Tariff liberalization in the RCEP trade agreement and impact on India's automobile industry: An applied general equilibrium analysis

Tariff liberalization in the RCEP trade agreement and impact on India's automobile industry: An applied general equilibrium analysis

Thursday, April 11, 2019
Public information and advocacy materials

Adequate attention has not been paid by researchers towards general equilibrium effects of trade liberalization particularly involving trade in global value chains (GVC) goods, in spite of its emergence being an established phenomenon among Regional Comprehensive Economic Partnership (RCEP) members including India. This paper contributes in that aspect by undertaking a Computable General Equilibrium (CGE) simulation utilizing the GTAP 9 database updated to 2015, augmenting it to study the automobile sector of trade in GVC goods in the Indian context. In the case of automobile industry, ours is the first attempt to employ this tool in this context and this is one of the methodological/data contributions of this paper. The key here is to analyze the welfare effects for India, in a probable futuristic scenario of a full tariff liberalization (with and without any productivity improvement) as part of the ongoing RCEP negotiations, and the specific impact of this on output, prices and trade in the automobile and auto-parts industry, wherein GVC led trade assumes significance.

We first employ the Splitcom tool (Horridge, 2008) to separate automobile sector from auto-parts and components sector across the world, using the data on production and trade of these commodities in several countries, utilizing the United Nations COMTRADE dataset. Thereafter, two policy simulations are conducted. The first scenario involves a full tariff liberalization within RCEP members, focusing on the sectoral impact on finished automobiles and auto-parts industry. The second scenario simulates the additional effects of a productivity improvement in this industry on top of the RCEP tariff reductions, wherein output or trade is made exogenous by making their corresponding technological change variables endogenous, as attempted in a few earlier studies (e.g. Golub and Narayanan, 2015; Wadhwa et.al., 2017). The results suggest that while there is a positive overall welfare impact due to RCEP on the Indian economy, and trade balance improves, the automobiles and auto-parts industry in India will specifically witness an adverse impact, unless an annual productivity growth of at least 2.5% is achieved. Imports of these goods are more likely to increase than exports from India to RCEP member countries, even in presence of a productivity improvement. The paper informs policymakers in India to focus on improving domestic productivity growth in face of increased foreign competition through mega-trade deals such as RCEP.