Proceedings of World Business and Social Science Research Conference
24-25 October, 2013, Novotel Bangkok on Siam Square, Bangkok, Thailand, ISBN: 978-1-922069-33-7
New Zealand - India Free Trade Agreement: A Numerical Analysis
Shamim Shakur*
Stalemate at WTO’s Doha Round saw many member countries actively
pursuing bilateral free trade agreements (FTA) that are easier to implement as
“second-best” option to a multilateral free trade. New Zealand is at the
forefront of this global race to sign bilateral trade agreements and India is not
falling behind either. An FTA with India can be expected to bring much bigger
benefits to New Zealand mainly because of India’s previous isolation and
current economic boom. But the final verdict remains an empirical question
that is the objective of this research. This objective is achieved by calculating
some key indices as well as important economy-wide impacts of the proposed
FTA, mainly from New Zealand’s point of view. Preliminary estimates suggest
New Zealand can expect modest gains irrespective of continued growth of the
Indian economy. Effects on trade balance within New Zealand’s main sectors
are uneven with wool, forestry and raw minerals as likely big winners, but not
for meat or dairy. Estimates on partner gains may pose some issues in future
negotiations. Non-economic considerations need to be weighed against
possible economic effects.
Keywords: New Zealand, India, free trade agreement
JEL Codes: D58, F13, F17
1. Introduction
That free trade is good for the freely trading nation (as well as the world) is the first and
foremost tenet of trade theory. Liberalising trade increases welfare in the reformed nations by
(i) improving allocative efficiency, (ii) better terms of trade and, (iii) technology transfer. The
effect of a trade barrier is that it causes a bulge between domestic prices of goods within
protected industries and their world prices. When this protection is removed, price would fall
except under extreme assumptions (Metzler paradox), and import would rise, displacing
domestic production in previously protected industries. Resources would be freed up from
these sectors which can be reallocated to other, more efficient sectors in line with comparative
advantage. This is how allocative efficiency gains are achieved in importing countries. For the
exporting country, similar efficiency gains can be obtained by reallocation of resources to the
freed-up sectors from removal of protectionist policies.
While global gains from multilateral trade liberalisation are unambiguous, individual member
country gains from bilateral trade liberalisation are not always so obvious. Bilateral Selective
agreements remove barriers amongst partners, but raise common barriers against outsiders.
The theory of economic integration captures these effects in terms of trade creation and trade
diversion that typically arise out of the formation of a preferential trading arrangement such as
a customs union. Trade creation results when the removal of barriers within the union creates
new trade opportunities for the most efficient partner. Trade diversion occurs when such intraunion tariff removal plus a common tariff against third countries divert trade away from a more
efficient third country to a union partner.
_________________________________________________________________
Shamim Shakur, *School of Economics and Finance, Massey University, New Zealand and Visiting Professor of
Economics, BRAC University, Bangladesh. Email:S.Shakur@massey.ac.nz
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Proceedings of World Business and Social Science Research Conference
24-25 October, 2013, Novotel Bangkok on Siam Square, Bangkok, Thailand, ISBN: 978-1-922069-33-7
While the former has the potential to improve welfare of the union members through allocative
efficiency gains and consumer surplus gains within the union, the latter reduces welfare. The
net effect on global welfare therefore will depend on the balance of the welfare gains and
losses of trade creating and trade diverting consequences of selective tariff removals. Welfare
gains and losses are measured in terms of gains and losses in real output of countries. It is an
exercise in the theory of the second best as it is only universal free trade that offers the firstbest Pareto optimum.
The issue of bilateral trade becomes more contentious when the member countries are very
unequal in size. In such cases, the large-country partner needs to be mindful of terms-of-trade
loss from tariff removal. The smaller-country partner that is a price-taker need not worry of
such terms-of-trade loss and likely to be the big winner in such arrangement.
The present study examines one such bilateral trade liberalisation scenario, that of India-NZ
FTA and computes their effects, ex ante, on the welfare levels of these two countries. India is
rapidly becoming important to New Zealand. By March 2011, India was New Zealand‟s
seventh largest export market and two-way trade was valued at NZ$1.2 billion. Talks on a
possible New Zealand-India FTA began in April 2010; by August 2011, six negotiations
meeting have been held between the parties. A formal signing of an FTA is expected before
end of 2014.
