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Indias Trade Policy ChoicesMANAGING DIVERSE CHALLENGES
SANDRA POLASKIA. GANESH-KUMAR
SCOTT MCDONALD
MANOJ PANDA
SHERMAN ROBINSON
February 2008
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0
100
200
300
400
500
600
700
1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004
Imports Exports GDP
TRADE VALUE (BILLIONS, CONSTANT 2000 DOLLARS)
Source: United Nations, UN COMTRADE database.
Indias Exports, Imports, and GDP
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Key Domestic Challenges ThatAffect Indias Trade Policy Choices
Poverty
Agriculture and rural development
Employment creation
To illustrate . . .
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Poverty in India, 2004-2005
World Bank$1/day
World Bank$1/day *
World Bank$2/day
World Bank$2/day *
Nationalpoverty line
* Using revised PPP estimates (forthcoming)
Number of persons (millions) Percentage of population
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Analytical Tools and Simulations
Computable general equilibrium (CGE)model of global trade
Computable general equilibrium (CGE)
model of the Indian economy Social accounting matrix with
considerable detail on sources of
household income Simulated Doha agreement and bilateral
free trade with EU, US and China
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Simulation of a Doha
Agreement
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Doha Simulation
Tariff reductions for agriculture, NAMA: 36% by developed countries
24% by developing countries
Agricultural subsidy reductions Domestic subsidies reduced by 1/3
Export subsidies eliminated
Reductions taken from applied rates
Services trade liberalization not simulated
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Macroeconomic Results for India of aDoha Agreement
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0.00 0.10 0.20 0.30 0.40 0.50 0.60
Wearing apparel
Other manufacturing
Textiles
Chemicals
Minerals and metals
Trade and transportation
Services
Major Changes in Indian Exportsunder a Doha Agreement
CHANGE FROM BASE SIMULATION (BILLION DOLLARS)
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0.00 0.10 0.20 0.30 0.40 0.50 0.60 0.70
Other manufacturing
Minerals and metals
Chemicals
Vegetable oils and fats
Oil and gas
Vehicles
Major Changes in Indian Importsunder a Doha Agreement
CHANGE FROM BASE SIMULATION (BILLION DOLLARS)
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Other Doha-related Simulations
Impact of volatility of world agricultural pricesRice
Wheat
Simulations: +/- 25%, +/- 50% change in world price
World price shocks would affect India differently afterit reduces tariffs toward the rest of the world
Distributional effects of agricultural price shocksamong households reveal strong risk of increasedpoverty
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150
200
250
300
350
400
450
500
550
600
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
The World Price of Rice, 1980-2006
$/TON (CONSTANT 1990 DOLLARS)
Note: Figures given are for Thai 5% broken milled rice.
Source: World Bank, Commodity Markets Briefs: Rice.
