Removing Trade Barriers Between China and India: A Counterfactual Analysis on Export Growth and Welfare

Abstract

The two Asian giants, China and India, share a long history of political acrimony and simmering border disputes. This often disrupts their bilateral economic relationship along with the overall dynamics of the regional balance of power and the global multi-polarisation order. Under such a scenario, this study aims to measure the impact of a hypothetical removal of all trade barriers between China and India on the overall exports and welfare of 73 sample countries while preserving the geographical trade costs. Employing the structural gravity model under a general equilibrium setting, the counterfactual scenario reveals that India, followed by China, is the main beneficiary of full-scale integration in terms of trade growth and welfare. Indian consumers gain while producers tend to lose through a decrease in prices. Chinese welfare gains are shared among its producers and consumers with light asymmetry. Next, we simulate a unilateral removal of all trade barriers while preserving the effects of geography for exports from China to India. The results reveal that asymmetric trade liberalisation leads to smaller gains for both countries at the expense of certain groups and the aggregate national welfare. JEL Codes: D58, F02, F17, O57