in the GTAP model. The GTAP database is benchmarked to the year 2007.
The Ex-Ante analysis/ Computable General Equilibrium (CGE) Analysis require detailed data on
the whole economy. This is because not only are inter-linkages present between various sectors of
an economy; sectors in an economy are also linked to the rest of the world. Thus, linkages are
present at the national, regional and global levels both in terms of products and in the input
markets. To get this data, this study will utilize GTAP 7 database. The database provides data on
57 different sectors and 134 different regions across the world. These 57 sectors have been linked
to 4 different sectors which consists of All Goods, Utility and Construction, Transport and
Communication and Other Services. Similar breakdown for 134 regions is done for the regional
aggregation and they are mapped to 10 different regions (India, EU27, North America, Latin
America, South Asia, West Asia, South East Asia, North Asia, East Asia and Rest of the World).
This type of aggregation is done due to the global importance of the mapped regions. The
aggregated regions would get influenced with the decisions made by India and the EU on this FTA
and it might cause changes in the future relations between India and the EU with these regions.
SECTORAL AGGREGATION
All Goods Utility and
Construction
Transportation
and
Communication
Other Services
Paddy, Rice Wheat Cereal Grain
Nec, Vegetable, Fruits, Oilseeds
Sugarcane, Sugar Beet
Plant Based Fiber, Crop Nec
Cattle,sheep, goat, horse
Animal Product Nec
Raw Milk, Wool,
Silk‐Worm Cocoons
Forestry, Fishing, Coal, Oil, Gas
Minerals nec
Meat: Cattle, Sheep, Goats, horse
Meat Products Nec
Vegetable Oils And Fats
Dairy Products
Processed Rice, Sugar
Food Product Nec
Beverages And Tobacco Products
Textiles, Wearing Apparel,
Leather Wood and paper products
Petroleum, plastic products
Minerals, Ferrous Metals and
products, Transport and Electric
Equipment, Machinery
Electricity,
Gas
Manufacture
And
Distribution,
Water,
Construction
Trade, Transport
nec,
Sea transport,
Air transport,
Communication
Financial Services nec,
Insurance,
Business Services nec,
Recreation and other
services,
PubAdmin/Defense
Health/Education,
Dwellings
REGIONAL AGGREGATION
India, East Asia (8 countries), North Asia and Russia (1 group), South East Asia (12 countries),
South Asia (7 countries), West Asia (15 countries), North America (4 countries), Latin America
(19 countries), EU 27, Rest of the world.
RESULTS
Major Macroeconomic Variables: GDP, Exports, Imports, Welfare’
This section of the study deals with the simulation results done in the GTAP model.
WELFARE EFFECTS
In the GTAP model, the net welfare gains are measured using the Equivalent Variation (EV) in
income. The welfare gain is decomposed into several components such as Allocative Efficiency
effect, terms of trade effect, and investment and savings effect. In the static GTAP model, which
has been used here, the population, endowment and technology remain fixed. So the only way to
increase welfare is to reduce the excess burden which arises from the existing distortions. Any
change in the allocative efficiency is directly propagated to the equilibrium conditions.
In case of Perfect Competition:
The GTAP model calculates the welfare change by analyzing a variable called EV
(Equivalent Variation). It computes a money metric equivalent of the utility change (which
is calculated using % change in aggregate per capita utility for a region) and any population
change in the region. It is measured in Million Dollars.
EV = E (U,Pi) – E (Ui,Pi), where E stands for expenditure, U for Utility, Pi for Initial price
level.
It is welfare improving to increase the level of a relatively taxed activity since this involves the
reallocation of a commodity or endowment from a low value use to a relatively high social
marginal usage. The same is true for endowments and for goods traded. Any good that yields trade
tax to the economy benefits the economy. Saving-investment term does not contribute to welfare
changes but both investment and savings appear in welfare decomposition. This is because
investment sales generate income but do not enter into regional utility while savings enter regional
utility but does not generate current income.