-61%
+39%
-31%+43% -42%
+56%
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Rice, 50% decrease, urbanImpact of a Decrease in the WorldPrice of Rice on Indian Households
-----------------------------------Urban-----------------------------------------------------------------------Rural------------------------------------
25% decrease
50% decrease
ScheduledTribes Others
OtherBackwardClasses
ScheduledCastes
ScheduledTribes Others
OtherBackwardClasses
ScheduledCastes
CHANGE IN REAL INCOME
(PERCENT CHANGE RELATIVE TO BASELINE NOMINAL INCOME TO HOUSEHOLDS)
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Rice, 50% decrease, urbanImpact of a Decrease in the World Priceof Rice on the Demand for Indian Labor
25% decrease
50% decrease
CHANGE IN DEMAND FOR LABOR (PERCENT CHANGE FROM BASELINE)
-14.00
-12.00
-10.00
-8.00
-6.00
-4.00
-2.00
0.00
2.00
Rice sector Agricultural
sector
Manufacturing
sector
Services sector
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Impact of a Doha Agreementcompared to Impact of a Decrease in
the World Price of Rice(PERCENT CHANGE FROM BASELINE)
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Rice, 50% decrease, urbanImpact of an Increase in the WorldPrice of Rice on Indian Households
CHANGE IN REAL INCOME
(PERCENT CHANGE RELATIVE TO BASELINE NOMINAL INCOME TO HOUSEHOLDS)
-----------------------------------Urban-----------------------------------------------------------------------Rural------------------------------------
25% increase
50% increase
ScheduledTribes
OthersOther
BackwardClasses
ScheduledCastes
ScheduledTribes Others
OtherBackwardClasses
ScheduledCastes
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Impact of a Doha Agreement onAggregate World Prices
CHANGE IN PRICES (PERCENT)
-1.00
0.00
1.00
2.00
3.00
4.00
5.00
6.00
7.00
Whea
t
Dairy
pro
duc
ts
Ca
ttle
,she
ep,
goa
ts
Mea
tpro
duc
ts
Proce
sse
drice
Other
food
pro
duc
ts
Oilsee
ds
Othercrops
Rice
Tra
dean
dtransporta
tion
Vege
tableoilsan
dfats
Plan
tbase
dfibres
Minera
lsan
dme
tals
Tex
tiles
Coa
l
C
hem
ica
ls
Othermanu
fac
turing
ehiclesan
dtransporte
qu
ipmen
t
Pe
tro
leum
pro
duc
ts
Cons
truc
tion
Serv
ices
Woo
dan
dpaper
pro
duc
ts
Oilan
dgas
Rawm
ilk
Utilities
Otheran
ima
lpro
duc
ts
Wearin
gappare
l
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Impact of a Doha Agreement on theRest of the World
CHANGE IN REAL INCOME (BILLION DOLLARS)
-2.00
-1.00
0.00
1.00
2.00
3.00
4.005.00
6.00
7.00
8.00
9.00
Australia,New
Zealand,
Oceania
China Japan Rest of East Asia
Rest ofSouth
Aisa
Rest ofNAFTA
UnitedStates
Mercosur Rest ofthe
Americas
EU SouthAfrica
Rest ofSub-
Saharan
Africa
MiddleEast,
North
Africa
Rest ofworld
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Simulation of an India-EU
Free Trade Agreement
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0.00
5.00
10.00
15.00
20.00
25.00
30.00
35.00
1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005
Exports (from India to EU) Imports (from EU to India)
TRADE VALUE (BILLIONS, CONSTANT 2000 DOLLARS)
Note: In 2004, the EU expanded from fifteen to twenty-five countries. Earlier data are for EU-15; post-2004 data are for EU-25.
Source: United Nations, UN COMTRADE database.
The Evolution of India-EU Trade
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Macroeconomic Results for India ofan India-EU FTA
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Macroeconomic Results for the EU ofan India-EU FTA
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Simulation of an India-U.S.
Free Trade Agreement
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0.00
5.00
10.00
15.00
20.00
25.00
1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005
Exports (from India to U.S.) Imports (from U.S. to India)
TRADE VALUE (BILLIONS, CONSTANT 2000 DOLLARS)
Source: United Nations, UN COMTRADE database.
The Evolution of India-U.S. Trade
M i R l f I di f
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Macroeconomic Results for India ofan India-U.S. FTA
M i R l f h U S f
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Macroeconomic Results for the U.S. ofan India-U.S. FTA
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Simulation of an India-China
Free Trade Agreement
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0.00
2.00
4.00
6.00
8.00
10.00
12.00
14.00
1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005
Exports (from India to China) Imports (from China to India)
TRADE VALUE (BILLIONS, CONSTANT 2000 DOLLARS)
Source: United Nations, UN COMTRADE database.
