(Luận văn thạc sĩ) effects of ASEAN free trade area (AFTA) on intra regional trade flows evidence from automotive industry

VIETNAM NATIONAL UNIVERSITY, HANOI

VIETNAM JAPAN UNIVERSITY

LE MINH PHUONG

EFFECTS OF ASEAN FREE TRADE AREA
(AFTA) ON INTRA-REGIONAL TRADE
FLOWS: EVIDENCE FROM AUTOMOTIVE
INDUSTRY

MASTER'S THESIS
………………….
Master Program in Public Policy

Hanoi, 2020


VIETNAM NATIONAL UNIVERSITY, HANOI

VIETNAM JAPAN UNIVERSITY

LE MINH PHUONG

EFFECTS OF ASEAN FREE TRADE AREA
(AFTA) ON INTRA-REGIONAL TRADE
FLOWS: EVIDENCE FROM AUTOMOTIVE
INDUSTRY

MAJOR: MASTER OF PUBLIC POLICY
CODE: PILOT

RESEARCH SUPERVISOR:
Assistant Prof. TRAN LAM ANH DUONG
Associate Prof. NGUYEN THI MINH

Hanoi, 2020


ACKNOWLEDGEMENTS
The writing of a master’s thesis is not a comfortable task. So far, the biggest
accomplishment in my life is complete it. And, I would like to grab this chance to
express my immense thankfulness to all those persons who gave me their invaluable
support and assistance.
Above all, I am greatly indebted to my supervisors, Assistant Professor Tran Lam Anh
Duong who was very willing with her time and knowledge. She supported me from the
first steps of the research process. Not only instructing, but she also studied with me
from theory to analytical practice. And, Associate Professor Nguyen Thi Minh who gave
me valuable suggestions to help me overcome the most difficult periods. Without their
advice, I would definitely have ended up in chaos.
I would include those who helped me in finding data - Mrs. Nguyen Thi Xuan Thuy
from the Viet Nam Industry Agency (Ministry of Industry and Trade, Vietnam) and Dr.
Dang Quang Vinh from the Master’s program in Public Policy of Viet Nam Japan
University who assisted me during the final procedure.
Especially, I am grateful to all other lecturers Dr. Thuy Anh, Prof. Naohisa Okamoto,
Dr. Vu Hoang Linh who gave me helpful comments during one year of preparation for
the thesis. It is also appropriate to thank, MPP program assistants Ms. Ha and Ms. Huong
and staffs from the Office of Global Initiatives at the University of Tsukuba for
supporting me during two years studying at VJU and to undergo the memorable threemonth internship in Japan.
Last but not least, special thanks are reserved for my family and my friends for their
tireless efforts and spiritual support.

After all, I take full responsibility for any flaws, errors and omissions.
This thesis is dedicated to the memory of my father.


TABLE OF CONTENTS
ACKNOWLEDGEMENTS .......................................................................................... iii
LIST OF TABLES .........................................................................................................vi
LIST OF FIGURES ...................................................................................................... vii
LIST OF ABBREVIATIONS ..................................................................................... viii
CHAPTER 1: INTRODUCTION....................................................................................1
1.1 Background ............................................................................................................1
1.1.1 AFTA overview ................................................................................................ 1
1.1.2 ASEAN economics and trade overview ........................................................... 2
1.1.3 ASEAN automotive industry ............................................................................6
1.2 Definition .............................................................................................................13
1.3 Research objectives and research questions......................................................... 14
1.4 Hypotheses ...........................................................................................................15
1.5 Method and methodology ....................................................................................16
CHAPTER 2: LITERATURE REVIEW.......................................................................18
2.1 Theoretical framework of gravity model ............................................................. 18
2.2 Effects of AFTA on intra-regional trade flows at aggregated level..................... 20
2.3 Effects of AFTA on intra-regional trade at disaggregated level .......................... 21
CHAPTER 3: DATA AND METHOD .........................................................................24
3.1 The estimation methodology and model specification ........................................24
3.1.1 The estimation methodology ..........................................................................24
3.1.2 Model specification ........................................................................................ 27
3.3 Data description ...................................................................................................31
3.4 The estimation method and common issues of panel data in gravity model
estimation ...................................................................................................................33
3.5 Data processing ....................................................................................................37

