The growing importance of trade barriers elimination in the era of globalisation has pushed ASEAN countries to establish a regional FTA. Consequentially, AFTA was formed in 1992 in order to eliminate trade barriers in the region.
Since ASEAN economies are amongst the emerging economies in the developing world, it is necessary to investigate the impact of AFTA East Asian trade flows. Meanwhile, the revival of the gravity equation in the recent years has turned it into a better tool in analysing regional trade flows. Therefore, the main purpose of this paper is to analyse the determinants of trade in ASEAN 6 economies and the significance of AFTA in the dynamic development of East Asian regional trade.
It augments the traditional gravity equation with new variables, technological distance and income gap, and uses the fixed effects and random effects models for the estimation purpose. The objective of this estimation is to seek the determinants of trade in the ASEAN 6 economies. Moreover, it also investigates the intra-regional and extra-regional impacts of AFTA.
The contribution of this paper is three-folds. First, the empirical methodology used in this paper corrects a major shortcoming that exists in the literature by introducing fixed effects and random effects models. Second, it finds that GDP, population, difference in per capita income are amongst the main determinants of trade flows in ASEAN 6 economies. Third, it shows the long-run impact of AFTA on East Asian economies is net welfare gain.