Technical Note - 2021 - September - Number 35- Dinte

Assessing the effects of a free trade agreement between Brazil and India: A General Equilibrium Approach

Author: Fernando J. Ribeiro

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The bilateral relationship between Brazil and India has advanced substantially in recent decades, following the globalization process that strengthened the integration and cooperation among most countries. Until the 1990s, the two countries had a tenuous relationship, what can be due to some factors, like the geographical distance, the differences in cultural and historical background and the fact that both countries adopted inward-oriented economic development models, based on an import substitution strategy that gave little value to economic integration with other countries (Mukherji, 2013; Oliveira et al., 2019). One important instrument in this strategy is the high import tariff rates. In Brazil, the simple average of most favored nation (MFN) tariff was 42.9% in 1990 (48.3% for manufactures). In India, the average tariff was 80.9%.

This has changed since then, with both countries putting in place liberalization measures concerning trade and capital flows, aiming at taking advantage of the globalization forces to give exports a more important role in domestic production and to reap the efficiency gains that could be provided by an easier access to imported products, especially capital goods and intermediate goods, but also services. Besides this liberalizing trend, the two countries started to notice that they had common characteristics and shared many interests, especially in face of the new opportunities and challenges brought by globalization.

Both are big emerging countries, with extensive areas, big population and high levels of poverty and inequality; both are relatively young democracies, still in the process of solidifying its institutions and modernizing its political practices and policy-making; both were plagued by corruption practices and suffered with extensive, time-consuming and costly bureaucratic rules; both were laggards in terms of education levels and research and development investments; and, last but not least, both had a largely inefficient and non-competitive industrial sector constructed in the import substitution period.