CHAPTER 4: FINDINGS ............................................................................................. 38
4.1 Estimation results of trade creation and trade diversion effects by AFTA ..........38
4.1.1 Export flows ...................................................................................................38
4.1.2 Import flows ...................................................................................................40
4.2 Estimation results of trade creation effect by tariff elimination .......................... 41
4.2.1 Export flows ...................................................................................................41
4.2.2 Import flows ...................................................................................................43
4.3 Trade creation effect by tariff elimination by individual AFTA member countries
....................................................................................................................................44


CHAPTER 5: CONCLUSION ...................................................................................... 48
5.1 Research summary ............................................................................................... 48
5.2 Policy implication ................................................................................................ 49
5.3 Limitations of the thesis ....................................................................................... 50
5.4 Further research ....................................................................................................50
REFERENCES ..............................................................................................................51
Appendix 1. Average tariff under CEPT Scheme from 1993 to 2015 ....................... 55
Appendix 2. ASEAN Countries code table ................................................................ 57
Appendix 3. Regional trade agreements – AFTA and AFTA-plus-FTAs .................58
Appendix 4. Summary Statistic .................................................................................59
Appendix 5. The effects of AFTA on export trade flows by PPMLHDFE ...............61
Appendix 6. The effects of AFTA on import trade flows by PPMLHDFE ...............62


LIST OF TABLES
Table 1.1: Share of total trade on GDP (%) of ASEAN countries, 1993-2018 ..............3
Table 1.2: ASEAN-5 motor vehicle production (in units), 2006-2018 ........................... 7
Table 1.3: ASEAN-7 motor vehicle sales (in units), 2006-2018 ....................................8
Table 1.4: List of ASEAN countries by GDP (PPP) per capita ranked by the World

Bank (2018) ...................................................................................................................13
Table 2.1: The estimated coefficients of AFTA dummies from existing studies…….22
Table 3.1: Possible outcomes of trade effects in an AFTA ...........................................30
Table 3.2: Hypotheses of the estimated coefficients ..................................................... 30
Table 3.3: The availability of bilateral trade flows from UN Comtrade ....................... 32
Table 3.4: Description of multiple fixed effects models ...............................................36
Table 4.1: The effects of AFTA on export trade flows by REGHDFE ........................ 39
Table 4.2: The effects of AFTA on import trade flows by REGHDFE ........................ 40
Table 4.3: Trade creation effect by tariff elimination – Export flow by PPMLHDFE
method ........................................................................................................................... 42
Table 4.4: Trade creation effect by tariff elimination – Import flow by PPMLHDFE
method ........................................................................................................................... 43
Table 4.5: Estimation results of trade creation effect by tariff elimination ..................44
Table 4.6: Estimation results with country dummy – Export flow ............................... 46
Table 4.7: Estimation results with country dummy – Import flow ............................... 47
Table 5.1: Summary of trade creation and trade diversion effects ................................ 48


LIST OF FIGURES
Figure 1.1: Real GDP growth (annual %) of ASEAN region, 1980-2020 ......................2
Figure 1.2: Total value of exports and imports of goods and services in ASEAN, 20002017 (in US$ billion) .......................................................................................................4
Figure 1.3: Trend of ASEAN total trade, extra-ASEAN trade and intra-ASEAN trade,
1993-2013 ........................................................................................................................ 4
Figure 1.4: Share of export values of goods by intra-ASEAN and its major trading
partners (%), 2000-2017 ..................................................................................................5
Figure 1.5: Shares of export and import value of goods by ASEAN country, 2000-2017
(%) ...................................................................................................................................5
Figure 1.6: Trend of intra- and extra-ASEAN export of priority integration sector of
automotive products, 1993-2013 .....................................................................................6
Figure 1.7: Total automotive export and import value in ASEAN countries, 1993-2018

(in US$ million) ...............................................................................................................8


