ECON F311 : International Economics
First Semester: 2022-23
INDIA-AUSTRALIA TRADE DEAL (GTAP)
Under the Supervision of
Dr. Archana Srivastava
BIRLA INSTITUTE OF TECHNOLOGY AND SCIENCE, PILANI
HYDERABAD CAMPUS
Date: 29th October 2023
Group 2:
Serial Number
Name
ID Number
1
2021B3A70929H
Akhil Kumar Mishra
2
2021B3A72883H
Harsh Khandelwal
3
2021B3A70559H
Waleed Iqbal Shaikh
4
2021B3A72113H
Param Burad
5
2021B3A72631H
Keshav Saraiya
6
2021B3A70896H
Unnat Omer
7
2021B3A72513H
Jyotirmoy Singh
8
2021B3A70971H
Abhay Gupta
1
ABSTRACT
This study examines the impact of the India-Australia Economic Cooperation and Trade
Agreement (Ind-Aus ECTA) on the economy of the two countries. This study focuses on trade
liberalization and tariff reduction schemes introduced by these bilateral trade agreements and
their impact on various sectors, trade balance and GDP. Using simulations of the Global Trade
Analysis Project (GTAP), we examine the impact of the agreement on various sectors and
identify changes in trade balance and GDP for India and Australia.
The results show that India's trade balance has been affected by increased imports of cereals and
other sectors due to lower prices. Meanwhile, Australia had a positive impact on its trade balance
with increased exports, particularly in the cereal sector. It also revealed how this trade agreement
affected the GDP of both countries, India's GDP was negatively affected by the trade deficit,
while Australia witnessed a positive change in GDP due to increased exports.
The India-Australia Economic Cooperation and Trade Agreement (Ind-Aus ECTA) is a free trade
agreement between India and Australia. It was signed on April 2, 2022 and entered into force on
December 29, 2022. The agreement is expected to increase bilateral trade in goods and services
from $45 billion to $50 billion over five years. 27 billion.
This study shows the complex interaction of factors in trade agreements and their consequences
on various economic indicators. While the Ind-Aus ECTA offers opportunities for economic
growth, it also poses challenges for India due to trade imbalances in various sectors. Research
explores the dynamics of modern trade agreements and their impact on the economies of
participating countries.
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TABLE OF CONTENTS
TITLE
ABSTRACT
TABLE OF CONTENTS
ACKNOWLEDGEMENT
INTRODUCTION
GTAP SIMULATION
CONCLUSION
REFERENCES
GLOSSARY
1
2
3
4
5
7
16
17
18
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ACKNOWLEDGEMENT
We would like to express our gratitude to our Instructor-in-charge Dr. Archana Srivastava for
always being available and providing continuous support whenever needed for successful
completion of this assignment. The assignment helped us gain new insights and knowledge about
the impact of corruption on trade and various aspects of it.
We are very thankful to them for providing us with an opportunity to work on this assignment
and providing us with the necessary links to the websites required for its completion. It was a
wonderful learning experience. We would like to acknowledge that our assignment has been
fully completed by us and we ensure that this is original and not copied.
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INTRODUCTION
Both India and Australia were British colonies. But pre 1991 there was little in common between
the two. However, things started to take a different turn after the dissolution of the USSR and the
embarkment of Economic Liberalisation in India post-1991. The Australian trade minister visited
India in 1995 to develop the ties between the government in order to facilitate the
institutionalization of trade.
This deepening of ties accelerated in the last decade, leading to India and Australia today being
part of different multilateral partnerships like QUAD, Commonwealth, ASEAN Regional Forum,
etc. India and Australia are partners in the Supply Chain Resilience Initiative, which aims to
enhance the supply chain in the Indo-Pacific region. All this deepening of ties finally culminated
in the signing of the India-Australia Economic Cooperation and Trade Agreement (Ind- Aus
ECTA), which is an FTA, on April 2, 2022. The agreement was implemented on December 29,
2022.
