Foreign Trade Review

A distinctive feature of India’s trade liberalization has been a significant rise in the magnitude of intra-industry trade (IIT). India’s total IIT is substantially large with high and upper-middle-income group countries and dominated by low vertical IIT. Particularly during the second phase of economic reforms, magnitude of India’s vertical IIT with high-income group of countries had increased; while there had been a marginal decline in horizontal IIT. This article identifies some of the determinants of India’s total IIT as well as vertical and horizontal IIT with her major trading partners from 1990 to 2014. The convergence in the level of economic development between India and her trading partner(s) positively influences total IIT and its two broad forms. Similarity in relative factor endowments and regional trade agreement through South Asian Free Trade Area (SAFTA) is found to promote horizontal IIT. Having a large market size, the distortionary impact of tariff has not been able to dampen the magnitude of India’s IIT. Relative depreciation of trading partner’s real exchange rate enhances India’s imports and inhibits the growth of total and vertical IIT. Geographical distance adversely affects all forms of IIT.

JEL Codes: C23, F14

Based on the controversy surrounding the determinants of foreign direct investment (FDI) inflow from one country to another and the suggestion that inflow of FDI might be a result of countries’ locations, this study therefore revisits the determinants of FDI and economic growth by testing for the roles of country’s location in the determination of the inflow of FDI to Nigeria. Unlike other studies, this study finds that countries’ locations do not play any significant role in determining FDI inflow to Nigeria. The study, therefore, employs fully modified ordinary least square (FMOLS) to examine the determinants of FDI in Nigeria. The FMOLS results show that FDI, manufacturing sector, tax revenue, financial development, health expenditure, net trade and human capital have a positive relationship with income growth. These results were statistically significant except for tax revenue, net trade and human capital. These results support the argument that these variables are important determinants of economic growth. The article also finds a negative and statistically significant relationship among FDI, income growth, import and capital formation. These results are in conformity with economic theory in the sense that import of goods and services constitutes a leakage in the economy. Negative impact of capital formation and security could be associated with the prevailing high level of corruption, sharing of security votes and misappropriation of funds among the public officials in Nigeria.

JEL Codes: F23, F26, F21, H24

This study investigates the determinants of trade balance in post-liberalization Ghana, covering the period 1984–2015. Specifically, we test the validity of the Marshall-Lerner condition and the J-curve effect, and further assess the effect of other macroeconomic variables including household consumption expenditure, government consumption expenditure, foreign income, money supply and domestic prices on trade balance. The bounds testing approach to cointegration and the error correction model within a symmetric and asymmetric autoregressive distributed lag (ARDL) framework is used for the estimation. Additionally, to analyse the dynamic interactions of the variables included in the estimated model, variance decomposition is applied. The results from both symmetric and asymmetric specifications show the absence of the Marshall-Lerner condition and the J-curve effect. Further, the study finds that household consumption expenditure, government consumption expenditure and domestic prices are negative and significant in the long and short run, whereas foreign income and money supply are positive and significant in the short run. Results from the variance decomposition show that innovations in household consumption expenditure highly contribute to the forecast error variance of the trade balance compared with other explanatory variables. A key finding of the study suggests that depreciation of the Ghana cedi is not an appropriate step to help in improving the country’s trade balance position.

JEL Codes: C22, F10, F31, F32

The post-WTO period has witnessed a rapid increase in growth of non-tariff measures (NTMs). As a result, quantification of NTMs has emerged as an important policy question. Quantification of NTMs is often challenging as these measures, in most cases, do not have direct numerical measurements. Hence, proxies have to be constructed. The present article proposes a methodology which uses time series information on legislation related to NTMs to construct comprehensive indices of NTMs. The incidence of NTMs is very high in the textile and garments (T&G) sector in the EU, which is also an important destination of India’s textile and garments exports. Hence, the EU textile and garments sector is selected as a case study. Separate NTM indices are constructed for the German and rest of the EU market, and the effects of these indices on the flow of India’s T&G exports are explored.

JEL Codes: F13, F18

The trade relations between India and the Gulf Cooperation Council (GCC) countries have been intensified during the last two decades. The GCC has emerged as one of the largest trading partner of India. This article attempts to investigate the result of tariff liberalization on welfare, output, employment and the potential trade flows between India and the GCC region using the GTAP-model. The study reveals that tariff liberalization has positive effects on India and GCC countries, with no or nominal negative effect on the rest of the world. Overall results show that India’s trade relation with GCC countries is increasing continuously, but still there is a lot of untapped potential to bring the welfare gains for both trading partners. Finally, the study concludes that the proposed economic integration in terms of FTA between India and GCC will be mutually beneficial and welfare enhancing, and a case of a win–win situation.

JEL Codes: F1, F13, F14, F17

This study considers foreign aid flow by sector in which the aid is directed and then estimates its impact on corruption in order to clarify the specific direction of aid flow that triggers (or does not trigger) corrupt practices. Data are from the Organisation for Economic Co-operation and Development database, Freedom House dataset, and the World Bank Governance Indicators. The dynamic system GMM and quantile regressions (QR) were estimated for robust estimation and correction of endogeneity issues. We found that aid flows for the development of economic infrastructure, multi-sector and programme assistance were consistently reducing corruption. This result stands for both the entire sample and for the African countries (especially for countries at the 25th, 50th and 75th quintiles). Aid flows to social infrastructure and debt relief significantly induce corrupt practices in the sampled countries. These forms of aid only spur rent-seeking behaviour for countries at the lower quintiles of corruption. Two robust checks were estimated, including: (a) using an alternate explained variable—the corruption measure by Transparency International; and (b) correcting for endogeneity in the QR estimation by instrumenting the independent variables of interest with their first-lags. For both checks, the signs and significant values of the variables were consistent with the earlier estimation.

JEL Codes: B20, F35, F50, O10, O55