This study‘s primary objective is to explore the benefits for trade and economic growth that could be derived from enhanced market access for Bangladesh in India, and improved physical connectivity between the two countries. It studies the impact of market access on trade in goods, an area of particular interest to Bangladesh. It also analyzes trade facilitation and transit issues between the two countries, and examines a set of emerging challenges for the region, setting out a road map for deepening bilateral economic relations.

## **Data and Methodology**

The study is based on secondary data.<sup>2</sup> A computable general equilibrium (CGE) model was used to address market access issues and to assess the impact of, say, a free trade agreement (FTA) on potential exports. The indirect effects of even a single tariff reduction may be quite complex, and this complexity increases with the number of trade policies and markets involved. As FTAs cover multiple sectors and various trade reforms, they are often simulated using CGE modeling. The CGE model relies on standard microeconomic theory for rigor and consistency and on computer algorithms for model-solving.

An augmented gravity model was also used to assess the effect of trade facilitation and trade cost elements on bilateral trade. Estimated results from this partial equilibrium model would help to estimate the potential for trade, whereas those from the CGE model would provide directions to the way forward.

# **2. Quantifying the Benefits of Trade Liberalization and Facilitation between India and Bangladesh: Brief Literature Review**

In trade theory, welfare effects of any regional trade agreement (RTA) are analyzed using two concepts: trade creation and trade diversion.<sup>3</sup> The fundamental arguments for regionalism rest on evidence that suggests RTAs are predominantly trade-creating.<sup>4</sup> The reasoning is that most RTAs are likely to entail relatively low welfare losses resulting from trade diversion, since the countries involved are often neighbors and hence already engaged in substantial trade;<sup>5</sup> countries can ―lock in‖ reform through RTAs, which is often politically less feasible under multilateral arrangements,<sup>6</sup> and if multilateral trade talks fail or stall, trade liberalization is restricted to RTAs. It is further argued that countries can build on the progress of regionalism and ultimately move towards a freer trade regime on the whole. There are, however, some critical arguments against formation of any RTA. It is alleged that an RTA undermines the spirit of multilateralism, and that the world might be divided into protectionist blocs, and that protectionists might accept RTAs in order to oppose further multilateral liberalization. In that case RTAs might be stumbling blocks to multilateralism. Simultaneous, complicated RTA negotiations could also bring about a ―spaghetti bowl‖ effect.<sup>7</sup>

> 2 Data came mostly from national government sources of Bangladesh and India, and multilateral development organizations such as the World Bank, IMF, WTO, UNCTAD, UNESCAP, and UNCOMTRADE.

> 3 Integration is both a policy of protection and a move towards free trade. The effect of the protectionist element of integration is called _trade diversion_ , and the effect of the trade liberalization element is called _trade creation_ . The RTA‘s overall effect on the welfare for a member country is determined by comparing the tradecreation and trade-diversion effects. If trade creation dominates, the formation of a RTA will enhance welfare; if trade diversion is greater, the RTA will lead to a welfare loss for the country concerned. Note that if member countries are the low-cost producers of the traded good, there will be no trade-diversion effect and integration will unambiguously increase welfare.

> 4 See Rodríguez-Delgado (2007).

- 5 See Krugman (1991).

> 6 Whalley, (1996), for example, asserted that a desire for increased credibility of domestic reforms was a central preoccupation behind the Mexican negotiating position on the North American Free Trade Agreement (NAFTA).

- 7

> See Bhagwati and Panagariya (1996).

2