Title: Do free trade agreements promote intra-industry trade? The case of India and its FTAs

Authors: Anjali Ramakrishnan; Poornima Varma

Addresses: The Energy and Resources Institute (TERI), Darbari Seth Block, IHC Complex, Lodhi Road, New Delhi 110 003, India ' Department of Policy Studies, TERI University, Vasant Kunj, New Delhi 110070, India

Abstract: The paper examines the role of free trade agreements (FTAs) in promoting intra-industry trade (IIT) between India and its selected FTAs - Association of South East Asian Nations (ASEAN), South Asian Free Trade Agreement (SAFTA) and Sri Lanka. IIT is evident for India's trade with Sri Lanka and Singapore whereas the same is low for other countries. Even the observed IIT is mostly in the form of vertical IIT (VIIT). The results based on fixed effects model using gravity equation shows that the FTAs have a significant impact in promoting IIT. This can be attributed to the high levels of VIIT observed after trade agreements are signed. The negative and significant GDP difference confirms the hypothesis of an inverse relationship between the level of IIT and the differences in development of the trading economies. If countries within an FTA are with different levels of development, then the resultant trade would mainly exhibit an inter-industry structure thus indicating possibilities of greater resource adjustment costs.

Keywords: intra-industry structure; FTAs; free trade agreements; VIIT; vertical intra industry trade; HIIT; horizontal intra industry trade; ISFTA; Indo-Sri Lanka free trade agreement; ASEAN; Association of South East Asian Nations; SAFTA; South Asian Free Trade Agreement; India; Singapore; fixed effects model.

DOI: 10.1504/IJTGM.2014.062855

International Journal of Trade and Global Markets, 2014 Vol.7 No.2, pp.129 - 144

Received: 15 Oct 2012
Accepted: 19 Apr 2013
Published online: 29 Oct 2014 *

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