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Europe and India: Relaunching a Troubled Trade Relationship


  • Gabriel Felbermayr


  • Devashish Mitra
  • Rahel Aichele


  • Jasmin Katrin Gröschl


Since June 2007, the EU and India have been negotiating a comprehensive free trade agreement, but negotiations broke down in 2013. Nevertheless, both sides have expressed their desire to revive talks on the Broad-based Trade and Investment Agreement (BTIA). To quantify potential economic consequences, we use a multi-country, multi-industry Ricardian trade model with national and international input-output linkages. Based on the assumption that the FTA would eliminate all tariffs between the EU and India and reduce non-tariff barriers, we simulate trade, value added, and welfare effects of the BTIA. The long-run level of real per capita income would change by 1.30% in India and by 0.14% in the EU. We find that outsiders to the agreement remain largely unaffected relative to the status quo. However, substantial regional heterogeneity exists across the 134 geographical, investigated entities. Due to an agreement, EU-Indian trade could approximately double particularly in business services. We find a small amount of trade diversion due to tightly integrated value chains, but a clear effect on structural change in India. So, at a first glance, both parties should have an interest in forming a FTA.

Suggested Citation

  • Gabriel Felbermayr & Devashish Mitra & Rahel Aichele & Jasmin Katrin Gröschl, 2017. "Europe and India: Relaunching a Troubled Trade Relationship," ifo Forschungsberichte, ifo Institute - Leibniz Institute for Economic Research at the University of Munich, number 80, October.
  • Handle: RePEc:ces:ifofob:80

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    References listed on IDEAS

    1. Jung, Benjamin, 2012. "Gradualism and dynamic trade adjustment: Revisiting the pro-trade effect of free trade agreements," Economics Letters, Elsevier, vol. 115(1), pages 63-66.
    2. Grossman, Gene M & Helpman, Elhanan, 1994. "Protection for Sale," American Economic Review, American Economic Association, vol. 84(4), pages 833-850, September.
    3. Panagariya, Arvind, 2011. "India: The Emerging Giant," OUP Catalogue, Oxford University Press, number 9780199751563.
    4. Andreas Dür & Leonardo Baccini & Manfred Elsig, 2014. "The design of international trade agreements: Introducing a new dataset," The Review of International Organizations, Springer, vol. 9(3), pages 353-375, September.
    5. Rahel Aichele & Gabriel Felbermayr & Inga Heiland, 2014. "Going Deep: The Trade and Welfare Effects of TTIP," CESifo Working Paper Series 5150, CESifo Group Munich.
    6. Donner Abreu, Maria, 2013. "Preferential rules of origin In regional trade agreements," WTO Staff Working Papers ERSD-2013-05, World Trade Organization (WTO), Economic Research and Statistics Division.
    7. Mattoo, Aaditya & Stern, Robert M. & Zanini, Gianni (ed.), 2007. "A Handbook of International Trade in Services," OUP Catalogue, Oxford University Press, number 9780199235223.
    8. Costinot, Arnaud & Rodríguez-Clare, Andrés, 2014. "Trade Theory with Numbers: Quantifying the Consequences of Globalization," Handbook of International Economics, Elsevier.
    9. Giovanni Maggi & Pinelopi Koujianou Goldberg, 1999. "Protection for Sale: An Empirical Investigation," American Economic Review, American Economic Association, vol. 89(5), pages 1135-1155, December.
    10. Fernandez, Raquel & Rodrik, Dani, 1991. "Resistance to Reform: Status Quo Bias in the Presence of Individual-Specific Uncertainty," American Economic Review, American Economic Association, vol. 81(5), pages 1146-1155, December.
    11. Dür, Andreas & Baccini, Leonardo & Elsig, Manfred, 2014. "The design of international trade agreements: introducing a new dataset," LSE Research Online Documents on Economics 59179, London School of Economics and Political Science, LSE Library.
    12. Mitra, Devashish, 2002. "Endogenous political organization and the value of trade agreements," Journal of International Economics, Elsevier, vol. 57(2), pages 473-485, August.
    13. Devashish Mitra, 2016. "Trade liberalization and poverty reduction," IZA World of Labor, Institute for the Study of Labor (IZA), pages 272-272, June.
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    Cited by:

    1. Douglas L. Campbell & Aleksandr Chentsov, 2017. "Breaking Badly: The Currency Union Effect on Trade," Working Papers w0241, Center for Economic and Financial Research (CEFIR).

    More about this item


    Außenhandel; Außenwirtschaftspolitik; Handelshemmnisse; Auslandsinvestition; Indien; EU-Staaten;

    JEL classification:

    • F02 - International Economics - - General - - - International Economic Order and Integration
    • F13 - International Economics - - Trade - - - Trade Policy; International Trade Organizations
    • F23 - International Economics - - International Factor Movements and International Business - - - Multinational Firms; International Business


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