The Impact of ASEAN FTA: Regional Level Analysis

Abstract

Originally, AFTA was expected to create intra-regional tradeintra-regional trade(trade creationtrade creation) rather than to attract long-run investment of FDI inflows (investment creationinvestment creation). This is expected to be achieved through an increase in intra-regional trade among its member states. Intra-regional trade affects FDI inflows in two ways: (1) an increase in horizontal FDI inflows from non-members in order to avoid trade impediments from discrimination by regional trade policies and (2) an increase in vertical FDI inflows from members due to the increasing benefits from intra-regional trade following the implementation of regional discriminative trade policies. Previous studies suggest that intra-regional trade increases FDI inflows, therefore, it is important to see one, indirect impact which is the impact of AFTA to intra-regional trade compared to the impact of intra-regional trade to investment (FDI Inflows) and two, direct impact which is the impact of AFTA to FDI inflows. Trade discrimination such as AFTA is also expected to enhance investment creation (FDI inflows) from non-members even though its main purpose is for intra-regional trade enhancement. This chapter takes a time-series framework from 1988 to 2008. 1988 was selected as it was the start of the first of AFTA’s five year preparation before it was officially signed in 1992. It limits time-series analysis to year 2008 for three reasons: First, after 2008, ASEAN started to prepare the ASEAN Economic Community,ASEAN Economic Communitywhich came into force at the end of 2015. Two, the occurrence of a global financial crises, which changed ASEAN’s economic relations with other trading partners especially major economies which have been most affected by this crises. Three, ASEAN established several significant regional-plus cooperation to enhance its investment flows such as the ASEAN Japan Free Trade Area (AJFTA), ASEAN South Korea FTA, ASEAN China FTAASEAN China FTA, ASEAN India FTA and ASEAN Australia New Zealand FTA. These three considerations have significantly changed the major factors that affect FDI inflows in ASEAN region other than ASEAN FTA as such. Given its time-series framework, this chapter takes the founding members of ASEAN and in particular Indonesia, Malaysia, Thailand, and Philippines as the observation countries.