The Evolution of India-China Trade
M i R lt f I di f
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Macroeconomic Results for India ofan India-China FTA
M i R lt f Chi f
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Macroeconomic Results for China ofan India-China FTA
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Comparison of the Impacton India of Different
Trade Policy Choices
Ch i R l I f I di
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-0.40
-0.20
0.00
0.20
0.40
0.60
0.80
1.00
1.20
1.40
Doha India-EU FTA India-U.S. FTA India-China FTA
Change in Real Income for Indiaunder Different Trade Agreements
CHANGE IN REAL INCOME (BILLION DOLLARS)
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-1.50
-1.00
-0.50
0.00
0.50
1.00
Doha India-EU FTA India-U.S. FTA India-China FTA
CHANGE IN REAL INCOME (BILLION DOLLARS)
Change in Real Income for Indian Householdsunder Different Trade Agreements
Ch i D ti P d ti i I di
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0
0.5
1
1.5
2
2.5
3
3.5
4
4.5
5
Doha India-EU FTA India-U.S. FTA India-China FTA
0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
0.8
0.9
1Change in production (billion dollars)
Change in production (percent)
Change in Domestic Production in Indiaunder Different Trade Agreements
CHANGE IN PRODUCTION (BILLION DOLLARS) CHANGE IN PRODUCTION (PERCENT)
Ch i I di I t d E t
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Change in Indian Imports and Exportsunder Different Trade Agreements
0.00
0.50
1.00
1.50
2.00
2.50
3.00
3.50
4.00
Doha India-EU FTA India-U.S. FTA India-China FTA
Imports
Exports
CHANGE (BILLION DOLLARS)
Ch i D d f U kill d L b
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Change in Demand for Unskilled Laborunder Different Trade Agreements
CHANGE IN DEMAND FOR UNSKILLED LABOR (PERCENT)
0.00
0.10
0.20
0.30
0.40
0.50
0.60
0.70
0.80
0.90
1.00
Doha India-EU FTA India-U.S. FTA India-China FTA
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Conclusions
Multilateral liberalization through the WTOsDoha Round would produce larger gains forIndia than bilateral agreements with any ofits major trading partners.
Gains (losses) in real income to the Indianeconomy from either multilateral or bilateraltrade agreements are modest, ranging from again of $1.2 billion under the Doha simulationto a loss of $250 million under the India-EUFTA.
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Conclusions, continued
Indian exports and imports increase under allsimulated agreements, with the strongest increasesunder an India-EU FTA, followed by a Doha pact.
However total domestic production increases verymodestly, ranging from an increase of 0.52% under aDoha agreement to 0.34% under an India-EU FTA to0.14% under an India-China FTA.
The three bilateral agreements result in losses forIndian households as a group, while Doha producessmall gains ($530 million, 0.17%) for households.
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Conclusions, continued
Volatility in world agricultural prices wouldaffect India more strongly after a reduction intariffs toward trading partners.
Decreases in the world price of rice have anegative effect on Indian households similarin magnitude to the positive impact of theentire Doha agreement.
Agricultural price decreases would worsenincome distribution and could significantlyincrease rural poverty.
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Conclusions, continued
In the Doha Round, Indias attention to its defensiveagricultural interests is warranted.
Special products designations and a special
safeguard mechanism would be needed tools to shieldpoor households from world agricultural pricevolatility until other sectors grow sufficiently toabsorb their labor.
Employment creation will receive only a mild boostfrom trade liberalization. Domestic demand and laborpolicy will continue to be the main determinants of jobcreation.
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Conclusions, continued
Services liberalization could add to Indiaspotential gains; however few offers on servicesof interest to India have been tabled in the
Doha Round.
In negotiations with the EU, significantservices liberalization would be required for
India to experience net gains in real income tothe overall economy, as well as to offset lossesto households.
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Conclusions, continued
Given the low incomes of most Indianhouseholds and high levels of poverty, evenshort-term welfare losses are not to be taken
lightly.
Both Doha and bilateral pacts require carefulnegotiation if India is to realize the modest
gains on offer and avoid risking large negativeeffects on the households of the poor.
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Thank you for your
attention