In GTAP modeling framework, regional household behavior is governed by an aggregate utility
function specified over per capita private household consumption, per capita government spending
and per capita savings. The percentage change in this aggregate per capita utility for a region is
the welfare change variable that is computed in a standard GTAP model during simulations. The
model computes a money metric equivalent of this utility change and any change in population in
the region. This convenient measure referred to as equivalent variation (EV) summarizes the
regional welfare changes resulting from any policy shock and is given in dollar values (US $
million). The regional household’s EV is given by the difference between the expenditure required
to obtain the post simulation level of utility at initial prices and that available initially.1
The welfare effect of the simulation are given below. (in million dollars)
Regions|WELFARE Allocative Efficiency Terms of Trade
Investment and Savings Total
India 603 -1181 -525 -1103
EastAsia -166 -597 360 -403
NorthAsia 46.9 -96.9 1.42 -48.7
SEAsia -68.2 -424 138 -354
SouthAsia 1.16 50.3 -38.7 12.7
WestAsia -159 -1336 303 -1193
NorthAmerica -30.9 -222 -414 -667
LatinAmerica -56 -181 31.5 -205
EU27 1339 5062 136 6538
RestofWorld -108 -1084 5.46 -1186
Total 1401 -8.6 -1.13 1392
It can be easily seen from the above simulation results that EU has gained the most in terms of
welfare effect and all other countries except South Asian Region experienced a welfare loss. The
welfare loss effect on India are unsuccessful due to the highly negative terms of trade effect and
negative investment and savings effect. The main reason behind this type of behavior is that in the
case of India, resources would divert from efficient sectors to inefficient sectors. As for the other
regions, West Asia also faces a welfare loss due to highly negative terms of trade effect.
GDP EFFECTS
The change in GDP is not only due to the trade liberalization but also due to all related effects due
to change in the trade policy of the country such as change in product demand, production pattern,
resource distribution, prices etc. Bigger economies would have more GDP growth, technically.
Below are the simulation results explaining macroeconomic effects for all the regions:
GDPEXP consumption investment Govt sp exports imports Total
India 727458 423873 133234 247223 -307638 1224150
EastAsia 4719527 2862039 1494675 2955936 -2480056 9552121
NorthAsia 668555 287701 237078 384356 -277997 1299694
SEAsia 712485 303319 125092 887921 -733910 1294907
SouthAsia 209842 63906 25801 47904 -81489 265964
WestAsia 656258 367092 263596 794646 -598806 1482785
NorthAmerica 11427074 3232948 2646317 2091897 -2888315 16509920
LatinAmerica 1728914 554580 479126 575268 -522215 2815672
EU27 9800967 3622681 3483340 5842554 -5927586 16821956
RestofWorld 2749156 1110775 708232 1517175 -1526868 4558470
Total 33400235 12828913 9596491 15344880 -15344880 55825639
As we can see from the above table that there is an increase in the GDP for all the present regions.
The EU27 and North American region will be most beneficial from this FTA in terms of GDP
gain. India will also benefit from the FTA but not to the extent of EU gain.
Terms of Trade: Terms of trade is defined as the relative price of exports in terms of imports and
is defined as the ratio of export prices to import prices. It can be interpreted as the amount of import
goods an economy can purchase per unit of export goods.
