Technology and Investment, 2013, 4, 10-15
doi:10.4236/ti.2013. 43B002 Published Online August 2013 (http://www.scirp.org/journal/ti)
Comparing the Eff ects of CAF TA on Internal Trade of
China and ASEAN Countries
Tavi Supriana
Department of Agribusiness, Faculty of Agriculture, University of Sumatera Utara, Medan, Indonesia
Received April, 2013
ABSTRACT
This paper compares the effects of CAFTA on internal trade of China and ASEAN Countries. ASEAN countries are
analyzed individually, by developing two gravity models and using the panel data of 7 samples countries and areas from
2002 to 2010. The empirical result shows that GDP, distance, exchange rate, population and policy framework of
CAFTA are trade determinant factors for China and ASEAN countries. The effects of CAFTA implementation in this
study can be divided in four categories. Firstly, positive and significant effect. Singapore and Malaysia are gaining this
effect. Secondly, positive effect but not significant, China and Thailand are gaining this effect. Thirdly, negative but not
significant. Indonesia is having negative but not significant effect. Fourthly, negative and significant. Philippines is
having this effect. Negative effect is happened to Indonesia and Philippines, not significant for Indonesia, but signifi-
cant for Philippines. These two countries are getting less compare to other ASEAN countries. The rank of ASEAN
countries that receive the greatest effect of CAFTA to the smallest one, that is: Singapore, Malaysia, Thailand, Indone-
sia and the last Philippines and this result is similar with the rank of countries Total Factor Productivity (TFP) growth
rate.
Keywords: CAFTA; Internal Trade; Determinant Factors; Positive Effect; Negative Effect
1. Introduction
China ASEAN Free Trade Area (CAFTA) is the world’s
third largest regional free trade area, after European Union
(EU) and North America Free Trade Area (NAFTA).
CAFTA has a population of 1.9 Billion, covers a total land
area of 14 million km2, with US$6000 Billion of GDP and
trade volume of US$ 4500 Billion, including ASEAN and
China. The Agreement Framework on China-ASEAN
Comprehensive Economic Cooperation (CEC) was signed
in 2002 and will be implemented gradually over a period
of 10 years. This means that the former members of
ASEAN countries, Indonesia, Malaysia, Singapore,
Thailand, Philippines and Brunei Darussalam began to
implement CAFTA in full on January 1, 2010. ASEAN
countries which joined later, namely Vietnam, Laos,
Cambodia and Myanmar, will implement this agreement
in 2015.
The implementation of CAFTA has actually started in
2004. The participants agreed to implement an Early
Harvest Program (EHP) with a package of agricultural
and industrial products. The EHP committed the partici-
pating countries to the elimination of tariffs on agricul-
tural and industrial products between 2004 and 2006. By
the 1st January 2004, the tariff on approximately 600 kinds
of products (mainly agricultural produce) shall be lowered.
The products include live animals, meat and edible meat
offal, fish, dairy products, other animal products, live
trees, edible vegetable, edible fruits, and nuts. The tariff
reduction was between 0 to 10 per cent, and by 1st January
2006, should have been under zero tariffs.
CAFTA was expected to increase trade flows, market
access services, investment rules and regulations, and
improve aspects of economic cooperation to promote
economic relations in order to improve welfare of the
members. According to the statistics of China’s Ministry
of Commerce, since the implementation of CAFTA,
China has risen its position from the sixth to the third
largest trade partner of ASEAN, and ASEAN has been the
fourth largest trade partner of China for years. Bilateral
trade volume increased from US$ 78.2 Billion in 2003 to
US$231.1 Billion in 2008.
However the impact of the CAFTA implementation is
not the same between countries. CAFTA presents differ-
ent opportunities and challenges to different ASEAN
members due to the gaps of level of development. Another
determinant factor is differentiation in cost of production
between ASEAN members and between ASEAN and
China, relatively. China’s relatively lower cost of pro-
duction compared to ASEAN has decreased the export

