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INDO-ISRAELI FREE TRADE AGREEMENT A CGE ANALYSIS USING GTAP Term Paper ECO412A – International Economics & Finance Guided by :- Submitted by :- Prof. Somesh K Mathur Srajal Nayak (12728)
INDO-ISRAELI FREE TRADE
AGREEMENT
A CGE ANALYSIS USING GTAP
Term Paper
ECO412A – International Economics & Finance
Guided by :- Submitted by :-
Prof. Somesh K Mathur Srajal Nayak (12728)
Abstract
India and Israel have been important trading partners in the last two and a half
decades. Besides trade, the two countries share extensive relations over the common
military and security concerns too. Of late, the two nations have been negotiating a free-
trade agreement. This study tries to analyze the effects of trade liberalization on the
bilateral trade structure between India and Israel and the welfare effects of the Indo-
Israeli FTA. By employing GTAP for a CGE analysis, we find that there is a welfare
increase for India as well as Israel following the FTA but both countries do not seem to
benefit equally from the agreement. Israel visibly seems to have a greater advantage in
terms of change in GDP, increase in welfare and even balance of trade.
Introduction
India and Israel have, since a long time, enjoyed an extensive economic, military and strategic
relationship. Their relationship came into light about two and a half decades ago, after India formally
established connections with Israel in January 1992. Ever since, bilateral trade and economic
relations between the two nations have rapidly progressed. As of 2014, India stands as the third-
largest Asian trade partner of Israel after China and Hong Kong (trade data includes diamonds), and
tenth-largest trading partner overall. In 2014, excluding sales of defense goods, bilateral trade stood
at US$4.52 billion. Starting from a base of about US$ 200 million in 1992 (which comprised
primarily of diamonds), merchandise trade has experienced diversification and increased sharply
over the years, reaching US$ 4747.1 million in 2010 (marked increase of 59.92% as compared to
2009, US$ 2968.3 million). India-Israel bilateral trade in 2014 increased by 3.81% from US$ 4.35
billion in 2013 to US$ 4.52 billion in 2014 (excluding defense). As of 2015, both the nations are
negotiating a bilateral free trade agreement. The main focus of this FTA lies on areas like
information technology, biotechnology, and agriculture. In this study, we aim to explore the
economic impacts of such a bilateral trade agreement on both the countries as well as the major
trading partners, namely, China, Hong Kong, USA, Germany, Belgium and other countries using
CGE methods on GTAP database.
Review of Literature
There have been a few previous studies that have tried to explore how a flourishing relationship
between India and Israel has the potential to make a noteworthy impact on global politics by altering
the balance of power, not just in the Middle East and South Asia, but also in the larger Asian and
European regions which have been in a state of flux in the recent times. Pant (2004) examines the
factors which are bringing India and Israel increasingly closer and also the constraints that might
make it difficult for this relationship to achieve its full potential. In his study, he focuses not just on
trade, but also on the political and safety concerns that the two nations share. Mostly, his work is
just a qualitative commentary on the issues both countries face and lacks quantitative analysis. Other
than this, there is hardly any existing research in the area of India-Israel bilateral trade. In an entirely
different work, Gilbert et al. (2016) study the Trans-Pacific-Partnership (TPP) trade agreement using
a CGE approach. They discuss CGE methods to analyze the potential economic impact of the TPP
agreement under a variety of theoretical and policy assumptions. By providing a synthesis of the key
results that have emerged from the literature, they also discuss some new simulation results of their
own. Recently, Roy & Mathur (2016) employ the GTAP analysis to study the impact of a free trade
agreement between India and EU. They run simulations on two separate scenarios – one by taking
UK as a part of the EU and the other after UK has exited EU (Brexit). Their study reveals that the
FTA between the European Union and India loses its significance for both India and EU if Britain
is not a part of the EU. Cororaton (2015) analyzes the potential effects of RCEP on the Philippine
economy using a global CGE model. This analysis involves an 80 percent tariff reductions and 10
percent reduction in non-tariff barriers within RCEP member nations over a period of ten years.
Using these studies as references, we apply the CGE models to the Indo-Israeli bilateral free trade
agreement in order to better understand how that would shape the dynamics of both the countries
as well as their major trading partners.