LIST OF ABBREVIATIONS
ACFTA

ASEAN-China Free Trade Area

AEC

ASEAN Economic Community

AFTA

ASEAN Free Trade Area

AIFTA

ASEAN-India Free Trade Area

AJCEP

ASEAN-Japan Comprehensive Economic
Partnership

AKFTA

ASEAN-Korea Free Trade Area

APTA

Asia-Pacific Trade Agreement

ASEAN

Association of Southeast Asian Nations

ATIGA

ASEAN Trade in Goods Agreement

CBU

Complete Built-Up

CEPT

Common Effective Preferential Tariff

CIA

Central Intelligence Agency

CKD

Completely Knocked Down

CLMV

Cambodia, Lao PDR, Myanmar and Viet Nam

EL

Exclusion List

FDI

Foreign Direct Investment

FEM

Fixed Effect Model

FTA

Free Trade Agreement

GVC

Global Value Chain

HMR

Helpman, Melitz and Rubinstein

HS

Harmonized System

IL

Inclusion List

MFN

Most Favoured Nation

MNEs

Multinational Enterprises

NTBs

Non-Tariff Barriers


NTMs

Non-Tariff Measures

PPML

Poisson pseudo-maximum likelihood

PPP

Purchasing Power Parity

PTA

Preferential Trade Agreement

SL

Sensitive List

TL

Temporary Exclusion List

REM

Random Effect Model

WDI

World Development Indicators

WTO

World Trade Organization

ZIPPML

Zero-inflated PPML


CHAPTER 1: INTRODUCTION
1.1 Background
1.1.1 AFTA overview

The Association of Southeast Asian Nations (ASEAN) was established in 1967 with 5
original members, namely Indonesia, Malaysia, the Philippines, Singapore and Thailand.
Currently, the association consists of 10 member states, as successively Brunei
Darussalam, Vietnam, Laos, Myanmar (Burma) and Cambodia. In October 2003,
ASEAN leaders decided to create a single market for a huge economy of US$722 billion
and nearly 550 million people (2003). The building of the ASEAN Economic
Community (AEC) by the end of 2015 is a major milestone of integration effort
attempted in the developing world, offering variety of opportunities for each member
states to attract inward Foreign Direct Investment (FDI) and increase trade flows. AEC
has been considered as successor following the completion of the ASEAN Free Trade
Area (AFTA), which was signed in 1992 in Singapore by 6 original ASEAN countries.
At that time, the AFTA agreement aimed to eliminate the tariff on a wide range of
products between ASEAN members.
The establishment of AFTA has attracted the remaining members, Vietnam has been
joined since 1995, Laos and Myanmar (1997), Cambodia (1999). Under the Common
Effective Preferential Tariff (CEPT) Scheme, the products are firstly classified into two
different groups depending on the willingness of each member - Inclusion List (IL) and
Exclusion List (EL). Those product under IL were subject to removal of tariff to between
0% and 5% by 2008 for original AFTA members. Later on, the tariff reduction schedule
was revised several times. Finally, the end year of IL was moved to 2002. The EL was
later devided into a Temporary Exclusion List (TL) and Sensitive List (SL). Those
products in TL would be shifted to IL in the future. Whereas, additional time for both
IL and TL were given to the newer member countries, namely Cambodia, Laos,
Myanmar and Vietnam (CLMV) to implement their private routine of tariff reduction
for products which originate from within AFTA members. In addition, non-tariff
measures (NTMs) or non-tariff barriers (NTBs) were excluded under the CEPT scheme.
However, since 2010 the ASEAN Trade in Goods Agreement (ATIGA) has come into
effect to enhance and supersede the CEPT/AFTA with greater goal ambiguity covering
both tariff and non-tariff elimination.
1

The creation of AFTA (or ATIGA) has generated a bigger internal market that each
member is able to entry into lower trade cost market and attract more investment into
their economy that allow producing on a large scale.
1.1.2 ASEAN economics and trade overview
Nowadays, the ASEAN region has become well known in the world due to its high real
Gross Domestic Product (GDP) growth in a long period of time.

Figure 1.1: Real GDP growth (annual %) of ASEAN region, 1980-2020
Source: IMF DataMapper
Firgue 1.1 illustrates the real GDP growth rate of the ASEAN region compared to the
group of advanced economies and the average across the whole world from 1980 to
2020 (estimated data). ASEAN’s real GDP growth have increased remarkably, except
during two crisis periods: the Asian financial crisis in 1998 and the Global crisis in 2008.
The average growth rate of GDP in the whole period 1980-2018 of three groups ASEAN,
advanced economies and the average of the world is 5.3%, 2.2% and 3.3% respectively.
Followed by that data, the average value of this important indicator reveals that ASEAN
is one of the fastest growing economies in the world.

2


On the other hand, trade to GDP ratios measure the relative importance of international
trade in each ASEAN economy. Table 1.1 below shows the trade to GDP ratios or
openness indicator of 10 ASEAN countries. In general, almost ASEAN countries open
its economy to the world, partially due to its economic integration efforts. The high trade
openness which trade to GDP ratios is greater than 100 percent bringing many economic
benefits, from increasing technology transfer, supplying more job, enhancing the total
factor productivity for the economic development. It seems that the smaller economies

in land area and GDP than trade more and vice versa. That can be seen from the table
1.1, for example Singapore is the most dynamic economy in ASEAN in comparison
with Indonesia which is the largest country in both land area and GDP in ASEAN region.
Table 1.1: Share of total trade on GDP (%) of ASEAN countries, 1993-2018

Singapore
Malaysia
Viet Nam
Cambodia
Thailand
Brunei Darussalam
Lao PDR
Philippines
Indonesia
Myanmar

357
175
149
125
118
102
90
84
55
15

Source: Author’s calculations based on WITS country profile data
From the calculation formula of GDP by expenditure approach, the rapid of expansion
in GDP of ASEAN region has been definitely contributed by export-import component1.

