The effect of regional trade agreement to trade flow: evidence of trade creation and trade diversion of Asean – Japan free trade area

Abstract

This paper analyzes the effect of AJCEP, focusing on trade creation and trade diversion effects to ASEAN countries and Japan. Aggregated and disaggregated data sets for five different products include: Agricultural goods, manufactured products, chemical products, Machinery and equipment of transportation and clothing, accessories and textile, fabric trade in period time from 2000-2015 between nine ASEAN countries and 14 biggest partners were employed. By using gravity model and various kind of estimators: OLS, FEM, REM and Hausman-Taylor, however, to take into account not only country-specific unobserved effects but also yielding a consistent estimator for time-invariant variables, Hausman-Taylor is our preferred estimator. The estimation result showns that GDP of importing and exporting countries, common border are positive factors that help to encourage the bilateral trade. Similarly, cultural distance factors such as language, colony have the positive effects and foster bilateral trade as well. Meanwhile, the empirical finding states that geographic factors such as geographic distance, land-locked as the trade-restrictive factor which have strong the egative effect to trade. In addition, a negative effect of geographic distance on trade is consistent with the international trade gravity model‘s hypothesis. By using aggregated total export data, the regression result reveals that even though eliminating in tariff commitment, however, AJCEP has not yet to be successful FTA in promoting trade among member countries as well as extra-bloc countries. In addition, disaggregated data regression results confirms that trade agreement between ASEAN and Japan named AJCEP yields a negative or no effect to trade in most of the sub-catalogues: agricultural goods, manufactured products, chemical products, Machinery and equipment of transportation and clothing, accessories and textile, fabric. The negative effect generally implies that the elimination of tariff in AJCEP has not yet to encourage trade in intra-bloc AJCEP members as well as trade flow from AJCEP members to partners of Japan. In addition, an insignificant result when testing inward AJCEP trading from Japan partners shows that AJCEP has not yet to make AJCEP members be more integrated to international trade