Preferential trading agreements and the gravity model in presence of zero and missing trade flows: Early results for China and India

The two most populous countries of the world have embarked upon an extensive array of preferential trading agreements in recent decades. This paper specifically investigates the impacts on trade creation and trade diversion of China’s and India’s 11 major preferential trade agreements using an augmented gravity model that takes into account zero and missing trade flows in the data, employing a Zero Inflated Negative Binomial (ZINB) regression model as suggested in the recent literature by Burger et.al (2009) and Kohl (2012). The early results for the ZINB model, provided only for India and China as the home country, confirms that Chinese exports and imports were more likely to be net trade creating in presence of PTAs while India’s exports were more likely to be net trade diverting in the presence of the same PTAs, with imports having an insignificant effect. For India and China so far, most ASEAN+6 PTAs seems to have created both intra-bloc and extra-bloc trade. APTA is observed to be the only significant export creating PTA for India, while APTA and ACFTA are both found to be export creating for China.