The entire value of trade in goods and services in this region has been playing an
important role in GDP measurement under expenditure approach.
By looking at the figure 1.2, the total merchandise trade of ASEAN region has sharply
increased from 2000 to 2017 equivalent to an increase of nearly 3.5 times (ASEAN
Secretariat, 2018).

1

The formula for GDP by expenditure approach: GDP = C + I + G + (X-M)
3


Figure 1.2: Total value of exports and imports of goods and services in ASEAN,
2000-2017 (in US$ billion)
According to report of ASEAN Secretariat (2014) in the special edition “the removal of
trade barriers has been centered on the removal of intra-ASEAN tariffs through
commitment CEPT under the AFTA”. Although, figures in trade indicates that “ASEAN
depended a great deal on the consumption and production needs of the rest of the world”
(Mahfuz Kabir et al., 2014), but intra-ASEAN trade still has been increased dramatically,
even though faster than overall ASEAN trade and extra-ASEAN trade. From 1993 to
2013, the intra-ASEAN trade has surged by more than 7 times, while extra-ASEAN
trade has increased more than 5 times.

Figure 1.3: Trend of ASEAN total trade, extra-ASEAN trade and intra-ASEAN trade,
1993-2013
4


Regarding to a very fast increasing in intra-regional trade and the success of trade
surplus in ASEAN region, from 2000 to 2017 intra-ASEAN collectively is the largest

market.

Figure 1.4: Share of export values of goods by intra-ASEAN and its major trading
partners (%), 2000-2017
Overall, there is a significant gap in trade by export and import value among 10 ASEAN
countries. Singapore is the largest exporter, followed by Thailand, Malaysia, Viet Nam,
Indonesia and Philippines. Meanwhile, Brunei Darussalam, Laos, Cambodia and
Myanmar are among trade less countries.

Figure 1.5: Shares of export and import value of goods by ASEAN country, 20002017 (%)
5


Specially, according to ASEAN Community in Figure reported in 2014, ASEAN records
a surplus in its trade of agro-based products, rubber-based products, wood-based
products, fisheries products, textile products, electronic products and automotive
products with its major trading partners, although the surplus was relatively small, in
general. According to the report, in the case of automotive products, including both final
and intermediate products, by 2013 ASEAN achieved a small surplus with Australia and
New Zealand, and USA. Meanwhile, trade deficit was large with Japan, small in the
case of China, Republic of Korea, and EU-28.

Figure 1.6: Trend of intra- and extra-ASEAN export of priority integration sector of
automotive products, 1993-2013
1.1.3 ASEAN automotive industry
Regarding to the trade value of automotive industry in ASEAN, this region has remained a
net importer despite its export value is closely catching up with import value. Remarkably,
the value of extra-ASEAN export in the case of automotive was 2 times that of intraASEAN export compared to other industries those was 7 to 15 times (ASEAN Secretariat,
2014). This figures imply that intra-regional trade flows of automobile are increasingly
significant important. However, ASEAN still import mainly from neighboring ASEAN

countries such as China, Japan, South Korea, etc.
Further, according to the ASEAN Investment Report (ASEAN Secretariat, 2020), steady
economic growth, increasing in middle-class consumer, deepening regional integration
ASEAN has attracted more the Multinational Enterprises (MNEs) increasing their value
chain participation in automotive industry.
6


Therefore, AFTA was expected to accelerate easier obtaining and more efficient intraregional and intra-industry trading, creating an environment that is advantageous to
achieve economies of scale in automobiles and its components.
Table 1.2: ASEAN-5 motor vehicle production (in units), 2006-2018
Country

