A panel data analysis of trade creation and trade diversion effects: The case of ASEAN-China Free Trade Area

- Theoretically justified gravity model of trade to examine the trade effects of ACFTA.
- Panel data for 31 countries over the period 1995-2010 using aggregate and disaggregated exports.
- Distinguising between effects on trade in agricultural products and manufactured goods.
- ACFTA leads to substantial trade creation in both agricultural and manufactured products.

This study uses a theoretically justified gravity model of trade to examine the impact of the ASEAN-China Free Trade Agreement (ACFTA) on exports, focusing on trade creation and diversion effects. The model is tested on a sample of 31 countries over the period dating from 1995 to 2010 using aggregated and disaggregated export data for agricultural and manufactured goods and within manufactures for chemical products, as well as for machinery and transport equipment. In order to obtain unbiased estimates, multilateral resistance terms are included as regressors and the endogeneity bias of the FTA variables is addressed by controlling for the unobserved specific heterogeneity that is specific to each trade flow. A multinomial PML is also applied to solve the zero trade issue and the presence of heteroskedasticity. The results indicate that ACFTA leads to substantial and significant trade creation. Using disaggregated data, the significant and positive relationship between exports and ACFTA is confirmed in the case of both agricultural and manufactured goods, as well as in the case of the most important manufacturing industries, namely, chemical products and machinery and transport equipment.