India has formed different types of trade agreements with different countries. Starting from the
lowest level of trade cooperation, we have PTA (Preferential Trade Agreement), followed by
FTA (Free Trade Agreement) followed by CECA (Comprehensive Economic Cooperation
Agreements) and CEPA (Comprehensive Economic Partnership Agreements). While PTA has a
positive list that lists the products on which tariffs are reduced, FTA has a negative list that
lists the products on which tariffs are not reduced or eliminated. So, the FTA is more
ambitious than the PTA. CECA and CEPA are more comprehensive in the sense that besides
dealing in goods, these agreements include an integrated package extending to services and
investments, helping in facilitating trade and rule-making for intellectual property, government
procurement, technical standards, sanitary and phytosanitary issues, disputes settlement and also
focuses deeply into the regulatory aspects of trade as compared to FTA.
Through this agreement India will get preferential market access on all products it exports to
Australia, including labour intensive sectors such as Gems, Textiles, Jewelleries, leather,
footwear, furniture, food, agricultural products, engineering products, medical devices and
automobiles. In return India will give preferential access to Australia on 70% of goods that
it exports to India (primarily raw materials, coal, mineral ores and wine).
The trade deal is not limited to only good and merchandise exports. In services Australia “has
offered wide-ranging commitments in around 135 sub-sectors and Most Favoured Nation
(MFN) status in 120 sub-sectors covering key areas of interest to India. ”
(Reference: www.pib.gov.in/PressReleasePage.aspx?PRID=1887259).
In return, India will provide market access to Australia “in around 103 sub-sectors and
Most Favoured Nation status in 31 sub-sectors from the 11 broad service sectors such as
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‘business services’, ‘communication services’, ‘construction and related engineering
services’, and so on.”
(Reference: www.pib.gov.in/PressReleasePage.aspx?PRID=1887259).
In addition Indian STEM (Science, Technology, Engineering, and Mathematics) graduates will
be eligible for extended post-study work visas under the terms of the agreement. According to a
government estimate, it will increase bilateral commerce in products and services to between
USD 45 and USD 50 billion over the course of five years, up from roughly USD 27 billion, and
create more than one million jobs in India.
However, The IND-AUS ECTA lacks provisions on investment protection, such as giving
foreign investment to the most-favorable-nation and national treatment, protecting foreign
investment from expropriation, committing to treat foreign investment fairly and equally, and
recognizing the right of foreign investors to file claims against the State for alleged treaty
violations.
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Objectives of the Agreement
The objectives of this Agreement according to Commerce ministry is to:
A. Establish a framework for strengthening and enhancing the economic, trade and
investment relationship between the Parties;
B. Liberalise and promote trade in goods in accordance with Article XXIV of the GATT
1994;
C. Liberalise and promote trade in services in accordance with Article V of GATS;
D. Improve the efficiency and competitiveness of their manufacturing and services
sectors and to expand trade and investment between the Parties;
E. Facilitate, enhance and explore new areas of economic cooperation and develop
appropriate measures for closer economic cooperation between the Parties.
(https://commerce.gov.in/wp-content/uploads/2022/06/1-INITIAL-PROVISIONS-ANDGENERAL-DEFINITIONS.pdf)
Objective of Our Project
Through our project we will be simulating the effect of various tariff reduction schemes and
service liberalization as shocks to see the effect of it on two country’s economy and trade and
also the effect of such a trade deal on India’s other major trade partners and neighboring
countries.
Some Terminologies Used
1. Trade Balance:
This refers to the difference in value of a country's exports (goods and services sold to
other countries) and its imports (goods and services bought from other countries). A
positive trade balance (exports > imports) means a trade surplus, while a negative balance
(imports > exports) leads to a trade deficit.