2008

2010

Indonesia

296,008

600,844

702,508 1,065,557

Malaysia

503,048

530,810

567,715

569,620

596,418

545,253

564,971

12

63,621

80,477

75,413

88,845

116,868

79,763

25

1,880,007 1,944,417 2,167,694

82

Philippines
Thailand
Viet Nam

2012

2014

1,188,044 1,394,029 1,645,304 2,453,717
35,087

107,918

106,166

2016

2018

% Change

2006

1,298,523 1,177,389 1,343,714

73,673

121,084

236,161

200,436

2006-2018
354

471

Note: Data for other countries are not available

Source: ASEAN Automotive Federation
According to figure collected from the ASEAN Automotive Federation, five largest
economies in producing automobile are Indonesia, Malaysia, Philippines, Thailand, and
Viet Nam produced totally over 44 million units of motor vehicles from 2006 to 2018.
Meanwhile, at the national level, Thailand accounts for 52%, Indonesia (27%), Malaysia
(16%), Viet Nam (4%) and the Philippines (2%). It can be stated that Thailand continues to
play a dominant role in the ASEAN automotive industry. These countries are expected to
continue to grow and become an important role in the global value chain (Kobayashi, 2014).
Korwatanasakul, U., and Intarakumnerd, P. (2020) in the report about the global value
chains in automobiles in ASEAN also emphasized that the automobile industry has been
an important driving force in ASEAN, contributing at least $177 billion to ASEAN’s
GDP every year and creating about 2.4 million jobs.
Overall, ASEAN is considered as an important production hub for the entire automobile
sector, including automobiles, motorcycles, trucks, and their parts becoming a “factory
of Asia”. Therefore, the analysis of trade flows in automotive industry among ASEAN
countries is necessary in this context of trade globalization.

7

Table 1.3: ASEAN-7 motor vehicle sales (in units), 2006-2018
% Change

Country

2006

2008

2010

2012

2014

2016

2018

Brunei

12,522

14,680

13,589

18,634

18,114

13,248

11,226

(10)

Indonesia

318,904 603,774 764,710 1,116,212 1,208,019 1,061,735 1,151,291

261

Malaysia

490,768 548,115 605,156

627,753

666,465

580,124

598,714

22

99,541 124,449 168,490

156,654

234,747

359,572

357,410

259

110,455

95,243

(31)

Philippines
Singapore

137,564 110,574

37,247

47,443

Thailand

682,161 615,270 800,357 1,436,335

881,832

768,788 1,041,739

53

133,588

270,820

606

Viet Nam

51,891

2006-2018

40,897 110,186 111,737

80,453

288,683

Note: Data for other countries are not available

Source: ASEAN Automotive Federation
During the period 2006-2018, more than 36 million units of motor vehicles have been
sold in the ASEAN market of more than 650 million of population. Indonesia and
Thailand are biggest important markets account for 62% in total, followed by Malaysia,
the Philippines and Viet Nam. Contrarily, sales in Brunei and Singapore is very lower,

even though these two countries are among richest ones. The possible reason is that
because these countries have smaller scale of population.

Figure 1.7: Total automotive export and import value in ASEAN countries, 19932018 (in US$ million)
Note: Lack of data for Cambodia, Lao, Myanmar, the Philippines, Viet Nam and Malaysia
8


Source: Author’s collection and calculation from UN Comtrade source
Brunei Darussalam is a small country in land area. Its population is only 428,962 (World
Bank) in 2018. From 1990 to 2012, its real GDP has significantly increased 50% before
decreasing slowly due to the Global Financial Crisis. Brunei was early ranked among
industrialized countries by high GDP per capita at purchasing power parity. In 2018
World Bank ranked Brunei as the fifth-richest nation out of 182 countries, based on its
petroleum and natural gas fields. Crude oil and natural gas production of Brunei account
for approximately 65% of GDP and 95% of exports, with Japan as the primary export
market. According to Korwatanasakul, U., and Intarakumnerd, P. (2020), Brunei
Darussalam is the only ASEAN country that has not directly involved in the automotive
value chain. However, Brunei was explored developing assembly plant for electric and
renewable energy-powered vehicles in 2016. Besides, the total export value involving
automotive industry of this country from 1993 to 2018 was lowest among ASEAN
countries, only 162 million USD.
Cambodia has experienced strong economic growth since 1996. Its GDP grew an
average annual rate of over 8% between 2000 and 2010 and about over 7% since 2011.
Its main industries are tourism, garment, textile, construction and real estate. So far
Cambodia remains one of the poorest countries in the world was ranked at 138th
measuring by GDP (PPP) per capita, only 4,000 USD for one people per year. Besides,
the total automotive export and import value of Cambodia is also among lowest
countries compared to other ASEAN ones. The automobile industry in Cambodia
mainly engages in Complete Built-Up (CBU) production through Completely Knocked

