Australia’s trade with India and South Africa has been growing steadily in recent times. These countries have become more liberalized in trade during the last five years and they also play a significant role in the Indian Ocean Rim-Association for Regional Cooperation (IOR-ARC). It has been proposed that Australia should take the initiative in forming effective cooperation with India and South Africa for complete free trade. This paper examines the trade links between these three countries and then evaluates quantitatively the likely effects of the establishment of a bilateral Free Trade Agreement (FTA) between them. GTAP (Global Trade Analysis Project) model has been used to quantify the effects of the FTA. The results provide some indication of the magnitude of the welfare gains involved under free trade and shed some light on prospects for trade liberalization in IOR countries.

The world economy has become more integrated as evidenced by the growth in international trade. The volume of world trade has grown 16 times bigger by 1996 in comparison to 1950. The ratio of world exports to GDP at 1990 prices has increased from 7% in 1950 to 15% in 2000. Formation of effective cooperation between nations and trade liberalization are the two main factors that have contributed to such integration among countries. Australia’s integration with East Asia and other countries has helped it in recent years to increase its exports to GDP ratio to 16% by 1996 (Kalirajan and Shand, 1998). This proves that Australia should be well-integrated with international economy further, particularly with countries that have great growth potential.

Australia’s trade with South Africa and India has been growing quite steadily in recent times. These countries have become more liberalized in trade during last five years and they also play a significant role in the recently formed Indian Ocean Rim-Association for Regional Cooperation (IOR-ARC)1. Australia, India and South Africa, though committed to freetrade, still have restrictive trade policies. In all three countries, trade policy reforms have occupied an important place in the policy agenda. It is imperative that Australia should take the initiative in forming effective cooperation with India and South Africa for complete free trade.

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