The remainder of the paper is structured as follows. The next section provides an overview of
bilateral trade relations between India and New Zealand. The same section examines existing
tariffs in place between the countries as well as their current trade policy. Section 3 reviews
literature on customs union and gains from trade. In section 4, empirical analysis is undertaken
to assess if New Zealand and India would form a beneficial trade partnership. Calculations of
trade intensity and revealed comparative advantage indices as well as computable general
equilibrium estimates are reported here. Section 5 concludes.
2. Review India and NZ’s Trade Relations and Policies
India is one of the fastest growing economies in the world, with growth averaging a rate of 9.5
percent between 2005 and 2007 and forecast growth of 8.6 percent for 2011. India has a
modern economy with a large agricultural sector, diversified industry and a relatively large and
sophisticated financial and service sector (NZTE, 2011). India is regarded a large-developing
nation that, along with its coalition partners (notably China, Argentina and Brazil) is
increasingly playing a vocal role in WTO trade negotiations.
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Proceedings of World Business and Social Science Research Conference
24-25 October, 2013, Novotel Bangkok on Siam Square, Bangkok, Thailand, ISBN: 978-1-922069-33-7
Table 1: India’s FTAs
FTAs already concluded by India
Agreement on Economic Cooperation between India and Finland
Agreement on South Asia Free Trade Area SAFTA
Asia Pacific Trade Agreement APTA
CECA between India and Singapore
Economic Cooperation Agreement between India and Malaysia
India Chile PTA
India Afghanistan PTA
India ASEAN Agreements
India Japan CEPA
India Korea CEPA
India MERCOSUR PTA
India Nepal Trade Treaty
India Sri Lanka FTA
India's Current Engagements in RTAs
ASEAN and India Free Trade Agreement (FTA) negotiations
India-Thailand Comprehensive Economic Cooperation Agreement (CECA)
Bay of Bengal Initiative for Multi-Sectoral Technical and Economic Cooperation (BIMSTEC)
India-Gulf Cooperation Council (GCC) FTA negotiations
India-SACU Preferential Trade Agreement (PTA) negotiations
India-MERCOSUR Preferential Trade Agreenent (PTA) Negotiations
India-Pakistan Trading Arrangement
India_EFTA Negotiations on broad based Bilateral Trade and Investment
Asia Pacific Trade Agreement (APTA)
India -New Zealand Free Trade Agreement
India-Canada Comprehensive Economic Partnership Agreement (CEPA)
India-Australia Comprehensive Economic Cooperation Agreement (CECA)
India-Indonesia Comprehensive Economic Cooperation Agreement (CECA)
In contrast New Zealand is a small- island economy of 4 million people. A unilateral tariff
reductions policy for over two decades reduced simple average manufacturing tariffs from
6.9% in 1987 to less than 2.3% currently. As a result, the perception is that New Zealand is
already very open and any further tariff reductions can come only through bilateral FTAs or
successful conclusion to Doha Round. As a developed country, New Zealand belongs to
OECD. More than 60% of New Zealand‟s export receipt is obtained from agricultural exports.
As a member of the Cairns Group, New Zealand actively lobbies for agricultural trade
liberalisation in its bilateral free trade initiatives as well as in WTO.
Both India and New Zealand have been active in completing FTAs and in seeking new bilateral
partners. These are summarised in Tables 1 and 2.