Indo-Israeli Trade Relationship (A More Detailed Description)
As discussed above, after the establishment of a diplomatic relationship between Israel and India in
1992, bilateral trade and economic relations also progressed rapidly. India continues to be a 'focus'
country for the Israeli Government’s efforts at increasing trade (along with China and Brazil). India's
major exports to Israel include precious stones and metals, electronic equipment, plastics, organic
chemicals, engines, machines, pumps, vehicles, clothing and textiles, medical and technical
equipment. In 2014, Israel's imports from India amounted to about $2.3 billion or 3.2% of its overall
imports. Israel's major exports to India include precious stones and metals, fertilizers, machines,
electronic equipment, engines, medical and technical equipment, pumps, organic and inorganic
chemicals, salt, stone, sulphur, cement, and plastics. Exports from Israel to India in 2014 amounted
to approximately $2.2 billion or 3.2% of its total exports. In 2007, Israel proposed the beginning of
negotiation on a free trade agreement with India, and in 2010, the then Prime Minister of India , Mr.
Manmohan Singh, accepted that proposal. This agreement is set to focus on many key economic
sectors, including but not limited to information technology, biotechnology, pharmaceuticals, water
management, and agriculture. In 2013, then Israeli Minister of Economy, Naftali Bennett projected a
doubling of trade from $5 to about $10 billion between the two nations, if a free trade agreement
was successfully negotiated. As of 2016, the negotiation on a free trade agreement continue, with
both the countries considering negotiating a narrower free trade agreement on goods, to be followed
by separate agreements on trade in investment and services.
Some important statistics related to trade between the two countries is depicted in the following
figures:
Source: Ministry of Economy and Industry, Foreign Trade Administration, Govt. of Israel
Source: Indian Central Bureau of Statistics
Source: Israel Trade and Economic Of f ice, Embassy of Israel
10 major commodities
exported
from India to Israel (2015)
Value of
Trade
(in US $
million)
10 major
commodities exported
from Israel to India
(2015)
Value of Trade
(in US $ million)
Gems, precious metals and
coins 973.6
Gems, precious metals
and coins 933.7
Organic Chemicals 296.5 Electronic Equipment 389.3
Electronic Equipment 121.2 Medical, Technical
Equipment 180.7
Medical, Technical
Equipment 59.3 Iron or steel products 170.3
Plastics 56.4 Fertilizers 157
Vehicles 44.4 Machinery 110.9
Machinery 38.1 Organic Chemicals 69.8
Other textiles, worn clothing 31.8 Other Chemical Goods 44.2
Knit or Crochet clothing 31.8 Inorganic Chemicals 43.6
Clothing (not knit or crochet) 30.8 Plastics 29.5
Source:http://www.worldsrichestcountries.com/top_israel_imports.html,http://www.worldsrich
estcountries.com/top_israel_exports.html
Data Sources
For performing the CGE analysis we will use the GTAP8 database (2007, Reference Year). The
GTAP database is compiled for 140 countries/regions across the world and for 57 tradable
commodities. Also, we use the database from World Integrated Trade Solution in order to identify
specialized products of India and Israel by calculation of Revealed Comparative Advantage (RCA)
for various sets of goods for both countries. This calculation is done on the HS 6-digit product
codes (using the Advanced Query Option on WITS).
Model and Methodology
RCA or the Revealed Comparative Advantage is an index that used for calculating the relative
advantage or disadvantage of a certain country in a certain class of goods or services, as evidenced
by trade flows. It is based on the concept of Ricardian comparative advantage.
Béla Balassa (1965) introduced the most commonly used index given by:
𝑹𝑪𝑨 = 𝑬𝒊𝒋/𝑬𝒊𝒕
𝑬𝒏𝒋/𝑬𝒏𝒕
Where 𝐸 = 𝐸𝑥𝑝𝑜𝑟𝑡𝑠, 𝑖 = 𝑐𝑜𝑢𝑛𝑡𝑟𝑦 𝑖𝑛𝑑𝑒𝑥, 𝑛 = 𝑠𝑒𝑡 𝑜𝑓 𝑐𝑜𝑢𝑛𝑡𝑟𝑖𝑒𝑠, 𝑗 = 𝑐𝑜𝑚𝑚𝑜𝑑𝑖𝑡𝑦 𝑖𝑛𝑑𝑒𝑥,
𝑎𝑛𝑑 𝑡 = 𝑠𝑒𝑡 𝑜𝑓 𝑐𝑜𝑚𝑚𝑜𝑛𝑑𝑖𝑡𝑖𝑒𝑠.