Down (CKD) kits. Cambodia’s automotive industry still is in its early stages, it could
raise their competitiveness base on advantages of cheap and large labor force in near
future. Typically, this country could have been benefiting from “China-Plus-One” and
“Thailand-Plus-One” strategies, which mainly extended the automobile production of
Tier-2 suppliers in China and Thailand to the CLM countries (Korwatanasakul, U., and
Intarakumnerd, P., 2020).
Lao PDR is the only landlocked country surrounded by Myanmar, China, Viet Nam and
Thailand. Due to its central geographical location, Laos became a hub for overland trade.
Initially, Lao PDR has been one of the memberships of Asia-Pacific Trade Agreement
9


(APTA) previously known as the Bankok Agreement was signed in 19752. Its population
estimates at 7 million people in 2018. As Cambodia, Laos still is poor country ranked at
124th nation according to GDP (PPP) per capita in the world. The automobile and parts
and components industries of the Laos are the least developed among the CLMV
countries. CKD assembly plants have not been established. However, under the Greater
Mekong Sub-region Economic Cooperation and Thailand-plus-one strategy, the Lao
PDR is one of the key countries for suppling labor at a relatively low cost for the
automotive value chain.
Myanmar (Burma) has been seen as a dynamic economy in the world with the average
annual rate of GDP growth at roughly 9.2% from 1992 to 2018. Its population is about
53.7 million people. Since 2011, Myanmar has experienced a comprehensive reform in
economy and politics Although Myanmar still has lots of challenges to catch up other
countries in ASEAN, this country is expected to receive lots of benefits from its
abundance of cheap and big labor force and natural resources as well.
Thailand is one of early industrialized countries in ASEAN region. Its economy highly
depends on international trade, with exports accounting for 66% of GDP. The main
export sector of this country focus on electronics, agricultural commodities, automobiles
and parts, and processed foods. The country has experienced over the past 50 years

developing automotive industry from early 1960s under the regime of import
substitution and a revision of the country’s investment promotion law to attract
automotive assembly to Thailand. Especially, in the late 1980s, due to the appreciation
of the Japanese yen raised the production costs of automobile in Japan. There was a
massive rise in FDI inflows and MNEs contribution to Thailand for both carmakers and
parts suppliers. Nowadays, Thailand’s automobile was ranked 1st among ASEAN
countries, 3rd in the Asian continent and 12th in the world.
Indonesia is the largest economy in the region. This country consists of a thousand
islands and ranked at 4th in the world’s population. As an emerging economy Indonesia
has experienced a high economic growth in a long period with the average at 6.8%
(1968-1996) and 5.3% (2000-2018). During the Asian financial crisis, the country’s

2

The member of Asia-Pacific Trade Agreement (APTA) include Bangladesh, China, India, Lao PDR,
Mongolia, Republic of Korea, and Sri Lanka.
10


GDP growth decreased dramatically to -13% in 1998. Indonesia is also a huge domestic
market and enable to supply employment for a half of population with the labor force of
more than 125 million people for domestic producing. Besides, a huge domestic market
makes Indonesian automotive manufacturers mainly focus on producing complete
automobiles and export mostly its parts and components to the world. Japanese
producers have contributed significantly to the development of Indonesia’s automobiles
as Thailand.
Malaysia performs impressively in GDP growth from 1963 after gaining independence
from Britain. From 1960s to 2018, tts GDP grew by an average of 6.4% per year. The
economic growth peaked in almost 10 years (1988-1997) with the average of 9.3% per
year just before falling in 1998. Nowadays, Malaysia is an upper middle-income country

with GDP per capita at PPP is above 30,000 US$. Their first national car project was
launched in 1983, which produced a successful car brand for domestic market. As
Thailand, exports and imports in automotive industry of Malaysia have increasingly
contributed to the intra-regional trade flows.
The Philippines is a country which participated early in the auto assembly industry since
1950s. As other ASEAN countries, the motor vehicle industry is principally contributed
and dominated by Japanese automobile manufacturers. However, as of figure of motor
vehicle production, from 2006 to 2018, the Philippines accounts only 2% on the whole
total production of ASEAN region, ranked at 5th largest producers. In terms of sales, due
to a small domestic automobile market, more than 2.5 million car units were sold in
more than 10 years accounting for 8%. Since 2007, this country has been increasing its
competitiveness by promoting investment activities inward automobile.
Vietnam’ economy has impressed the intra-regional and extra-regional investors by its
high economic growth and relatively stable politics. In 1989, this country shifted from
a centrally planned to a market. Nowadays, Vietnam is among the most dynamic
emerging countries in Asia in general with the average of annual GDP rate at 6.8% per
year from 1989 to 2018. Also, Vietnam entered into production of automobile from early
1990s. In 1995, the first automotive factories were built in this country, knock-down
kits to produce vehicles, starting with Japanese car brand. However, by 2018 Vietnam
still is one of the most protector for domestic manufacturing by high tariffs and non11


