Will free trade agreement between India and China reduce India’s trade deficit?

Abstract

Trade between India and China has been rising exponentially with a widening trade deficit for India, which has raised alarm by businesses, and some Indian parliamentarians have started accusing China of unfair trade practices. Nevertheless, both countries intend to negotiate for free trade arrangements between them based on complementarity. This study examines how much reduction in trade deficit due to different preferential trading arrangements is feasible under hypothetical full export potential scenarios using a stochastic frontier gravity model. The empirical analysis shows that India’s potential gain is high when the influence of India’s existing ‘behind the border’ constraints is eliminated.