Trade Response to Economic Regionalism in BIMSTEC

Abstract

The wave of globalisation gave rise to a number of regional arrangements. The notion of economic regionalism gained importance rapidly in international trade as well as regional diplomacy. The body of theoretical and empirical literature suggests that economic regionalism is beneficial for trade flows and economic welfare, but some studies find it as a stumbling block for multilateral liberalisation efforts. The fundamental analytical questions are whether the groups demonstrate significant impetus to expand intra-bloc trade and whether a preferential liberalisation within theregional arrangement results in non-trivial mutual gains. To address these queries,this thesis investigates the trade pattern, potential and effects of a comparatively newregional group, Bay of Bengal for Multi-Sectoral Technical and EconomicCooperation (BIMSTEC).To examine the trade pattern of BIMSTEC countries, it adopts an augmented panel gravity model. The results reveal that imports of the member countries follow the Linder hypothesis, while exports can be explained by Heckscher-Ohlin-Samuelson theorem. Controlling for behind and beyond the border constraints, the results of astochastic frontier gravity model also support these findings. Such constraints are found to explain most of the total variation in imports and exports. The results also suggest that the highest trade potential, estimated by the frontier gravity model, turns out to be significant. Every members of the group can substantially expand intra-BIMSTEC trade if the constraints are either removed or kept at the minimum.This thesis finally examines the possible effects of an FTA within BIMSTEC by trade policy simulation tools, Software on Market Analysis and Restrictions on Trade(SMART) and Global Trade Analysis Project (GTAP). The results of SMARTsimulations indicate that significant gains can be obtained from an FTA in terms of trade and welfare effects. Conversely, revenue effects appear to be disproportionate. Smaller members like Bangladesh, Bhutan, Myanmar, Nepal, and Sri Lanka would experience proportionately higher revenue loss compared to bigger members such asIndia and Thailand. It suggests that smaller members deserve technical support and compensation to offset negative incidences. The GTAP simulations suggest that only Bangladesh would incur a net welfare loss and a negative growth of real GDP by joining the FTA. The group as a whole would end up with a trade deficit, although India would enjoy a trade surplus. Intra-bloc trade would increase substantially in most of the sectors except for Myanmar. The simulation result also implies that despite some country-and sector-specific negative effects, the impact on overall economic growth would be positive by initiating an FTA.