ASEAN free trade area: An empirical evaluation.

The Association of Southeast Asian Nations (ASEAN) comprising six nations - Brunei, Indonesia, Malaysia, the Philippines, Singapore and Thailand - covers an area of more than 3 million sq. km. with a combined population of about 310 million. These countries have experienced significant economic growth in the last decade and this growth is expected to continue into the next century. ASEAN was established in 1967 with the objective of accelerating the economic growth, social progress and cultural development of the region. However, during the first decade after inception, regional security was of primary importance, especially with the escalating political and ideological struggle in Indo-China. Serious economic co-operation came into place only in 1976 with a range of co-operative schemes suggested by a UN-team of experts. These schemes, on the whole, were unsuccessful. Calls for greater political will and action in economic co-operation from the academic and business sectors culminated in the signing of the Singapore Declaration in 1992 which gave birth to the ASEAN Free Trade Area (AFTA). The purpose of this dissertation is to evaluate the extent to which intra-regional imports and exports will change as a result of such integration. Two main effects are evaluated - the static and the dynamic. The static effects are limited to trade creation and trade diversion effects. The methodology primarily uses the price elasticities of import demand and export demand, which are the author's own estimates, to measure the expected changes. While there are various components of dynamic effects, we have emphasised one, namely, the increase in intra-industry trade. Results of this study show that only Singapore would receive a net gain as a result of the integration, i.e. its trade creation effects would outweigh trade diversion, while Malaysia, the Philippines, Indonesia and Thailand would face a welfare loss. These are however, optimistic results based on the assumptions which we have used. As a whole, AFTA would face a 10 percent increase in intra-ASEAN trade. With regards to intra-industry trade, the study finds that the potential for a larger proportion of intra-ASEAN trade to be of the intra-industry type is greater for Indonesia, Thailand and the Philippine compared to Malaysia and Singapore. However, comparing the level of intra-industry trade of the members with the Newly Industrialised Countries (NICs) and Developed Countries (DCs), there are indications that large gains would be accrued by all member countries as economies of scales and the benefits of greater efficiency through greater competition are realised when the free trade area is fully operational.