2. Tax on Imports (TMS):
This is a type of duty or fee imposed by a government on goods that are imported. The
purpose is often to protect industries within by making foreign goods expensive and less
competitive in the domestic market. It's also a source of revenue for the government.
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3. Tariffs:
Tariffs are taxes or duties levied on goods and services that are imported. They can be
specific as a fixed amount per unit or as a percentage of the product's value. Tariffs are a
common tool for governments to regulate trade and protect its domestic industries. It also
helps in generating revenue.
4. Trade Deficit and Trade Surplus:
A trade deficit occurs when a country's imports exceed its exports, leading to a negative
trade balance. On the other hand, a trade surplus happens when a country exports more
than it imports, leading to a positive trade balance. Both scenarios have implications for a
country's economy and can influence policies.
5. Comparative Advantage:
This is the ability of a country to produce a particular good or service more efficiently (at
a lower opportunity cost) than other countries. It forms the basis for international trade, as
countries can specialize in producing what they do best and trade for goods and services
they are less efficient at producing.
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GTAP SIMULATION
Let's talk about the effects of the IND-AUS trade deal using a world trade CGE model used to
predict the response of the desired measures based on the shock on specific macroeconomic
variables.
As the trade deal majorly involved reductions in the import tariffs of the products being imported
into INDIA we consider our shock variable to be TMS(tax on imports) which is different for
various sectors and the effect of this would be studied through the change in the Trade Balance
of INDIA due to a specific sector and due to AUSTRALIA in US million $’s.
The process of GTAP simulation involves the following:
1. Create an aggregated version with the required regions and sectors on whose
historical data you want to work.
2. Choosing the variable to be shocked and then filling in the required data fields
which involve the 2 countries and the magnitude of the per cent change rate.
3. Solve the equation obtained by the shock procedure in step 2 and get the results.
We have found results based on the historical data till 2014.
The results have been found for various sectors individually as well and a combined depiction
has also been done.
Moving on with the shock on TMS in various sectors separately due to the IND-AUS trade deal
the results that we get are:
1. Effect on GrainCrops:
The deal led to a duty-free entry for barley and oats and a 50% tariff reduction for
in-quota exports of lentils immediately. Also, tariffs were to be eliminated over 6 years in
phased manner for avocados, onions, cherries and berries, accompanied by a reduction of
tariffs over 6 years for apricots and strawberries. For oranges, mandarins and pears, there
was to be immediate 50% tariff reduction for in-quota exports. Thus on average, the
import tariffs were reduced by 50 percent in the GrainCrops sector.
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Interpretation:
With the 50% reduction in tariff, India promoted trade between the 2 countries as a result of
which the import of Barley and Oats and other millet crops saw a huge surge for India.
Promoting foreign trade in this case is a viable option as India has a comparative advantage as
well as a market for wheat and rice so instead of diversifying they focus on these main crops and
simply import the millet crops from other countries.
As the Trade Balance is (exports - imports) India saw a huge surge in imports whereas
Australia saw the same spike in exports so India's trade balance went negative and the opposite
for Australia.
We can also see that India is now producing only those crops in which it has a comparative
advantage so it can shift their labour force and technology to other sectors due to which there
was an increase in the exports of processed food, textiles and manufacturing sectors which are
very labour intensive. This export increase is seen by a positive change in the trade balance for
these sectors.
Now as India is getting enough imports from Australia there is a negative impact on the trade
balance of other countries especially in GrainCrops such as the USA, China etc. because the
demand in India remained the same so it has readjusted their import quantities from foreign
countries.
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2.
Effect on Heavy-Manufactured Goods:
The tariffs of lifting machinery for mines have been eliminated by up to 7.5% and
machinery parts such as that of boring and excavating and also railway equipment parts
have faced an immediate reduction of about 10%.
Interpretation:
So here we see that now due to lesser tariffs Australia’s exports and India’s imports for heavy
manufacturing items have increased which can be seen as a negative effect on the trade balance
for India and a positive one for Australia. (Trade Balance = Exports - Imports).
