Can India plug into Asian international production networks through RTAs?
Recent literature has focused attention on the important question of whether the current trend of proliferation of bilateral and regional trade agreements can facilitate creation and development of international production networks (IPNs) among member countries. However, majority of these adopt a partial equilibrium approach, thus ignoring the economy wide impact. As India gets increasingly integrated through calibrated globalization of its economy over the past two decades and creates a web of such trade agreements, this paper attempts to specifically analyze the effect of recent RTAs involving India on its ability to plug into IPNs in Asia by changing international trade and production patterns. The auto-parts industry, identified as one of the high-growth sectors for India’s manufacturing sector, with a potential to integrate into existing Asian IPNs, is chosen for this analysis.
The paper reviews the current state of India’s participation in Asian IPNs identifying the policy challenges, and further undertakes an applied general equilibrium analysis of the above issue by utilizing the GTAP 8 database based on 2004 data to simulate the impact of tariff reduction in auto-parts for India’s currently implemented FTAs with ASEAN, Japan, Korea and EU. Additional scenarios of a productivity improvement along with reduction in trade costs along with the RTA, are also explored. The paper analyses the impact of these policy shocks on output, prices and trade volumes ,as well as their impact on overall welfare changes across all regions.
The results point to the evidence that India that there are significant gains for India and its trading partners through export expansion and welfare improvements from better resource allocation not from an RTA alone, but from productivity improvement and reductions in trade costs as this should not only reduce border trade costs, but also network costs set up for an IPN.