T. SUPRIANA 11
competitiveness of ASEAN. Differentiation of cost of
production between ASEAN countries even exist. Beside
differentiation in cost of production, there is homogeneity
in production and exports in the region. China and
ASEAN has similar sectors of commodities production
and exports. In this condition, theoretically only countries
which have the lowest of cost production will gain in
trading.
The magnitude of the trade increases as a result of this
agreement has been reviewed by several researchers.
Various studies are generally done to the economy of
China. [1] analyzed the effect of CAFTA implementation
on China trade. This paper focused on both China’s bi-
lateral trade with its trading partner along with its effect,
both creation and diversion effects. The result showed that
the diversion effect is greater than the creation effect.
[2] investigated the implementation of CAFTA on In-
donesia trade and found that the diversion and creation
effects on Indonesia are not significant. She also found
that the diversion effect, which leads to a decrease in
society’s wealth, is greater than that of the creation effect.
[3] explored the impact of CAFTA on ASEAN’s man-
ufacturing industry and finds that there are members of
ASEAN which receive a positive impact and there are will
lose. China has a large market, lower cost of labour and
other types of cost production, a reliable stock of human
capital and attractive investment incentives. The threat is
even greater since most of the products produced and
exported by China are also produced and exported by
ASEAN. This has resulted in a huge competition since the
two regions are substituted and complementary goods.
Therefore both regions have to compete each other.
There are several techniques could be used to analyze
the effects of free trade area implementation. The first
technique is CGE (Computable General Equilibrium),
such as Global Trade Analysis Project (GTAP). [4]
analyze impacts of China-ASEAN free trade area using
GTAP model, upgraded database to 2010 with dynamic
recursive approach, designed baseline projection and
scenario analysis to simulate the long term impacts of
China-ASEAN free trade on trade, import and export
price, GDP, and resident’s income. Compared with
baseline projection, implementation of CAFTA would
have significant impacts on trade, production, GDP and
resident’s income to CAFTA members, bilateral trading
partners and other countries. As the distortion of tariff on
trade was declined, import prices of products with tariff
reduction could decrease in China and most ASEAN
members. CAFTA could provide trade internally in the
free trade area, and adjust the domestic production
structure of the members. Under the policy framework of
CAFTA, China could give priority to increase products
with comparative advantages. ASEAN members could
shift resources from agricultural sector to industrial sector.
Another technique that usually uses to analyze trade
creation and diversion is Balassian model. [5] used
Balassian model to measure the trade creation and trade
diversion of China-ASEAN Free trade area on china’s
import. OLS and Chow test for structural change across
time are employed. The result is that there is evidence of
trade creation of CAFTA on China’s import and no
evidence of trade diversion on China’s import from
extra-region.
[6] analyzed impact of the China–ASEAN Free Trade
Area (CAFTA) on China’s international agricultural trade
and its regional agricultural development, using the
Global Trade Analysis Project model and the China
Agricultural Decision Support System. The analysis
showed that: 1) CAFTA will improve resource allocation
efficiencies for both China and ASEAN and will promote
bilateral agricultural trade and, hence, will have positive
effects on the economic development of both sides; 2)
CAFTA will accelerate China’s export of the agricultural
commodities in which it has comparative advantages,
such as vegetables, wheat and horticultural products, but
at the same time bring about a large increase in imports of
commodities such as vegetable oil and sugar; and 3)
CAFTA will have significantly varying impacts on
China’s regional agricultural development because of
large differences in the agricultural production structure in
each region.
[7] analyzed the impact of CAFTA implementation on
Indonesia’s export by using the GTAP model; a Multi
Regional Computable General Equilibrium Model. The
results shows that CAFTA provides opportunities for
increased export from Indonesia; Indonesia obtained a net
trade creation of international trade amounted to 2% and
total exports growth increased by 1.8. However, the
export performance of Indonesia in the period showed a
decrease of competitiveness, as shown by the decline in
share of Indonesian export commodities which are highly
competitive and high intra-industry linkage. This paper
also found that the commodity structure of China and the
non compeeting behavior of ASEAN countries including
Indonesia (tends to complement), China is relatively
easier to penetrate ASEAN market.
All of related studies treated ASEAN countries as a
group, and compared the effect to China. This paper will
compare the effects of the CAFTA on internal trade of
ASEAN countries and China, and ASEAN countries
would be analyzed individually. Beside the effects of
CAFTA this paper also analyzes the determinants of trade
for China and ASEAN.
2. Theoretical Analysis and Empirical
Methodology
The model used in this study is gravity model. Gravity

