Dynamic Analysis of a BIMSTEC-Japan Free Trade Area

The Bay of Bengal Initiative for Multi-Sectoral Technical and Economic Cooperation (BIMSTEC) is a subregional economic grouping comprising Bangladesh, India, Nepal, Myanmar, Bhutan, Thailand and Sri Lanka. The BIMSTEC Free Trade Framework Agreement sets out a program of ambitious preferential trade liberalization between the member countries. There has also been some discussion of promoting further economic integration with Japan. However, incorporating Japan into the preferential trade agreement would substantially change the composition of the group, offering a new range of opportunities and challenges for BIMSTEC economies. The current paper uses a dynamic global trade model in an effort to improve understanding of the potential impacts of a BIMSTEC-Japan Free Trade Agreement (FTA). We develop a baseline scenario to 2020 using GTAP-Dyn, a recursive dynamic version of the Global Trade Analysis Project (GTAP) model. From this, carefully developed scenarios facilitate quantification of the impacts of progressive liberalization within the BIMSTEC FTA, both with and without the inclusion of Japan and also sensitive product liberalization. Our tentative results suggest that if the FTA is extended to include Japan, significant gains are likely for both the BIMSTEC region as a whole and for Japan. However, we find substantial variation in the impacts on individual BIMSTEC member economies, with results depending upon the exact form of the liberalization, including the timing of reform, the use of sensitive product categories and special treatment for countries categorized as Least Developed Countries. We also note the dynamic nature of the global trading environment, with implementation of other preferential agreements likely to impact on the outcomes of the agreements discussed here.