But now extending the effects of HeavyManuf. we see that with the availability of proper
technology India can contribute more, domestically in light manufacturing items, textiles and
major resource extraction processes as India is a resource-rich country. Due to this, its exports
would also see an increase thus depicted as a positive effect on the trade balance in these specific
sectors.
For Australia, we see the opposite in the above-mentioned sectors such as Extraction etc. because
now due to Technology India is more domestically oriented and self-dependent so the export of
resources from other countries would see a decrease thus a negative trade balance for Australisa
in extraction,lightmanuf. and processed food/textile industries.
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3. Effect on textiles and clothing fibres:
There is an elimination of tariffs of up to 10% for processed wool and cotton fibres.
Interpretation:
So this tariff reduction is seen as a negative effect on the trade balance for India as its imports for
textiles increase and the opposite happens for Australia. Now if the imports of processed fibres
have increased the need to get heavy/lite manufactured products to do the processing on our own
would decrease thus decreasing the imports for such types of machinery which positively
impacts the trade balance for India in these sectors but negatively on the other countries because
their export magnitudes in these sectors go down.
4. Effect on Sheep Meat:
There is an elimination of tariffs upto 30% for sheep meat and fresh rock lobster and
elimination of tariff over 6 years for other fresh, frozen and processed seafood products
including frozen rock lobster, Atlantic salmon and tuna in phased manner.
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Interpretation:
In this scenario, we see that now due to lesser tariffs, Australia’s export and India’s imports for
sheep meat and processed sea food have increased which can be seen as a negative effect on the
trade balance for India and a positive one for Australia. (Trade Balance = Export - Import).
Nonetheless, we see that with availability of proper technology, India can contribut more,
domestically in processed foods, textiles light manufacturing, heavy manufacturing, and other
services due to the abundancy of labour in India. Due to this, its export would also see an
increase thus depicted as a positive effect on the trade balance in these specific sectors.
For Australia, we see that it will rely majorly on imports for the grain crops, extraction,
processed foods, textiles, manufacturing and thus would result in import heavy country exporting
only sheep meat and processed seafood.
5. Effect on processed food:
There is an elimination of tariffs of 50% for a wide range of food products including
infant formula, certain chocolates, breakfast cereals, pasta, olive oil, protein concentrates,
prepared nuts, coffees and teas.
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Interpretation:
With the decrease in tariff on processed foods by 50 %, Australia’s export and India’s imports for
processed foods including infant formula, certain chocolates,breakfast cereals etc. have increased
which can be seen as a negative effect on the trade balance for india and positive one for
Australia (Trade Balance = Export - Import).
Nonetheless, we see that with the availability of proper technology, India can contribute more to
sheep meat, textiles, light and heavy manufacturing etc. due to labour abundancy in India. Due to
this, its export would also see an increase thus depicted as a positive effect on the trade balance
in these specific sectors.
For Australia, we see that once again, it will rely majorly on imports for almost all sectors listed,
except processed food, where it will export significantly.
6.)Changes in trade balance:
The table below shows the combined effect of all such tariff reductions in the different sectors on
the trade balance between the countries
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Interpretation:
As a result of the combined tariff changes, we find that India will be importing grain crops
profusely resulting in negative trade balance. Also India will have to resort to importing
extraction goods, utilities and other services which would also result in negative trade balance
for these sectors. On the other hand, India would be exporting sheep meat, processed foods,
textiles, light manufacturing goods, heavy manufacturing goods, and transport and
communication services sector goods, which will all positively affect the trade balance of these
sectors. We also find that India has the greatest trade balance for heavy manufacturing goods
among all the other countries, which implies it can witness immense growth in this sector.
