Regional Economic Integration & Trade Flows: The Experience of Asean-5 and Japan

Abstract

This study determines the effect of regional economic integration, namely the ASEAN Free Trade Area, on bilateral trade flows between the ASEAN-5 countries and their major trading partner, Japan. The analysis begins with the construction of a simple country-specific index based on the Common Effective Preferential Tariff (CEPT) scheme of AFTA to measure the progress of economic integration of each ASEAN-5 country. The index is then used to determine the effect of this economic integration on bilateral trade flows between the individual ASEAN-5 country and Japan. The empirical results of this study based on the Autoregressive Distributed Lag (ARDL) approach show that there is a significant trade creation between ASEAN-5 and Japan after the implementation of the regional free-trade area. The Philippines and Malaysia are the two most benefited countries, in terms of trade flows to Japan, from the regional economic integration of AFTA. The results also show that the other three countries, namely Indonesia, Singapore and Thailand, have gained in trade flows to Japan due to the Japanese foreign Investments in the countries.

Keywords: AFTA, Economic integration, trade flows, foreign direct investment

JEL Classification: F10, C22