AFTA's effects on international trade

Abstract

The main purpose of this study was to make an assessment of the ASEAN Free Trade Area (AFTA) in regards to its effects on members’ trade. The scope of analysis is mainly limited to ASEAN-5 countries, but covers most of the history of the Association, from 1975 to the present. A review of trade statistics was performed with consideration for the dynamics of the product mix and direction of trade for this time period. In addition, innovative use of the gravity model of international trade was applied to regressions with careful consideration to potential trade determinates and related issues that are unique to the region. Comparisons of outputs are made across time periods and for both intra-regional and extra-regional trade samples and a comprehensive series of tests of AFTA’s significance for trade determination are applied. Evidence shows that AFTA is a positive and significant factor for ASEAN trade. Other findings of particular interest relate to the relationship between inward FDI and trade, trade growth in new manufacturing industries, and the clear differences in trade determination at different time periods and directions for ASEAN. Results also suggest that ASEAN’s most recent declarations for the future, in the form of the ASEAN Investment Area (AIA) and the ASEAN Economic Community (AEC), are correctly designed and should be conducive to their expresses goals. These continuing ASEAN integration efforts appropriately utilize a market-based, trade and investment restriction reduction approach conducive to stimulating competition and scale productivity gains.