A country is said to have a comparative advantage in a particular commodity if its RCA for that
good is greater than or equal to 1. Running the analysis for the years 2012-2015 for both India and
Israel, using the HS 6-digit product codes, we find that in the year 2015, India had a comparative
advantage in about 1415 products out of the 4657 products that India traded in whereas Israel has a
comparative advantage in about 538 products. (See the link shared at the end of the document for
detailed data). These are respectively the specialized products of India and Israel. Upon classifying
these products in broader categories, we find that the specialized products of India mostly lie in one
of the following categories: Stone and Glass, Textile and Clothing, Hides and Skins, Footwear,
Vegetables and Fruits, Intermediate Goods, Chemicals, Consumer Goods, Animal Products, Metals
and Minerals. Similarly, the specialized products of Israel lie in one of the following broad
categories: Stones and Glass, Chemicals, Machinery and Electronic Goods, Raw materials, Capital
Goods and other Miscellaneous goods.
After identifying the specialized products of both the countries, we turn to the Computable General
Equilibrium Analysis in GTAP. Global Trade Analysis Project (GTAP) model (developed by Hertel)
is the basis of Computable General Equilibrium (CGE) model. It is a multi -sectoral, multi-country
CGE model, whose structure is based on inter-relations between regional production, consumption
and trade. In a GTAP model, bilateral trade is handled via the Armington Assumption, which states
that goods are differentiated by the country of origin. We use GTAP to analyse the macroeconomic
effects of changes in tariff and non-tariff barriers between India and Israel. Some of the
macroeconomic effects we focus on are: Change in value of GDP (vGDP), Terms of Trade effect,
Welfare Effect (EV), Trade Balance and changes in sectoral outputs.
If we consider two policy options, the existing one with prices 𝑝0 and income 𝑚0 and a policy
shock with price 𝑝1 and income 𝑚1 ; then the equivalent variation can be expressed as:
𝑬 = 𝝓(𝒑𝟎 ; 𝒑𝟏 ,𝒎𝟏) − 𝝓(𝒑𝟎 ; 𝒑𝟎 ,𝒎𝟎) = 𝝓(𝒑𝟎 ; 𝒑𝟏 ,𝒎𝟏) − 𝒎𝟎
Where 𝜙(𝑝0; 𝑝, 𝑚 ) called money metric indirect utility function, measures how much income the
consumer would need at prices 𝑝0to be as well off he would be facing price 𝑝1and having income
𝑚.
For the GTAP model, McDougall (2001) obtained the following EV associated with a specified
perturbation to the GTAP model:
𝑬 = 𝒀𝑬 − 𝒀′
where 𝑌𝐸 is the expenditure required to obtain the new level of utility at initial prices, i.e.
𝝓(𝒑𝟎 ; 𝒑𝟏 ,𝒎𝟏) and 𝑌′ is the initial expenditure, i.e. 𝒎𝟎.
Upon differentiation, we get 𝒅𝑬 = 𝟎. 𝟎𝟏𝒀𝑬𝒚𝑬 where 𝑦𝐸 is the percentage change in 𝑌𝐸 required to
achieve the current actual utility level with prices kept as fixed.
If we notice the impact of the tariff reforms, we can make the following conclusions. If there are
two countries: Importer (s) and Exporter (r) and one composite good (i), then the reduction in
Import Tax by s, leads to a decrease in price of imported good in region s which leads to change in
TOT. It also changes demand as demand for imports in region s from region r rises. Plus it also
encourages agents’ in the importing country to alter their sourcing of imports in favour of region.
From the exporter side (region r), price of exportable rises due to increase in demand, which leads to
increase in p(fob) with border tax remaining the same. We employ the following tariff shocks during
our analysis on GTAP:
𝑡𝑚𝑠 (𝑖, 𝑟, 𝑠): the source specific percentage change in the import tax i.e. on imports coming from
country r.
