An empirical assessment of trade creation and trade diversion effects of the ASEAN-China free trade agreement: has the Philippines become more integrated?
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2017-06
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Abstract
This study uses an augmented gravity model on a panel trade data from 1995-2014 to measure the net trade creation effects of the ASEAN-China Free Trade Agreement, under which was the signing of an Agreement on Trade in Goods in 2004. Overall, the ASEAN-China region was able to take advantage of the trade liberalization. Results show that there is a 95 percent net trade creation effect at the aggregate level prior to the Global Financial Crisis in 2008. However, the net trade creation in ACFTA declined to 32 percent due to the weakening of the global economy and international trade post-2008 crisis. Analysis at the sectoral level shows that gains from the Agreement were positive but widely uneven across the following sectors: Food and Beverage, Industrial Supplies, Capital Good, and Transport Equipment. On the other hand, Fuel and Lubricants and Consumer Goods sectors have initially registered small net trade creation effects but these effects have subsequently turned negative post-2008 crisis.
Examining the effects on the Philippines, the net trade creation effects on aggregate trade were negative in each period in study. This reflects the poor performance of the Philippine trade sector as its economy was unable to capture and fully exploit the potential gains from the ACFTA. Amid weak net trade effects, sectoral analysis shows that the Transport Equipment sector had the biggest success in expanding trade with net trade creation effect of 90 percent. Interestingly, certain sectors have indeed undergone greater integration, to wit: (i) Food and Beverages; and (ii) Consumer Goods. This implies that there has been reorientation of economic resources towards serving ACFTA markets as evidenced by their strong sectoral intra-trade growth vis-à-vis shrinking exports and imports to the rest of the world.
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Gravity Model, Panel Data, Trade Creation and Trade Diversion Effects, ACFTA