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Proceedings of World Business and Social Science Research Conference
24-25 October, 2013, Novotel Bangkok on Siam Square, Bangkok, Thailand, ISBN: 978-1-922069-33-7
Table 2: New Zealand’s FTAs
Agreements in Force
NZ-HK CEP entered into force on 1 January 2011
New Zealand-Malaysia Free Trade Agreement (MNZFTA 2010)
ASEAN-Australia-New Zealand Free Trade Agreement (AANZFTA) - 2010
New Zealand-China Free Trade Agreement (NZ-China FTA) - 2008
Trans-Pacific Strategic Economic Partnership (P4) - 2005
New Zealand-Thailand Closer Economic Partnership (NZTCEP) - 2005
New Zealand-Singapore Closer Economic Partnership (NZSCEP) - 2001
Australia-New Zealand Closer Economic Relationship (CER) - 1983
Agreements under Negotiation
New Zealand-Gulf Cooperation Council Free Trade Agreement
Expansion of the Trans-Pacific Strategic Economic Partnership (TPP)
New Zealand-Korea Free Trade Agreement (NZ-Korea FTA)
New Zealand-India Free Trade Agreement (NZ-India FTA)
New Zealand-Russia-Belarus-Kazakhstan Free Trade Agreement (NZ-RBK)
(source: mfat.govt.nz)
Figure 1:New Zealand-India bilateral trade (1996-2010)
Data Source: Statistics New Zealand
600000
500000
400000
300000
200000
100000
0
1996
1997
1998
1999
NZL Export to IND
2000
2001
2002
NZ Import from IND
2003
2004
2005
IND Export to NZL
2006
2007
2008
2009
2010
IND Import from NZL
India is rapidly becoming important to New Zealand (see Figure 1 above). By March 2011,
India was New Zealand‟s seventh largest export market and two-way trade was valued at
NZ$1.2 billion. It is interesting to note that differences in cultural dimensions can hinder
bilateral trade expansion. As an example, Indian perceptions of New Zealand, NZTE (NZ
Trade and Enterprise) commissioned study in June 2010 concludes “It is disappointing for
Indian business people to find that although New Zealanders are honest and trustworthy, they
take a seemingly cold, transactional approach to business with an emphasis on profit, not
relationship.”
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Proceedings of World Business and Social Science Research Conference
24-25 October, 2013, Novotel Bangkok on Siam Square, Bangkok, Thailand, ISBN: 978-1-922069-33-7
Table 3: India-New Zealand Relative Tariff Structure
Weighted average applied MFN tariff levels in India and NZ, 2009
Country
Total
Agricultural
Industrial
New Zealand
1.68 %
1.06 %
1.72 %
India
12.73 %
41.56 %
10.69 %
Source: Based on the data from 2009 using Harmonised System Nomenclature Rev. 07.Market
Access Map, International Trade Centre
High selective tariff s (India):Prepared foodstuffs, beverages, spirits (56.88%), Vehicles (47.96%),
Animal products (31.12%), Vegetable products (34.70%).
High selective tariffs (NZ): Footwear (6.11% ), Textile (4.11%) Miscellaneous manufactured articles
(3.38%)
Trade theory posits that countries will experience larger gains from FTA, the higher are their
tariff rates prior to the agreement. From Table above, expect New Zealand to gain more
market access from a proposed FTA. As agriculture accounts for a large share (about 60%) of
New Zealand‟s merchandise exports, potential gains expected to be even higher. Moreover as
Schiff (1999) adds that if the partner country (in this case India) continues to maintain high
tariffs with outside nations, the home country (NZ) is likely to experience an improvement in its
terms of trade by exporting at the higher tariff inclusive price. Hence, from their pre-FTA tariff
structure, we can expect gains to NZ would be higher than that of India.
Table 3 shows the overall average MFN tariff rates in New Zealand and India that are also split
over agricultural and industrial products. Although New Zealand averages do conceal
somewhat higher standard deviation because of selective discriminatory tariff in certain labourintensive products (notably textile, clothing and footwear), these tariffs are considered
relatively low by the WTO and much lower when compared to India. This suggests, (even
before evaluating important indices that are reported in Appendix section), “a priori,” that the
removal of remaining barriers to trade among these countries is more likely to bring significant
welfare gains to New Zealand but not for India. Moreover, agricultural tariffs remain relatively
very high in India– a potential source of gain to New Zealand as agriculture accounts for a
large share of merchandise exports.
3. Literature Review
The economic rationale for removing trade barriers of all kinds should be the fact that a
country benefits from opening its own markets regardless of what policies other countries
choose to pursue. The superiority of free trade over restricted trade, based on the
comparative advantage of countries, is well entrenched in trade theory ever since David
Ricardo‟s classic demonstration of it. The only exceptions in the form of a country exploiting its
monopoly or monopsony power in trade by imposing an optimum tariff, or temporarily
protecting a domestic (infant) industry are based on a particular set of special conditions.