𝑎𝑚𝑠(𝑖, 𝑟, 𝑠): handles bilateral services liberalization and other efficiency-enhancing measures that
serve to lessen the effective price of goods and services imported. Shocks to 𝑎𝑚𝑠(𝑖,𝑟, 𝑠) represent
the minus of the decay rate on imports of commodity or service 𝑖, exported from region r and
imported by region 𝑠. For example, when 𝑎𝑚𝑠(𝑖, 𝑟, 𝑠) is shocked by 10%, then 10% more of the
product becomes available to domestic consumers, provided the same level of exports from the
source country.
We consider the following four shock scenarios:
Shock 1: Removal of tariff barriers for all GTAP goods coming to India from Israel and vice-versa.
Thus we set the target percentage rate for 𝑡𝑚𝑠 (𝑖,𝑟, 𝑠) at 0.
Shock 2: Removal of tariff barriers for all GTAP goods coming to India from Israel and vice-versa.
Thus we set the target percentage rate for 𝑡𝑚𝑠 (𝑖,𝑟, 𝑠) at 0. Also, we reduce non-tariff barriers for
both the countries by technology augmenting methods. This is implemented by increasing
𝑎𝑚𝑠(𝑖, 𝑟, 𝑠) from 0 to 5, representing a 5% shock.
Shock 3: Removal of tariff barriers for only the specialized goods coming to India from Israel and
vice-versa. Thus we set the target percentage rate for 𝑡𝑚𝑠 (𝑖, 𝑟, 𝑠) at 0 only for the specialized
products of both countries.
Shock 4: Removal of tariff barriers for only the specialized goods coming to India from Israel and
vice-versa. Thus we set the target percentage rate for 𝑡𝑚𝑠 (𝑖, 𝑟, 𝑠) at 0. Also, we reduce non-tariff
barriers for both the countries by technology augmenting methods. This is implemented by
increasing 𝑎𝑚𝑠(𝑖, 𝑟, 𝑠) from 0 to 5, representing a 5% shock. Note again that both these shocks are
only applied to the specialized goods.
Upon applying these shocks, we get the results that are summarized in the next section.
Results
Applying the aforementioned shocks on GTAP and solving for the new general equilibrium gives us
useful insights into the effects of the free-trade agreement between India and Israel. A few results
are mentioned in the following tables
WELFARE Allocative
Efficiency
Terms of
Trade
Investment
Saving Total Welfare
China -3.16 -1.99 4.48 -0.669
Hong Kong -0.002 -1.2 -0.589 -1.79
South East Asia -1.45 -15.7 2.58 -14.5
India 110 -20.6 -8.33 80.8
South Asia 0.097 1.16 -0.59 0.67
USA 1.33 -17.4 -0.594 -16.6
Germany -1.37 -5.65 1.26 -5.76
Belgium -11 -60.3 -3.29 -74.6
EU_25 -4.29 0.653 0.67 -2.97
Israel 55.7 253 -3.45 305
Rest of World 13.1 -132 8.56 -110
Total 159 0.043 0.706 160
Table 1 summarizes the Welfare effect of Shock-1 in the model. As expected, removal of tariff
barriers increases the total welfare of both India and Israel. Moreover, what is worth noting is that
the increase in total welfare of Israel is almost four times that of India. On an average, the trading
partners of India and Israel see a fall in their respective welfares. This again is not surprising because
increased trade between India and Israel after the implementation of FTA might hamper both these
countries’ trades with their other respective partners.
Table 1: EV after applying shock 1(in million $USD)
WELFARE Allocative
Efficiency
Technological
Change
Terms of
Trade
Investment
Saving
Total
Welfare
China -5.21 0 -7.83 4.82 -8.21
Hong Kong -0.003 0 -1.68 -0.881 -2.56
South East
Asia -2.37 0 -24.9 3.12 -24.1
India 178 116 49.8 3.52 348
South Asia -0.158 0 -0.19 -0.539 -0.887
USA 0.34 0 -38.8 -8.74 -47.2
Germany -2.35 0 -14.1 2.05 -14.4
Belgium -15.9 0 -87.4 -5.1 -108
EU_25 -11.3 0 -19.1 -2.61 -33
Israel 110 91.2 371 -4.39 567
Rest of World 9.92 0 -226 9.41 -207
Total 261 207 -0.109 0.664 469
Table 2: EV after applying shock 2(in million $USD)
Again in this case, there is a significant increase in the total welfares of both India and Israel.
