EU-India Bilateral FTA: Potential Implications for the Excluded Low-Income Economies in Asia and Africa

This paper provides an analysis on welfare, macroeconomic and trade impacts on a number of low-income economies as a result of a proposed bilateral FTA deal between the EU and India. A global general equilibrium modelling technique is applied for the analysis. A simulation of a scenario depicting a full FTA between India and EU is conducted. It appears that the EU-India FTA would result in welfare gains for both India and the EU. In absolute terms, the gains of EU would be much higher than that of India. However, in terms of share in GDP the gains of India would be much large than that of EU. India’s welfare gain is mainly driven by the gain in terms of trade, whereas, EU’s welfare gain is primarily because of gain in allocative efficiency. All the low-income economies under consideration would experience loss in welfare, and the welfare losses for the South Asian countries are much higher than the other low income economies in Asia and Africa. Bangladesh would appear to experience largest loss in welfare in absolute value, whereas rest of South Asia would incur largest loss in terms of share in GDP. The welfare losses of these low-income economies are mainly driven by the loss in terms of trade. However, in general, the extents of welfare loss in terms of share in their GDP for most of these countries are not very high. Most of these lowincome countries would also experience loss in real GDP and loss in exports. For rest of South Asia, the loss in real GDP is as high as 0.17 percent and loss in exports is as high as 1.32 percent. Other South Asian countries like Bangladesh and Sri Lanka would also experience loss in exports by more than 0.9 percent. However, for most of the other countries, the loss in real GDP and loss in exports are not very large. Most of the low income countries under consideration would experience fall in exports both in the EU and Indian market mainly because of loss in preferences and diversion of trade in the EU and Indian market. However, the pattern of export loss is different for different countries. Countries like Bangladesh and Pakistan would suffer from larger export losses in the EU market compared to the Indian market whereas for Sri Lanka and rest of South Asia the impacts will be just the opposite. Most of the other low-income countries would however experience larger loss in exports in the EU market. The product wise figures suggest that Asian low-income countries’ loss in exports in the EU market will be dominated by the loss in exports of textile and wearing apparels. Most of the African countries would however experience loss in exports of agricultural and agro-processing products in the EU market. In the Indian market, Sri Lanka and rest of South Asia would experience loss in exports in a number of mineral and manufacturing products. Bangladesh’s loss in exports in the Indian market would be primarily the loss in exports of chemicals, rubber and plastics products. Most of the African countries would incur loss in exports of oil, minerals and mineral products in the Indian market. The simulation results in general suggest that the impacts of the EU-India FTA on most of the excluded low-income economies are not very large. It should however be mentioned that the impacts, as derived from the simulation results, are static in nature and the dynamic impacts could be much larger than the static impacts. For example, though the static loss in preference for Bangladesh’s exports of textile and clothing in the EU market might appear to be small, such loss in preference might result in long term loss in competitiveness and thus the dynamic losses could be much larger than the static losses.