Free Trade Agreements that remove barriers amongst partners, but permit barriers against
outsiders, are both a step forward and a step backward in terms of their overall impact on
welfare. The theory of economic integration pioneered by Jacob Viner (1950) captures these
effects in terms of trade creation and trade diversion that typically arise out of the formation of
a preferential trading arrangement such as a bilateral free trade agreement. Trade creation
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Proceedings of World Business and Social Science Research Conference
24-25 October, 2013, Novotel Bangkok on Siam Square, Bangkok, Thailand, ISBN: 978-1-922069-33-7
results when the removal of barriers within the union creates new trade opportunities for the
most efficient partner. Trade diversion occurs when such intra-union tariff removal plus a
common tariff against third countries divert trade away from a more efficient third country to a
union partner. While the former has the potential to improve welfare of the union members
through allocative efficiency gains and consumer surplus gains within the union, the latter
reduces welfare. The net effect on global welfare therefore will depend on the balance of the
welfare gains and losses of trade creating and trade diverting consequences of selective tariff
removals. Welfare gains and losses are measured in terms of gains and losses in real output
of countries. It is an exercise in the theory of the second best as it is only universal free trade
that offers the first-best Pareto optimality. It is perhaps because of lack of progress at WTO‟s
Doha Round that prompted many member countries to actively pursue such bilateral FTAs that
are easier to implement. Wonnacott and Lutz (1989) extended Viner‟s concepts in the context
of FTAs to identify situations when trade creation is likely to be large and trade diversion small.
The authors then provided a number of criteria which if met may suggest ex ante, if an FTA is
more likely to be welfare improving than reducing. The current research reviews such
statistical indices and applies it to the proposed NZ-India Free Trade Agreement.
By observing the relative prices of goods within the protected countries and their world prices –
the difference being a measure of the tariff equivalence – one can capture the effect of the
removal of a trade barrier. When a tariff (or some other trade barrier) is removed, the import of
the good in question usually rises, and its price falls in the previously protecting country, while
its output and price rise in the countries that are its more efficient producers. Resources will be
removed from these sectors in the importing countries and reallocated to other, more efficient,
uses, giving rise to allocative efficiency gains there. Similar efficiency gains in the exporting
country will result from more resources being devoted to the freed-up sectors.
The decline in the import price will lead to an increase in consumption, and a corresponding
gain in consumer surplus in the importing country adding to the welfare improvement it
experienced from allocative efficiency gains. The trade balance of the exporting countries will
improve in respect of the freed-up sectors – another source of potential gains for them.
The exercise involving the measurement of welfare changes in terms of consumer surplus
requires capturing the pure substitution effect, i.e. the substitution of imports for import
substitutes prompted by the change in relative prices, while the consumers‟ real income was
held constant. The income effect of the price change is thus netted out. Typically, the
assumption is made that the income effects are relatively unimportant (Corden 1975), and it is
not necessary therefore to derive a compensated demand curve for estimating the welfare
changes in terms of substitution effects alone. In common with a number of other studies in
this area (Khan 1997, Martin 1997), this paper uses the equivalent variation to measure the
changes in welfare. This Hicksian concept is embedded in the ordinal approach to the
measurement of consumer surplus, and is closely related to the concept of compensating
variation alluded to above.
4. Data, Methodology and Model
We employ two commonly used indices in order to look at broad trends in trading patterns
between India and New Zealand, these are; trade intensity and revealed comparative
advantage indices.1 Finally we employ preliminary computable general equilibrium estimates
1
For example used by Pitigala, N. (2005), Michaely, M. (2004), Yeats, A. (1998)
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Proceedings of World Business and Social Science Research Conference
24-25 October, 2013, Novotel Bangkok on Siam Square, Bangkok, Thailand, ISBN: 978-1-922069-33-7
of potential welfare gains from a FTA between these countries. The objective of this research
is to employ pre-FTA to make an ex-ante assessment of the agreement from each partner
perspective. We accessed annual data over 1996-2010 from UNCOMTRADE covering
commodity trade only.