Another thing worth noticing here is the Welfare caused by technological change, which is greater in
the case of India than Israel. This again makes sense because Israel is the more technologically
developed nations of the two. Hence making possible technology augmentation between the two
economies is definitely going to bring huge benefits to India. Also here, in absolute terms, the total
welfare for both the nations increases more as compared to that in shock 1. This is again intuitive
since now there was removal of non-tariff barriers (via technology augmentation) besides the
removal of tariff barriers. Just like in the previous case, the trading partners are negatively affected
after the implementation of FTA between India and Israel. In the next table, we see the Welfare
outcomes of applying Shock-3, i.e. removing tariff barriers only on the set of specialized products of
both the countries.
WELFARE Allocative
Efficiency
Technological
Change
Terms of
Trade
Investment
Saving
Total
Welfare
China -0.457 0 -11.9 5.33 -7.04
Hong Kong -0.001 0 0.481 0.054 0.534
South East
Asia -1.2 0 -12.4 3.05 -10.5
India 81.4 0 -29.8 -11.2 40.4
South Asia 0.077 0 0.948 -0.821 0.204
USA 3.1 0 -32.6 -4.06 -33.6
Germany -1.52 0 -9.11 1.42 -9.21
Belgium -1.41 0 -11.9 -0.467 -13.7
EU_25 -5.45 0 -18.1 -0.017 -23.5
Israel 50.2 0 211 -3.98 257
Rest of World -2.95 0 -86.3 11.4 -77.8
Total 122 0 0.075 0.639 122
Table 3: EV after applying shock 3(in million $USD)
Once again, what is worth noting is the fall in total welfare increase of both nations as compared to
even Shock-1. This is because there is not complete tariff reduction on all sets of products. Rather it
is only on the smaller subset of specialized products. Again here, the fall in the increase of India’s
welfare is almost 50% as compared to that in Shock-1, which is much greater than the fall in increase
of Israel’s welfare. The results of the fourth and final shock are summarized in the following table
on the next page. As can be noticed from Table 4 in the next page, the total welfare of both India
and Israel increases by a greater amount as compared to the scenario of Shock-3. Again, this greater
increase can be accounted to the removal of non-tariff barriers in shock-4 coupled with the removal
of tariff barriers.
WELFARE Allocative
Efficiency
Technological
Change
Terms of
Trade
Investment
Saving
Total
Welfare
China -1.79 0 -22.9 6.18 -18.5
Hong Kong -0.001 0 0.909 -0.037 0.871
South East
Asia -2.02 0 -18.8 3.67 -17.1
India 143 90.9 27.1 -2.01 259
South Asia -0.393 0 -0.752 -0.898 -2.04
USA 2.01 0 -56.9 -12.1 -67
Germany -3.64 0 -17.8 2.35 -19.1
Belgium -3.41 0 -22.7 -1.46 -27.6
EU_25 -14.5 0 -39 -3.1 -56.6
Israel 88.4 75.4 297 -5.41 455
Rest of
World -13 0 -146 13.5 -145
Total 194 166 0.038 0.668 362
Table 3: EV after applying shock 3(in million $USD)
After checking for the EV post the implementation of FTA, we look towards understanding the
effects it has on GDP of both the countries as well as their common trading partners. With the base
vGDP being equal to 10 for all countries when no shocks are applied, Table-5 summarizes the
changes in GDPs of all the countries after the implementation of India-Israel FTA. In each scenario,
three things are worth noting. One, Israel seems to benefit more from the FTA as compared to
India as far as percentage change in GDP is concerned. Israel observes a 4%, 7%, 5% and 7%
increase in GDP after the applications of Shocks-1, 2, 3 and 4 respectively. Second, India doesn’t
seem to have any significant benefit in terms of percentage change in GDP. One of the possible
reasons could be that India is a far bigger economy as compared to Israel. And as we saw in Tables
1-4, the increase in total welfare outcomes for India were smaller than that for Israel in absolute
terms for all the shocks. Thus, the increase in GDP as a proportion of total GDP is an insignificant
quantity for India. This also raises questions as to how beneficial it would actually be for India to get
into a Free Trade Agreement with Israel if the benefits are mostly marginal? Third interesting
observation from Table 5 is that Belgium is the country that seems to be losing the most due to a
free trade agreement between India and Israel. It could be possible because there could be a lot of
commodities that Belgium trades in with India and Israel, and that trade could get hampered after
the FTA comes into being.
