Mechanics of Intra-Industry Trade and FTA: Implications for India in RCEP

Abstract: Worldwide, free trade agreements (FTAs) have remained a debatable issue. This paper tries to demystify the recent myths that have surrounded the FTA strategy of India, especially as part of the Look East Policy. The paper does this by analysing the determinants of Intra-Industry Trade (IIT), which has remained as one of the most dominant forms of trade flows, not explained by the traditional trade theories. Most importantly, the paper highlights the economics of IIT in the context of FTAs in a manner not explored before, by building on the new trade theories. The paper demonstrates both theoretically and empirically, with robust econometric estimations, that an FTA in goods among ASEAN+6 countries under RCEP, especially with India’s active presence and greater trade integration can, not only propel Intra-Industry type trade flows in the region under consideration but it can further help sustain such trade flows.

Keywords: RCEP, Free Trade Agreement, Intra-Industry Trade, Tobit