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 Background 1.1.1 AFTA overview 1.1.2 ASEAN economics and trade overview 1.1.3 ASEAN automotive industry 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 Average tariff under CEPT Scheme from 1993 to 2015 55 Appendix ASEAN Countries code table 57 Appendix Regional trade agreements – AFTA and AFTA-plus-FTAs 58 Appendix Summary Statistic 59 Appendix The effects of AFTA on export trade flows by PPMLHDFE .61 Appendix 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 Table 1.2: ASEAN-5 motor vehicle production (in units), 2006-2018 Table 1.3: ASEAN-7 motor vehicle sales (in units), 2006-2018 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 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 Figure 1.4: Share of export values of goods by intra-ASEAN and its major trading partners (%), 2000-2017 Figure 1.5: Shares of export and import value of goods by ASEAN country, 2000-2017 (%) 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 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 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 CHAPTER 5: CONCLUSION 5.1 Research summary This thesis analyses the impact of the ASEAN Free Trade Area (AFTA) on the intra-regional trade flows in the case of the automotive industry By the gravity model and panel data approach at disaggregated level for 26 years from 1993 to 2018 between 870 pair countries, the study considered the common important issues of gravity model which lead to biased estimation results in popular models The most important method to control the effects of unobservable variables due to multilateral resistance terms, endogeneity of trade policy and non-discriminatory trade policy is applying high-dimensional fixed effects (HDFE) Meanwhile, Poisson pseudo-maximum likelihood (PPML) model combine with HDFE method performs better estimation results in the case a lot of zeros, heteroskedasticity issue Also, log-linear method in REGHDFE models to avoid the problem of functional misspecification from PPML suggested that REGHDFE with only time effects is appropriate model to examine the trade creation and trade diversion by AFTA dummies The reduction of tariff calculated by the difference between MFN and CEPT Scheme under AFTA was also found to have a significant effect in increasing trade volume among AFTA members Moreover, a comparison of the magnitude of tariff elimination by individual has resulted significantly different effects of tariff between original and new AFTA member Firstly, according to the estimated results of trade creation and trade diversion effects, AFTA has resulted an overall negative trade effect or trade diversion for non-ASEAN countries by 82% on export flows of automotive industry, and positive trade effects or trade creation effect for non-ASEAN member countries is 307% on import flows The table 5.1 shows the overall trade creation and trade diversion effects Table 5.1: Summary of trade creation and trade diversion effects AFTA1 AFTA2 AFTA3 Net effect Export flow 0.669 -0.691** -1.749*** XD+MD= -1.771 Import flow 2.323*** -0.699** -0.220 TC+XD+MD =1.404 Net trade creation (%) Net trade diversion (%) 82 307 Note: Net trade creation effect is 307% {= [exp(1.404) − 1] × 100} Net trade diversion effect is 82% {= [exp(−1.771) − 1] × 100} Denote: *** p