Shock - 1 Shock -2 Shock - 3 Shock - 4
China 10 10 10 10
Hong Kong 10 10 10 10
South East
Asia 10 9.99 10 10
India 10 10.1 9.99 10
South Asia 10 10 10 10
USA 10 10 10 10
Germany 10 10 10 10
Belgium 9.97 9.95 9.99 9.99
EU_25 10 10 10 10
Israel 10.4 10.7 10.5 10.7
Rest of World 10 10 10 10
Table 5: VGDP for all the 4 types of shocks, Change in GDP in % (Base = 10)
In the next table, we see the effects of the FTA on trade balance (Exports – Imports) of all the
nations. Once again, the trade balance for India turns out to be negative and that for Israel is
positive. Though high imports are not always a bad thing, this surely raises concerns about how
much does India gain out of the FTA.
Shock - 1 Shock -2 Shock - 3 Shock - 4
China 27023 27025 27022 27020
2473 2474 2470 2470
Hong Kong 15401 15401 15402 15403
South East Asia -5890 -5937 -5866 -5890
India -3362 -3361 -3362 -3361
South Asia -83097 -83041 -83099 -83057
USA 21708 21715 21705 21708
Germany -3728 -3709 -3763 -3755
Belgium -26224 -26180 -26238 -26214
EU_25 75.8 -46.1 78.7 -6.55
Israel 55622 55659 55650 55682
Rest of World 0.067 0.006 -0.007 -0.009
Table 6: Trade Balance (in US$ million)
Finally, we look at the sectoral decomposition of outputs after each shock. Here we focus only on
China, Hong Kong, USA, Germany, Belgium and EU_25 besides India and Israel. Table 7 shows
India’s overall output increases, and India observes an increase in output in Textiles, grains and
crops, utility consumption products and heavy manufacturing. Israel’s overall output decreases. This
is despite the fact that Israel observed an increase in GDP as well as overall welfare. Again, in Table
8, India’s overall output increases, and India observes an increase in output in heavy and light
manufacturing, utility consumption products and transport & communication sectors. Here again,
Israel’s overall output decreases. In Table 9, it can be observed that India’s overall output increases
marginally, but contrary to intuition, India observes a decrease in output of its specialized products.
This despite being the fact that here tariff barriers are removed on specialized products of both
countries. Finally, Table 10 paints a similar picture for India as that in Table 9. Also, in both these
scenarios, Israel’s overall output increases, with a considerable increase in the output of its
specialized products.
DQO chn hkg ind usa deu bel EU_25 isr
GrainsCrops 1.41 0.006 7.59 0.375 0.928 2.59 5.13 -19.2
MeatLstk 0.769 0.012 -2.14 0.165 -0.144 4.3 -2.39 -3.08
Extraction -10.8 6.25 -30.3 -7.37 -0.581 -8.44 0.745 185
ProcFood 1.02 -0.028 -1.44 0.565 -0.667 11 -4.14 -5.63
TextWapp -1.43 -0.074 16 1.78 -0.463 8.23 -6.59 -26.2
LightMnfc 22.6 0.044 -32.8 2.81 0.479 32.6 -29.6 -94
HeavyMnfc -21.9 -13.7 112 7.22 -16.4 -62.3 -40.3 -16.1
Util_Cons -1.95 -2.1 78.2 -18.5 -4.35 -30.1 -24.2 74.9
TransComm 2.33 1.13 19.6 -2.27 0.543 8.48 12 -59.2
OthServices 3.14 4.24 -46.9 16.7 10.3 17.9 42.2 -71.5
Total -4.85 -4.18 120 1.54 -10.3 -15.8 -47.2 -34.7
Table 7: Change in Output after Shock-1 (in US$million)
DQO chn hkg ind usa deu bel EU_25 isr
1 GrainsCrops 4.14 0.015 -3.34 3.95 2 3.91 11.5 -30.7
2 MeatLstk 0.22 0.01 1.83 1.2 0.015 6.29 -2.63 -4.55
3 Extraction -14.9 8.31 -56.4 -11 -1.01 -13.3 -1.4 245