Trade intensity index (TII)
If negotiating countries have an intensive trading relationship, an FTA would simply reinforce
the underlying trade patterns and provide less scope for welfare reducing trade diversion
(Pitigala 2005; p.12). TII uses the volume of trade data between member countries (see
Appendix for index calculation formulae). TII>1 suggests home country exports more than
would be expected given partner country‟s share of world imports. These TII‟s are calculated
for NZ exports to India and vice versa and reported in Table 4. We observe high (and rising)
intensity of New Zealand‟s exports to India, but not vice versa. It should be noted that on its
own TII is not enough to conclude that an FTA would necessarily be welfare enhancing for
either partner. Rather it only suggests that observed actual trade between New Zealand and
India has been increasing on its own momentum, and that an FTA could potentially reinforce
this trading pattern, rather than lead to significant trade diversion.
Table 4: TII (1996-2010)
Period
TII's - India to NZ
TII's - NZ to India
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
0.205850419
0.222730391
0.188820226
0.149681479
0.129503304
0.135470995
0.116275361
0.120578233
0.090269067
0.089084572
0.255561932
0.048316014
0.043099122
0.052697206
0.040305524
2.224982128
2.283113379
3.220339158
2.917008075
2.400223991
2.230624728
2.397741964
2.051218972
2.338109773
2.894051238
4.225207037
3.168758533
2.191925457
3.00862631
4.374993268
Source: UN COMTRADE and own calculations
Revealed comparative advantage indices
While TII forms is an important criterion for building momentum to bilateral trade volumes, the
literature also suggests that the partners must be competitive world producers of underlying
tradable goods (and services) in order to lessen the risk of trade being diverted to a higher
cost partner. The revealed comparative advantage (RCA) index, developed by Balassa (1965)
is a commonly used method of analysing one nation‟s export structure relative to the structure
of world exports and can point to commodity groups in which a country has a comparative
advantage. RCA is the ratio of the industry‟s share in the country‟s exports relative to its share
in world trade. RCA>1 means the reporting country is specialised in exporting selected
industry‟s products. These indices were estimated for the 2010 year using the formula stated
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Proceedings of World Business and Social Science Research Conference
24-25 October, 2013, Novotel Bangkok on Siam Square, Bangkok, Thailand, ISBN: 978-1-922069-33-7
in the Appendix section and the results reported in Table 5. In addition to New Zealand RCA‟s,
Table 5 shows the importance of each product grouping calculated as the average share of
India‟s national imports. These measures show that in certain products New Zealand has high
RCA but low market share (meat, fish, Albuminoids) in Indian imports. In others (dairy, wool,
Raw hides, skins and leather), New Zealand has high RCA and high market share, but very
low volume. As one would expect, New Zealand maintains high RCA index in dairy and milk
preparations, meat, wool, pulp and products of animal origin. Overall New Zealand‟s RCA
evidence points to higher prospects of trade creation than to diversion effects resulting from an
FTA with India.
Table 5: RCA Estimates for New Zealand
Product
code
TOTAL
Product label
All products
'04
Dairy products, eggs, honey, edible
animal product nes
'51
New Zealand's
India's imports
NZ's share in
New Zealand's
exports to India
from world
India's imports RCA
640117
220290676
0.290578345
111734
184338
60.61365535
45.5
Wool, animal hair, horsehair yarn
and fabric thereof
31496
323399
9.739052996
20.1
'41
Raw hides and skins (other than
furskins) and leather
22433
723712
3.099713698
5.9
'47
Pulp of wood, fibrous cellulosic
material, waste etc
9690
1055894
0.917705755
6.4
'08
Edible fruit, nuts, peel of citrus fruit,
melons
7838
683459
1.146813488
7.8
'35
Albuminoids, modified starches,
glues, enzymes
584
224265
0.260406216
18.1
'22
Beverages, spirits and vinegar
479
344333
0.139109525
4.9
'05
Products of animal origin, nes
233
13556
1.718796105
17.4
'21
Miscellaneous edible preparations
151
113499
0.13304082
4.8
'19
Cereal, flour, starch, milk
preparations and products
104
51996
0.200015386
6.9
'03
Fish, crustaceans, molluscs, aquatic
invertebrates nes
48
10696
0.448765894
5.8
'02
Meat and edible meat offal
0
3120
0
18.3
Sources : ITC calculations based on COMTRADE statistics for 2010
Computable General Equilibrium (CGE) model estimates
General equilibrium models are best-suited to capture linkages among economy-wide sectors
as well as to identify the sources of gains from trade. To add robustness to our analysis, we
use the Global Trade Analysis Project (GTAP) computable general equilibrium model (Hertel
1997) to quantify the impacts of a potential bilateral FTA between India and New Zealand.