tariff barriers level imposing on automotive exporters including from ASEAN. Vietnam
is currently ranked at 4th largest automotive manufacturers in the region. The strategy of
development automobile is being viewed as learning from the success of Thailand’s
automobile. Typically, the country is expected to fill the gap with ASEAN’s
industrialized countries through emerging a new player – Vinfast since 2018.
Singapore is a small island city-state located between Malaysia and Indonesia. This
country has only about 5.5 million people (2018). Singapore is a member of numerous
international institutions has led to it being classified as the most open economy in the

world. This country’s economy depends mostly on trade activities such as logistic
service. Singapore has achieved success in linking the existing industries to global and
regional automobile industries and regional markets by its advantage of geographical
location. According to UN Comtrade data, the total automotive export and import value
of Singapore is ranked at 3rd in ASEAN region just after Thailand and Indonesia, which
are two largest automotive producers.
Overall, the automobile is a very important industry among manufacturing sectors in
ASEAN that all country would like to have to improve the income level and become an
industrialized country as Thailand, Singapore and Malaysia. In the context of ASEAN,
all ASEAN member states are currently participating in the automobile global value
chain to different degrees. Indonesia and Thailand are regional hubs for the automobile
production bases of global carmakers, while Malaysia occupies a mid-level position.
Due to lower technical capacities and limited domestic markets, the Philippines and Viet
Nam focus on completely knocked-down (CKD) assembly and the production of certain
parts and components. The adjustment in the preferential policies for the automotive
industry in Vietnam and Malaysia are expected to further promote the production and
participation in the global and regional supply chains of the automotive industry.
Singapore with existing advantages of preferential tariff and non-tariff continues to be
the wealthiest and the most competitive consumption market for intra- and extraregional manufacturers. Cambodia and Myanmar are engaged in completely built-up
(CBU) production through CKD kits, while no automobile assemblers are observed in
the Lao PDR.

12


Table 1.4: List of ASEAN countries by GDP (PPP) per capita ranked by the World
Bank (2018)
GDP (PPP) per

Rank

Countries

3

Singapore

101,532

5

Brunei

80,920

43

Malaysia

31,782

69

Thailand

19,051

97

Indonesia

13,080

112

Philippines

8,951

123

Viet Nam

7,448

124

Laos

7,440

126

Myanmar

6,674

138

Cambodia

4,361

capita (in US$)

Source: World Development Indicators database, International Comparison Program
1.2 Definition
Intra-regional trade
Intra-regional trade defined in this study as the average of intra-AFTA exports and
imports, which focuses on trade exchange between ASEAN member countries.
Automobile industry
This study uses the definition of the automobile industry in global value chain (GVC)
data. The automobile industry is broadly defined as an industry of motorized vehicles
consisting of four wheels and powered by internal engines, while narrowly defined as
the car industry or motor vehicle industry (Dowlah, 2018). In general, the automobile
industry is understood as covering a wide range of motor vehicles, including
automobiles (cars), buses, motorcycles, off-road vehicles, trucks. However, this study
focuses on the car industry and its parts and components industry, therefore the narrow
definition is taken into account. The UN Comtrade Database classifies its traded
products according to the Harmonized Commodity Description and Coding Systems, or

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Harmonized System (HS). The automobile industry’s imports and exports are classified
mainly under sub-headers at HS-4 digit level and HS-6 digit level3.
Trade creation and Trade diversion
Trade creation and trade diversion is an economic term as Jacob Viner (1950) firstly
pointed out that related to economic efficiency and welfare-effect definitions. However,
in this study trade creation and trade diversion are different. The study follows the

