Is AFTA a Desirable Regional Trade Agreement for ASEAN?

Abstract

This study evaluates the effectiveness of the Association of Southeast Asian Nation (ASEAN) in liberalizing trade and investment through regional economic cooperation. We test whether the ASEAN Free Trade Area (AFTA) satisfies necessary conditions for a trade bloc to generate a positive and sufficient net trade creation effect by calculating trade-related indices introduced by the theory of economic integration. We find that ASEAN economies might not satisfy most of the conditions for creating positive welfare gains from AFTA. Moreover, in order to search for a desirable regional trade agreement (RTA) in the East Asian region, this study considers alternative strategies beyond AFTA, such as the currently implemented ASEAN hub (three sets of ASEAN+1: ASEAN+China, ASEAN+Japan, and ASEAN+Korea) RTA and a proposed ASEAN+3 (including ASEAN, China, Japan, and Korea) RTA. Although the ASEAN hub RTA appears to be a better policy option for ASEAN, it is not necessarily desirable for the region when we consider the neighboring countries in Northeast Asia as spokes. Therefore, we propose that the ASEAN+3 RTA, covering 10 ASEAN member countries and the three Northeast Asian countries, is a more desirable RTA in East Asia.