GTAP incorporates detailed inter-industry linkages for respective economies. Products are
differentiated by country of origin, allowing bilateral trade to be modelled, and bilateral
international transport margins are incorporated and supplied by a global transport sector. The
model is solved using GEMPACK (Harrison and Pearson 1996). The Version 7.1 GTAP
database released in May 2010 is used in this research to make projections to 2020 (see
Dimanaran and McDougall, 2005). Detailed description of GTAP database and its companion
CGE model can be found in Hertel (1997). Selections of GTAP CGE result are reported in the
following tables to answer two specific questions:
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Proceedings of World Business and Social Science Research Conference
24-25 October, 2013, Novotel Bangkok on Siam Square, Bangkok, Thailand, ISBN: 978-1-922069-33-7
1. Does India‟s economic growth matter to New Zealand (and to India)?
2. Does an FTA with India matter to New Zealand (and to India)?
TABLE 6 – Welfare Changes under Alternative Indian
Growth Scenario
Region
New Zealand
India
World (exc. India)
Indian growth
(6%)
Indian growth
(9%)
12.5
(0.01)
28.1
(0.03)
436626.9
(68.1)
747735.3
(116.6)
21557.3
(0.05)
39672.4
(0.10)
SOURCE: GTAP simulations
Gains are equivalent variation (EV) estimated in million US dollar
Welfare as a percentage of GDP shown in parentheses
Table 7: Effect of Indian economy growing at 9% on NZ’s main tradable
sectors
Dairy
Meat
Wool
Other Animal Prod.
Horticulture
Rice
Cereal
Bev. & Tobacco
Other Food
Forestry
Fisheries
Raw Min. & Metals
TCF Products
Wood Products
Min. & Metal Manu.
Other Manufactures
Services
Total
∆ Exports
(percent)
-0.57
-3.06
25.43
0.52
0.73
-1.02
1.61
0.00
-0.38
16.79
0.69
13.67
-5.77
-1.02
-0.81
-2.40
-0.45
-0.13
∆ Imports
(percent)
-1.85
-2.26
-4.09
-1.78
-0.31
-0.19
-0.89
-0.36
-0.47
1.40
-0.07
0.70
-0.29
-0.25
0.00
-0.22
-0.01
-0.11
∆ Price
(percent)
-0.26
-0.29
0.12
-0.31
-0.26
-0.26
-0.28
-0.22
-0.20
1.68
-0.06
1.94
-0.41
-0.04
0.30
-0.17
-0.32
∆ Output
(percent)
-0.23
-1.78
8.30
-1.08
0.58
0.23
-0.10
0.06
-0.02
3.98
0.11
6.46
-3.09
-0.33
-0.32
-0.95
0.00
SOURCE: GTAP simulation. Trade changes are wrt. NZ’s global trade- not bilateral trade with India
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Proceedings of World Business and Social Science Research Conference
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Performance impacts on NZ economy from NZ-India FTA
TABLE 8 – Decomposition of Potential Welfare Changes to New
Zealand and India resulting from FTA
Welfare
(EV mill
US)
Welfare
(% of GDP)
Allocative
Efficiency
Terms of
Trade
I-S
Effect
New
Zealand
103.0
0.11
15.142
89.791
-1.931
India
-28.9
-0.00
-7.25
-20.519
-1.175
World
-26.111
-0.00
-25.997
-0.117
0.003
SOURCE: Model simulation
All bilateral tariffs are eliminated in this scenario
Gains and losses are in million US dollar
I-S effect = contribution due to changes in prices of investment goods and savings
All of the above tables point to favourable outcomes to New Zealand from forming an FTA with
India. One important reason why so many countries aspire for an FTA with countries like India
or China is their phenomenal economic growth. However, our estimates in Table 8 provide a
rather weak support for such an argument. India‟s high economic growth would benefit India
enormously but would mean little to New Zealand if the latter wishes to benefit from India‟s
fortunes by merely forming an alliance. A high level of Indian growth would also bring mixed
fortunes to New Zealand‟s main tradable sectors. Wool, forestry, raw Minerals and metals
would experience biggest increases in outputs, price and trade balances. On the downside,
textile, clothing and footwear (TCF) products would experience biggest decline in outputs,
price and trade balances. Dairy, meat and other manufactures would also experience decline
in these categories, albeit to a much lesser extent.