CHANGE IN EXPORTS AND IMPORTS
Table for change in imports
VIWS 1 India 2 East Asia
3 NorthAsia 4 SEAsia
5 SouthAsia
6 WestAsia
7 NorthAmerica
8 LatinAmerica 9 EU27
10 RestofWorld Total
1 AllGoods 16099 -2419 -170 -1830 -73 -3118 -1818 -869 19673 -2544 22931
2 Util_Cons 15 79 39 24 1 44 25 5 -257 70 43
3 TransComm 118 320 15 201 12 216 217 90 -1264 337 263
4 OthServices 157 347 29 231 17 327 744 121 -1836 443 582
Total 16389 -1672 -89 -1374 -42 -2530 -832 -654 16316 -1694 23819
Table for change in exports
VXWD 1 India
2 EastAsia
3 NorthAsia
4 SEAsia
5 SouthAsia
6 WestAsia
7 NorthAmerica
8 LatinAmerica
9 EU27
10 RestofWorld Total
1 AllGoods 15168 -2393 -158 -1644 -60 -3054 -1738 -461 19225 -2285 22597
2 Util_Cons 15 79 39 24 1 44 25 5 -257 70 43
3 TransComm 118 320 15 201 12 216 217 90 -1264 337 263
4 OthServices 157 347 29 231 17 327 744 121 -1836 443 582
Total 15457 -1647 -77 -1188 -30 -2465 -752 -247 15868 -1435 23484
As we can see from the above tables for imports and exports change, there is a major change in
imports as well as for EU27 in case of all goods sector and this is also true for India. While EU
faces negative change in exports and imports for all the other sectors in the economy and India has
a slight but positive increase in all the other sectors. For other countries, and rest of the world, all
changes in imports and exports of All Goods are negative.
CONCLUSIONS
This project used the General Equilibrium Analysis using the GTAP model and database on 134
regions linked to 10 different regions and 57 sectors mapped to 4 different sectors to analyze the
possible impact of the EU-India FTA. The reference year for the GTAP model is 2007. In this
study we reduced the tariffs for the All Goods sector to zero and saw what repercussions it has on
India and EU. We analyzed all the macroeconomic effects on both the economies and found that
in terms of welfare, India is on the losing side while EU gains a lot if the FTA is finalized. For the
GDP growth, every region is experiencing a positive gain in GDP through this FTA. It is revealed
that the change in imports and exports for EU in every sector except All Goods is negative while
it is positive for All goods sector for both India and EU. India faces small but positive effects on
the change in imports and exports for all the other sectors.
Basically if we see on the welfare side, India might get other beneficial FTA partners. As the
welfare loss in case of India is very high and not at all fruitful. Overall, the impact of the proposed
EU-India FTA would be negative for India and positive (highly) for EU. However at the
disaggregated level, results will vary across the 57 sectors.
REFERENCES
Joseph Francois, Hanna Norberg, Annette Pelkmans-Balaoing (2008), “Trade Impact Assessment
of an EU-India Free Trade Agreement”, Institute of International and Development Economics
(IIDE).
Trade Sustainability Impact Assessment for the FTA between the EU and the Republic of India
(2009), European Commission, DG-Trade.
Decreux, Yvan and Cristina Mitaronna (2007), Economic Impact of a Potential Free Trade
Agreement (FTA) between the European Union and India (Study commissioned by the
Directorate-General for Trade of the Commission of the European Union).
Arpita Mukherjee, Paul Wymenga (2013), “The Long Road towards an EU-India Free Trade
Agreement”, Directorate-General for External Policies of the Union.
Thom Achterbosch, Marijke Kuiper, Pim Roza (2008), “EU - India FTA - A Quantitative
Assessment”, LEI.
Jan Wouters, Idesbald Goddeeris, Bregt Natens and Filip Ciortuz (2013), “Some Critical Issues in
the EU-India Free Trade Agreement Negotiations”, Working Draft, KU Leuven.
Sachin Kumar Sharma, Murali Kallummal (2012), “A GTAP Analysis of the Proposed BRICS
Free Trade Agreement”, Working Draft, IIFT.
Biswajit Nag and Chandrima Sikdar (2011), “India-ASEAN FTA: Implication of Phased
Liberalization”, IIFT.
Michael G. Plummer, David Cheong, Shintaro Hamanaka (2010), “Methodology for Impact
Assessment of Free Trade Agreements”, Asian Development Bank.
WEBSITES : GTAP, WTO, Ministry of Commerce and Industry, WITS