4 ProcFood 1.76 -0.027 -4.5 2.45 -0.554 16.1 -3.14 -8.68
5 TextWapp 8.11 0.206 -17.1 11 1.81 12.6 2.53 -42.9
6 LightMnfc 7.19 0.102 152 -41.5 -18.1 27.4 -98.1 -171
7 HeavyMnfc -24.3 -19 60.1 38.4 -15.9 -73.1 -47.5 -85
8 Util_Cons -6.57 -3.01 152 -37.5 -8.64 -43.1 -50.1 158
9 TransComm 3.73 1.08 51 -1.99 2.07 12.6 22.8 -84.3
10 OthServices 6.44 6.17 -119 36.6 18.5 27 80.5 -67.9
Total -14.2 -6.12 217 1.6 -19.7 -23.5 -85.5 -91.6
Table 8: Change in Output after Shock-2 (in US$ million)
DQO chn hkg ind usa deu bel EU_25 isr
Util_Cons -4.06 -0.068 47.3 -21.2 -3.42 -5.79 -18.6 64.4
TransComm 6.14 0.323 9.43 -3.39 2.86 1.89 19.1 -83.9
OthServices 4.3 2.32 -13.9 14.8 10.7 5.23 47.7 -116
Food_Cereals 1.69 -0.132 2.5 0.544 0.961 2.07 1.38 -29.8
Manufacturin 9.28 -0.283 19 0.849 0.272 2.94 -11.1 -82.2
SP -24.1 -5.18 -61.4 7.38 -22.5 -11.7 -83.2 393
Total -6.77 -3.02 2.9 -1.08 -11.1 -5.33 -44.7 146
Table 9: Change in Output after Shock-3 (in US$ million)
DQO chn hkg ind usa deu bel EU_25 isr
Util_Cons -7.76 -0.131 96.6 -37.1 -6.02 -10.9 -34.1 122
TransComm 9.7 -0.142 25.7 -3.37 5.67 5.09 36.7 -120
OthServices 7.7 4.41 -60.4 35.5 20.4 11.2 97.6 -159
Food_Cereals 4.14 -0.189 -2.41 5.18 2.2 5.25 5.72 -41.9
Manufacturin 14.2 -0.533 2.65 16.7 4.63 9.01 -9.4 -123
SP -39.8 -8.96 -13.1 -30.1 -47.7 -32.2 -188 513
Total -11.8 -5.54 49.1 -13.3 -20.8 -12.6 -91.7 191
Table 10: Change in Output after Shock-4 (in US$ million)
If we try to interpret the reason why we observe these patterns in the sectoral output
decompositions, one possible explanation could be that Israel is more effectively producing its
specialized products as compared to India. And most of Israel ’s specialized products (Extraction,
machinery, Capital Goods, Electronics etc.) are products that are heavily driven by advances in
technology. Hence Israel benefit seems to benefit more from the free trade agreement as compared
to India.
Conclusion
The CGE analysis of FTA between India and Israel using GTAP reveals an interesting set of result s.
What we observe is that Israel seems to be the country that benefits more whereas India doesn ’t
seem to gain a lot out of the free trade agreement. However, this work could involve a more detailed
analysis of various other sectors and reasons for the anomalous results we observe here in some
cases. But this is just the first quantitative study that tries to analyse the impact of India-Israel FTA
and the scope of this research is wide-ranging and there is significant room for improvement in the
analysis.
References
• Pant, H. V. (2004). India-Israel Partnership: Convergence andConstraints Middle East,
8(4),61.
• Mikic, M., & Gilbert, J. (2009). Trade Statistics in Policymaking-Ahandbook of commonly used trade
indices and indicators.
• Hertel, T. W., & Hertel, T. W. (1997). Global trade analysis: modeling and applications. Cambridge
university press.
• Gilbert, J., Furusawa, T., & Scollay, R. (2016). The Economic Impact of the Trans-Pacific
Partnership: What Have We Learned from CGE Simulation?
• Cororaton, C. B. (2016). Potential Effects of the Regional Comprehensive Economic Partnership on the
Philippine Economy (No. DP 2016-30).
Data and codes can be accessed through the following link:
https://drive.google.com/drive/folders/0B6c8aT7i6M8KUlM2cVhkX3hkdXc?usp=sharing
