Does gravity work in the context of India and ASEAN bilateral trade? An application of the FGLS method

Abstract

The proliferation of regional trade agreements after the article of GATT encouraged India to announce its Look East Policy in 1991 that aimed to strengthen India’s trade relations with ASEAN nations, followed by the signing of the India-ASEAN FTA in 2009. Since then, the trade relations between India- ASEAN have increased manifold. The proposed study aims at exploring the determinants of bilateral trade flows between India and ten ASEAN nations under gravity model analysis framework for a period of 32 years ranging from 1988-2019. The FGLS estimation methodology has been employed for estimating bilateral trade. The results of the augmented gravity model exhibit that bilateral trade is positively affected by GDP, population, TR/GDP ratio, bilateral real exchange rate. In contrast, transaction costs, tariff rates, common border, and common official languages significantly negatively impact bilateral trade flows. Further trade potential has been calculated as a difference between predicted trade and actual trade. The results indicate a substantial untapped trade potential between India and ASEAN countries except for Brunei and Cambodia, where trade has already reached its maximum potential.

Keywords

• india
• asean
• gravity model
• fgls
• trade potential