Trade Effects of ASEAN-Plus-China and -Japan Free Trade Agreements: With Focus on Production Stage and Machinery Industry

Abstract

This article examines the trade creation and diversion effects of ASEAN-Plus-China (ACFTA) and -Japan (AJFTA) free trade agreements focusing on production stage and machinery industry by estimating the gravity trade model for the recent two decades between 1993 and 2015. The purpose for focusing on the trade flows by production stages (final goods and intermediate goods) and by industries (machinery and non-machinery) is to uncover the effects of ACFTA and AJFTA on the expanding international production networks in East Asia. The main findings are summarized as follows. First, regarding industry total, the trade creation effects of ACFTA and AJFTA are identified not in intermediate goods but in final goods. This might come from the larger tariff gaps between the Most Favored Nation (MFN) rates and the preferential rate for ASEAN in final goods than in intermediate goods, reflecting the structure of “tariff escalation”. Comparing the effects of ACFTA and AJFTA, larger trade creation effects are found in ACFTA than in AJFTA, probably due to the larger tariff gaps as a result of higher MFN rates in China. As for the machinery industry, the trade creation effects are verifiable regarding ACFTA probably due to the large tariff gaps with the still-existing high MFN in China, while no trade creation effects are found with the implementation of the AJFTA because of no tariff gaps with almost zero MFN rates.