Europe and India – Relaunching a Troubled Trade relationship

Tasks

Since June 2007, the EU and India have been negotiating a comprehensive free trade agreement, but negotiations broke down in 2013. Nevertheless, both sides have ex-pressed their desire to revive talks on the Broad-based Trade and Investment Agreement (BTIA).

Methods

To quantify the agreement's potential economic consequences, we used a multi-country, multi-industry Ricardian trade model with national and international input-output linkages. Based on the assumption that the FTA would eliminate all tariffs between the EU and India and reduce non-tariff barriers, we simulated trade, the value added, and the welfare effects of the BTIA.

Data and other sources

Eurostat, GTAP data base, UN Comtrade, World Bank Development Indicators, Indian government sources.

Results

The long-run level of real per capita income would change by 1.30% in India and by 0.14% in the EU. We found that outsiders to the agreement remain largely unaffected relative to the status quo. However, substantial regional heterogeneity exists across the 134 geographical, investigated entities. EU-Indian trade could approximately double thanks to an agreement, particularly in business services. We found a small amount of trade diversion due to tightly integrated value chains, but a clear effect on structural change in India. So, at a first glance, both parties should stand to benefit from signing a FTA.

Publication