definitions that were firstly used by Endoh (1999) and applied by Sattayanuwat and
Nantarat (2017) and Wong, C. K. et al. (2017): (1) Trade creation refers to trade more
with non-AFTA member; (2) Trade diversion refers to trade less with non-AFTA
member.
1.3 Research objectives and research questions
In regard to notable achievements in trade liberalization under AFTA and ATIGA that
tariff and non-tariff are eliminated, which have officially been in effect since 1993, there
was a few existing empirical studies conducting research on the impacts of AFTA on
intra-regional trade flows at aggregated data level (Elliott and Ikemoto, 2004; Indira M.
Hapsari and Carlos Mangunsong, 2006; Trung Kien, 2009; Ismail and Wong, C. K.,
2013). Thus, one of disadvantages in using pooled data to investigate the effects of free
trade policy such as AFTA is not enable to reveal the detailed changes in trade volume
of a specific industry. Therefore, it is necessary to apply the gravity model in sector
analysis, especially in the case of the automotive industry in the context of ASEAN
countries’ clear target of becoming industrialized.
Regarding disaggregated level, only Pakasa Bary. (2015) and Wong, C. K. et al. (2017)
used trade data in manufacturing for their analysis. On the other hand, Herath et al.
(2014) implemented a thorough investigation on the ASEAN’s eight agrifood
commodities by applying the gravity model. Meanwhile, Okabe and Urata (2014)
conducted a large-scale examination on almost all ASEAN industries focusing on
investigating the trade creation effect due to tariff reduction . Those studies have focused
on the trade creation and trade diversion effects of AFTA without, however, using an
appropriate estimator as explained later. On the other hand, as mentioned above the

3

See in the Appendix
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ASEAN’s automobile industry has increasingly affirmed its position in the world and
contributed significantly to the intra-regional trade value.
Hence, the purpose of this study is to empirically investigate the effects of ASEAN Free
Trade Area (AFTA) on intra-regional trade flows of automotive industry for the period
of 1993-2018. Moreover, in the context of “openness” of ASEAN countries, the study
also considers the effect of AFTA on non-members. In addition, compared with previous
studies, this study is the only one applying the gravity model and the recent appropriate
techniques to avoid biased estimates in the case of automotive industry in the context of
growing strong regional integrations in ASEAN region.
Based on the main research objective, the principal research questions that the study
attempts to answer are:
1) Whether AFTA has trade creation and trade diversion effects in the case of
automotive industry?
2) Are there any difference in the elasticity of tariff reduction between original
and new AFTA members?
1.4 Hypotheses
Based on the estimated results from existing papers, AFTA has significantly enhanced
the trade flows between members since 1993. Almost the studies showed a trade creation
effect among them. For the case of automotive industry, the study initially believes that
AFTA also has resulted a trade creation effect among AFTA members. With regard to
the increasing trend in trade volumes in ASEAN region, a decreasing export flows
would be occurred from ASEAN automotive exporter to non-ASEAN importer in the
world to take the advantage of the removal of tariff and non-tariff barriers inside the
region. In addition, the significant increasing trend of FDI into ASEAN in recent years
contributed to the export trade value of ASEAN countries and domestic market as well.
The trade surplus recorded in the figure 1.2 suppose that the overall export trade value
is greater than import trade value in a long period of time. That means ASEAN countries
have gradually less depended on import from outside. On the other hand, the level of
economic development and the automotive industry are very different between two
groups of countries – original and new AFTA members – as discussed above (except for

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Brunei), so the impact of tariff reduction on automotive trade flows could be different
in these two groups.
Therefore, the main hypothesis of this study for AFTA dummies as follows:
1) AFTA has resulted trade creation effects among members, trade diversion effect
on export flows with non-ASEAN countries and trade creation effect on import
flows with non-ASEAN countries.
2) The elasticity of tariff elimination on automotive trade flows is significantly
different between original and new AFTA members.
1.5 Method and methodology
In order to see the impacts of free trade policies on the volume and direction of trade
flows between members after the formation of regional trade institutions, a variety of
quantitative methods have used. Among those methods, the gravity model is a
workhorse of international trade analysis (WTO, 2016). Specially, according to
Anderson, James E. (2011) “gravity model has long been one of the most successful
empirical models in economics” and was officially presented in the textbook
“International Economics: Theory and Policy” (Krugman, P. R., Melitz, Jacques and
Obstfeld, Maurice, 2017). By using this model, main determinants directly affect trade
flows as well as the impacts of membership in other multilateral and bilateral trade
agreements can be evaluated by using dummy variables.
Gravity model has firstly been introduced by Tinbergen, J. (1962) under the book named
“Shaping the world economy: Suggestions for an international economic policy” in
trying to understand the trade pattern at the international level. Tinbergen proposed the
“gravity equation”, which is derived from Newton's theory of gravitation with belief that
if planets according to Newton are attracted to each other in proportion to their sizes and
proximity, then countries too. The trade between any two countries also be mutually
attracted in percentage of their economic sizes (proxy as their GDPs) and in proximity

(represented as geographical distance of two countries).

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