Augmented Gravity Model of International Trade: An Empirical Application to ASEAN Intra- and Extra-Regional Trade of Textiles and Clothing

Abstract

This paper empirically tests an augmented gravity model of international trade, using four digits disaggregated data under the Harmonized System, in order to investigate the impact of AFTA to the volume and direction of intra and extra ASEAN trade of textiles and clothing. Several model specifications were tested using Poisson Pseudo-Maximum Likelihood (PPML) with Fixed Effects. The results show that income and income-difference between trading countries have positive effect on trade; population can either increase or decrease trade; and trade costs lessen international trade. Also, countries with common socio, cultural, and historical features trade more with each other. In textiles trade, AFTA is trade creating on both intra- and extra-ASEAN trade. While in the trade of clothing, AFTA is trade diverting.