EU - India regional trade agreement – a quantitative assessment

1. EU - India regional trade agreement – a quantitative assessment Thom Achterbosch LEI

2. Outline • Current approaches for impact analysis of agricultural trade policies • Application: EU-India Free Trade Agreement • Limitations

3. Agricultural trade liberalisation: factors driving impact on economic development • Reduced supply of program commodities in OECD countries (wheat, grains) under lower production incentives. Prices up. terms of trade declining (net importers) and improving (net exporters). • Global agricultural trade expands as barriers come down. Trade creation. • Competitive producers gain market share on the less competitive producers. Preference erosion. • Possible technological change and productivity growth, making free available resources for alternative use. Structural changes reflect shifts of factors of production from one sector to the other.

4. Tracing the links = trying to solve a puzzle

5. Agricultural trade reform: impact on the poor • Agriculture is important source of employment • Continuum of trade-poverty links: • First-round effects: households face price changes • Second-round effects: households adjust to changing market conditions • Long-term effects: sustained poverty reduction via economic growth • Outcome strongly depends on the ability of the poor to respond to changes (second-round vs. first-round)

6. First collect the pieces, then solve the puzzle • Research on trade and poverty should first be focused on finding and understanding the missing pieces • Therefore current poverty impact studies should not be taken too literally (since the puzzle is not yet completed) • However, the importance of domestic policies is already quite clear (strategic and tactical policies)

7. Application • Quantitative assessment of EU-India FTA: • Welfare impact of RTA (regional trade agreement) • Importance of agriculture in RTA, • Within-country effects (India) • Markets for goods and factors of production • Method: • GTAP model adapted to agricultural issues • simulate RTAs with different levels of ambition

8. EU’s interest in RTA - manufactures • EU always gains, unless it is only one liberalizing while India limits its liberalization to maximum 20% • EU gains most if only India fully liberalizes • Impacts on EU are small ( -0.004 to 0.023 % of GDP) • Doha does not change pattern of impact but reduces size further ( -0.002 to 0.011 % of GDP) Welfare effects for EU of gradual non-agricultural liberalization in EU and India based on EV welfare measure (source: model simulations)

9. India’s interest in RTA - manufactures EU: 100% India: 30% • India faces losses in majority of cases; only positive gains if liberalization less than 70% coupled with full liberalization by EU • Impacts are larger for India ( -0.30 to 0.14 % of GDP) than for EU • Doha does not change pattern of impact, but reduces size (-0.13 to 0.09 % of GDP) • Maximum allocative efficiency for India with 30% liberalization and full EU liberalization EU: 100% India: 70% Welfare effects for India of gradual non-agricultural liberalization in EU and India based on EV welfare measure (source: model simulations)

10. EU’s interest in RTA – manuf. + agriculture • EU always gains, gains peak with EU liberalizing between 70 and 80 % • EU gains increase nonlinearly with liberalization by India • Impacts on EU remain limited ( 0.002 to 0.005 % of GDP) • Doha shifts peak for EU to between 30 and 40, reduces impact further, now small negative impact with limited liberalization by India ( -0.001 to 0.02 % of GDP) Welfare effects for EU of gradual agricultural liberalization in EU and India on top of manufactures liberalization (100% by EU, 30 % by India), based on EV welfare measure (source: model simulations)

11. India’s interest in RTA – manuf. + agriculture • India in 18 cases losses from agriculture, these are outweighed by gains from manufacturing • India’s gains increase nonlinearly with liberalization by EU • Impacts on India larger than on EU (between 0.10 and 0.21% of GDP) • Doha does not change pattern of impact, but reduces size (0.05 to 0.11% of GDP) Gains from manufacturing (EU:100% and India:30%) Welfare effects for India of gradual agricultural liberalization in EU and India on top of manufactures liberalization (100% by EU, 30 % by India), based on EV welfare measure (source: model simulations)

12. Summary of welfare effects • Overall observations: • Limited impact of RTA on EU • Doha reduces size of impacts (positive and negative) but not pattern (except for impact of manufactures + agriculture in EU with Doha) • Interests in RTA: • Manufactures: interests of India strongly depend on level of liberalization by EU • Manufactures + agriculture: both EU and India have interest is one-sided full liberalization by the other party

13. Indian interests in EU free trade agreement? • India’s economy not well integrated in global markets • Particularly agriculture • EU not a logical trading partner in agriculture • India has strong defensive interests • Offensive interests conditional on EU opening up markets • Textiles • Crops: rice, possibly sugar

14. Exploring India’s “optimum” • Welfare gains 1st best = Crops-based exports to EU • Welfare gains 0.2% of GDP • Large impact on land markets • Offensive sectoral interests: rice (sugar) • 2nd best = Textiles, textiles • Keep Ag closed • Textiles, cotton sector expand • Substantial impact on unskilled labour demand, wages • Growth and equity effects – desirable growth?

15. India – land and capital (real price change, %) Land Capital

16. India – labor (real price change, %) Unskilled labor Skilled labor

17. Factor prices – a glimpse at distribution of impact • India: • factor prices tend to rise • prices of land, labor and capital employed in agriculture rise in all cases; prices respond most to a limited agriculture liberalization by India • prices of skilled labor and capital employed in non-agriculture decrease with limited agricultural liberalization • price changes reflect move to agriculture and labor intensive manufacturing • EU: factor prices unaffected by RTA

18. Strengths and Limitations • Applied global economic models and GTAP database • Bring numbers to the debate • Key stakes in trade reform lie in manufacturing, service, and interaction with agriculture economy • 0.1% of GDP across a range of studies – what fuzz? Distribution effects! • Research agenda • Household level impact (livelihood and production) • Mobility of land and labour, interactions between factor markets • Standards, non-tariff measures

19. Alternative perspectives, other results • Structuralist economics • Macroeconomic consistency • Deviate from neoclassicial framework, underemployment • Evolutionary, institutional economics • Market failures, and ‘history matters’