In pursuing the upcoming plan to create the AEC in 2015, ASEAN require a more integrated approach, especially in the trade dimension. Prior to that, it is, however, important to state the performance of the current form of regional economic integration, the long-established free trade zone: AFTA. The fundamental question often addressed by economists and policy makers within the region, is whether the creation of AFTA has brought about the desired effects for the member states over this time. The question
of ‘how far have we come?’, even though it sounds simple, is very important and indeed
necessary to allow AFTA members to consider and realize their position before strategizing any appropriate actions in order to obtain the best economic outcome from regional economic integration of any type. Otherwise, even if the most profound regional economic formation is established, it could end up as nothing more than the so- called ‘vision’ statement.
Given this background, the advanced progress of AFTA (in 2007), plus an improvement in ASEAN’s trade data prompt this study to reflect on examinations made regarding the past studies on ‘AFTA-effects’. An updated empirical account is essentially required for an evaluation of AFTA which is also vital for the whole region’s future plan regarding economic integration. The following chapter, Chapter 2, therefore deals with the concept of the ‘Gravity Model’ in the study of international trade as it is the empirical tool that this thesis relies on. The chapter starts by describing why, in comparison to
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other empirical tools, the ‘Gravity Model’ has become one of the most popular means to study RTA(s)-effects on countries’ trade flows. The origin of the model in the subject of international trade is also elaborated here. As far as theoretical foundations of the
‘Gravity Model’ are the concern, the chapter selectively presents key literature that
justified the model’s theoretical grounds. The chapter additionally explains various forms of empirical specification of the model that are commonly employed to study the issue. Last but not least, the chapter points out the format of the empirical gravity specification that the thesis will be used as a benchmark.
Chapter 3 discusses the application of the ‘Gravity Model’ to ASEAN’s trade database; ASEAN’s trade ties are examined in general and ‘AFTA-effects’ on intra-ASEAN trade flows are assessed, in particular. The chapter starts off reviewing related research in detail. Concerns regarding methodologies and modelling issues from past studies are also discussed. Aiming to control for several biases found in traditional cross-sectional work, the panel data framework is, in consequence, proposed as the solution. The time dimension of panel structure makes it possible to consider the role of the ‘business
cycle’ or the time dimension in the long period panel data. Furthermore, it allows
heterogeneities between trade-pairs to be observed and controlled for: the area in which traditional cross-section analysis ceases to function. By relying on the panel data structure, the upshot of ‘AFTA-effects’ on countries’ trade flows can therefore be evaluated using a time-variant AFTA dummy variable which captures not only membership status but also the point in time that each member joins the cooperation. Chapter 4 continues to work on the application of the ‘Gravity Model’, extending the domain of the analysis to cover membership countries and ASEAN’s top 10 most
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important trading partners outside the region. In general, trade impacts of AFTA are assessed but this time the analysis covers both intra-regional and extra-regional trade flows. In the same manner as Chapter 3, the first part of this chapter discusses literature reviews. In aiming to control for several biases found in conventional cross-section estimation techniques, the panel data setting is thus, again, anticipated as an empirical framework in this appliance. By relying on a similar approach, the result from this study can, in addition, be perceived as the robustness test for the estimated results concerning
‘AFTA-effects’ obtained in the previous chapter.
Chapter 5 provides an independent theoretical account illustrating pure economic motives underlying the incidence of RTA-membership expansion. The idea stems from the standard political economy framework: the ‘Domino Theory of Regionalism’ of Baldwin (1995). Even so, the theoretical model developed is original, focusing specifically on conceptualizing the pure economic reasons underlying non-members’ decisions towards calling for RTA-membership in differing circumstances. In brief, this chapter aims to point out cases where RTAs are an outcome of large trade flows rather than a source: RTAs are endogenous. Even though this theoretical chapter is not directly related to AFTA as it was largely driven by political motives, this theoretical development can be used to analyze other forms of RTAs that involved large (trade) countries or developed nations. The theoretical model is then set up under the standard symmetric-tariff and countries’ size assumptions. Given the positive model of the RTA, trading partners’ gains from trade and their welfare effects are then compared and contrasted between the case whereby of one of them decides to join the existing RTA, and the case that she continues to trade without having RTA-membership. The
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outcomes of these actions which are observed in the form of profits and welfare gains are assumed to be the only factors that drive countries to engage in the existing RTA in this application. The chapter finishes by relaxing this symmetric-tariff assumption. With asymmetric tariffs, countries’ gains from trade as well as welfare effects are then re- examined in a set of differing circumstances. In this case, beside the country’s status of being the RTA-membership, the status of her trading partners, whether or not they are RTA members and their tariff levels as well as the size of the bloc, would play an important role in determining the gains/losses from trade as well as welfare effects in this specific country. The chapter illustrates that with a simple alteration: the asymmetric tariff assumption, calculating a country’s gains from trade, especially in the form of welfare, can be markedly complicated.
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