Potential welfare gains to New Zealand are modest, but positive (Table 8). Most of these gains
are derived from terms-of-trade improvements. Gains to India are less clear and are neutral at
best. For India, welfare loses stem from terms-of-trade deterioration that is expected for the
large trading partner from a bilateral trade liberalisation.
5. Summary and Conclusions
Superiority of multilateral trade over its bilateral counterpart is established in trade theory
literature, but FTAs are becoming very popular. The reason for such a second-best option is
rooted in slow progress at WTO‟s Doha Round that is currently “deadlocked.” WTO reporting
of FTA notifications is increasing exponentially such that by 2012, some 489 FTAs/RTAs have
been notified to the GATT/WTO (wto.org). Because of their conflicting trade creation and
diversion effects, FTAs are both a one-step forward and a step backward from free trade. This
also means that overall welfare impacts of FTAs, in general are uncertain. In this research we
assessed the impacts of one such (proposed) bilateral FTA between India and New Zealand.
Simple numerical estimates in terms of popular trade indices and CGE estimates using GTAP
data were employed for this purpose.
In general, results obtained in the research provide adequate support to the wisdom of forming
a free trade alliance between India and New Zealand. This support is based on trade intensity
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Proceedings of World Business and Social Science Research Conference
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indices, RCA analysis and an examination of existing tariffs in effect between these countries.
The general equilibrium results of respective welfare gains or losses are somewhat
contentious than this. Estimates here demonstrate that New Zealand is a clear and big winner
but a small negative outcome is predicted for India. Being a large economy by many-folds
when compared to New Zealand, India‟s losses are statistically insignificant (virtually zero) as
a percentage of its GDP. However, if one considers a possible “negative list” of items that
typically characterise FTA negotiations, then India‟s welfare would fall further. In the end, a
final free trade agreement may remain a hard sell for New Zealand purely on economic
grounds.
References
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Manchester School of Economic and Social Studies 33(2), 99-123.
Corden, W.M. (1975), „The Costs and Consequences of Protection: A Survey of Empirical
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Proceedings of World Business and Social Science Research Conference
24-25 October, 2013, Novotel Bangkok on Siam Square, Bangkok, Thailand, ISBN: 978-1-922069-33-7
Appendix 1:
1.1 Trade intensity index
The TII is defined as the home country‟s (i) exports to a foreign country j as a proportion of
total home country exports divided by the foreign countries imports as a proportion of world
imports (net of home country imports). This is set out in the formula below:
Mj
 X ij  

TIIij    

 X i   (M w  M i ) 
Where:
TII ij is the trade intensity index for home country i‟s exports to partner country j.
( X ij / X i ) is the value of country i‟s exports sent to country j as a proportion of country i‟s total
exports.
[M j /( M w  M i )] is country j‟s total imports divided by world imports net of country i‟s imports.
An index value greater than one suggests country i exports to country j more than would be
expected given j‟s share of world imports, while an index less than one suggests these
countries trade less than would be expected.
1.2 Revealed comparative advantage (RCA) index
The index is calculated with the following formula;
X k / X wk
IRCAik  i
X i / X w 
Where;
IRCAik is the index of revealed comparative advantage for country i in commodity k;


X ik / X wk is the ratio of country i‟s exports of commodity k to world exports of commodity k;
X i / X w is the ratio of country i‟s total exports to total world exports.
The resulting figure is then multiplied by 100, where a commodity with an RCA index greater
than 100 suggests a country has a comparative advantage in the production of this product
(greater than average specialisation in the product), while an index less than 100 points to a
comparative disadvantage (less than average specialisation in the product. An RCA equal to
100 suggests neither a comparative advantage nor disadvantage (an average level of
specialisation in the product relative to the rest of the world).
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