In case of Australia, we find it will have to increase the import of goods from light and heavy
manufacturing sector,sheep meat and livestock sector, transport and communication services and
other service sectors. Due to this, there will be a negative impact on the trade balance for these
sectors. On the bright side, we see that Australia will become the sole exporter of grain crops
such as barley, oats, lentils etc. this will tremendously increase its trade balance and provide
positive effect. It will also be exporting goods from extraction sector, processed foods sector but
not to the extent at which it exports lentils, oats, barley.
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Impact on GDP due to the IND-AUS trade deal
So here we see the combined effect of all such tariff reductions in the different sectors on the
GDP of both countries and the results that we get are:
Interpretation:
The GDP for India even after the trade deal’s free trade situations is impacted negatively the
reason being that India has always been a trade deficit country and that the tariff reductions
have further affected its imports more than its exports whereas the GDP for Australia is slightly
towards a positive change because its exports have surged a lot as compared to the imports.
The impact on other countries is negligible as there is no significant involvement of any country
in the bilateral trade deal between India and Australia but they still can be told to be adversely
impacted a bit as the orientation of trade between all these countries would be surely facing an
adjustment considering the trade deal in mind.
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CONCLUSION
India-Australia Economic Cooperation and Trade Agreement signed an FTA, on April 2, 2022
which came into force on December 29, 2022. We conducted a GTAP analysis to see the impact
of the trade deal on two economies. From the GTAP analysis, we see that as a result of the tariff
changes, India solely depends on imports of grain crops sector which consists of barley, oats and
other millet crops and exports majorly the products form heavy manufacturing sector. This
affects the trade balance for grain crops sector negatively and heavy manufacturing sector
positively. Thus India has trade surplus in heavy manufacturing sector while a trade deficit in
grain crops sector among the peer nations. In case of Australia, we see that through the changes
in the tariff, Australia acquires trade surplus in grain crop sector, higher than any other peer
country and it acquires the significant trade deficit in the products from light manufacturing
sector. Finally we conclude that India’s GDP slightly depreciates because India is a trade deficit
country, whereas in case of Australia, it slightly appreciates while the impact on GDP for
countries other than these are negligible
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REFERENCES
● https://en.wikipedia.org/wiki/Free_trade_agreements_of_India
● https://en.wikipedia.org/wiki/Australia%E2%80%93India_Comprehensive_Economic_C
ooperation_Agreement
● https://www.youtube.com/watch?v=TlNaJXrI0o0
● https://www.abc.net.au/news/2022-04-02/india-australia-trade-deal-signed/100961618
● https://www.drishtiias.com/daily-news-analysis/launch-of-supply-chain-resilience-initiati
ve
● https://www.youtube.com/watch?v=1IeUFKWZEYI
● https://www.drishtiias.com/daily-updates/daily-news-editorials/india-australia-ecta
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GLOSSARY
● SCRI helps a country to ensure that its supply chain is diversified in order to spread the
supply risk across a large number of countries instead of depending on just a few, so that
in case of unanticipated events, supply disruption from a particular country doesn’t
severely affect the economic activity in the destination country.
● A global value chain (GVC) refers to the full range of activities that economic actors
engage in to bring a product to market. The global value chain does not only involve
production processes but preproduction (such as design) and postproduction processes
(such as marketing and distribution). It refers to international production sharing, a
phenomenon where production is broken into activities and tasks carried out in different
countries. They can be thought of as a large-scale extension of the division of labor.
● Article XXIV of the GATT 1994: WTO regulation on how countries can establish
custom union, free trade areas and interim agreements that lead to establishment of
custom union and free trade areas.
● Article V of GATS: This WTO agreement allows a country to form an agreement
liberalizing trade between two countries or a group of countries if they meet certain
conditions.
● Free trade area: When a group of countries have signed free trade agreements agreeing
to remove most or all restrictions on trade in form of tariff or quotas, then the country is
said to come under free trade area.
● Custom Union: a group of nations that in addition to having free trade, have also agreed
to charge the same import duties as each other.
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