T. SUPRIANA 12
model employed because beside to analyze the effect of
CAFTA, the model can also use to study the trade
determination factors. The model is based on Newton’s
law of gravitation, which states that the force of gravity
between two objects is affected by the mass and the
distance between that two objects. In the context of
international trade, this model suggests that the intensity
of trade between countries will also be affected by the
mass and the distance between countries, which mass is
described by the national income or population.
Gravity model is used for several reasons. First, the
gravity model is supported by various trade theories,
including the classical trade theories and the new trade
theories. Second, the gravity model can analyze the
determination variables of trade, both macroeconomics
variables such as aggregate income, per capita income,
exchange rates, transportation costs, and social variables,
such as population, political system, as well as cultural
variables, such as the common language. Third, gravity
models can be used to analyze the impact of a trade poli-
cies such as, cooperation policies (bilateral, multilateral,
regional, financial, border), institutional policies, and
other trade policies.
One form of the development of gravity models is to
use the power of gravity between the two particles is
represented by the value of trade or exports from country i
to country j, while GDP of both countries to represent the
mass of both particles and distance between the two
particles is represented by the great circle distance
calculation. According to Chen and Tu (2005), the basic
version of gravity model takes the following form:
Ln Xij = β0 + β1 ln(YiYj) + β2 ln Dij + µij` (1)
where Xij is the value of exports from country i to country
j, Yi and Yj are the GDPs of country i and j, Dij is the
distance between country i and country j, β0 is a constant,
β1 and β2 are the elasticities and µij is the error term.
This study aims to examine the effect of the
implementation of CAFTA on the magnitude of the trade
flow in ASEAN countries and China for the period
2002-2010. The selected countries of the ASEAN are
Indonesia, Malaysia, Philippines, Singapore, and
Thailand. Brunei Darussalam has been excluded in this
analysis because the lack of the data. These countries were
chosen because it is the first ASEAN countries that apply
the agreement in early 2004, by removing all tariffs for
agricultural commodities are traded. ASEAN members
that joint later, namely Vietnam, Laos, Cambodia, and
Myanmar, haven’t implemented this agreement until 2015.
The model used is static gravity model modified from the
study [1].
In this case, a dummy variable will be used to measure
the impact of CAFTA on the trade flow (export and
imports). This paper uses year 2004 as the starting point,
since the EHP agreement was first implemented in 2004.
Data pre 2004 are used to describe the flows of trade pre
CAFTA implementation. The model used to analyze the
impact of CAFTA on export of ASEAN countries and
China is as follows:


012
34 5
lnX ln ln
ln ln_
t
cj tt
cj cj
tt
cjjcj cj
GDP GDPDIST
ERPOPIN CAFTA
 



   
t
where: is volume of export between country c and country
j t
c
GDP GDP
DIST j : is distance between country c and country j
: is GDP between country c and country j
cj
cj : is an exchange rate between country c and
country j
ER
j
POP
_
: is population of country j
t
cj
I
NCAFTA : is dummy variable, 0 for year’s pre
CAFTA, 1 otherwise
β0: is constant
β1, β2, …, β5: are elasticities
t
cj

: is error term
The model used to analyze the impact of CAFTA on
import of ASEAN countries and China is as follows:


012
34 5
lnIMP ln ln
ln ln_
t
cj tt
cj cj
tt
cjjcj cj
GDP GDPDIST
ERPOPIN CAFTA
 



  
t
where: is volume of import between country c and country
j t
c
GDP GDP
DIST j : is distance between country c and country j
: is GDP between country c and country j
cj
cj : is an exchange rate between country c and
country j
ER
j
POP : is population of country j
_t
cj
I
NCAFTA : is dummy variable, 0 for year’s pre
CAFTA, 1 otherwise.
β0: is constant
β1, β2, …, β5: are elasticities
: is error term
Gross Domestic Product (GDP) and population
represent the size of a country’s economy. The larger the
GDP, the greater the amount of goods and services can be
traded, so that the expected value of β1 is positive. The
distance across the capital cities is used to measure
transportation costs, time costs, synchronization fees, and
transaction costs. The greater the distance between
countries, the greater the transportation costs and the less
the flow of trade will be, so that value of β2 is negative.
Exchange rate is one of the factors which may affect trade,
the more expensive the currency of a country relatively,
the more expensive the goods and services originating
from the country. This increased prices will reduce the
amount of demand for goods and services traded, so that
the expect value of β3 is negative. Population represents
the market size of a country. Population effect on trade is
positive. Increase in population led to an increase in

T. SUPRIANA 13
demand for goods and services for both the production
and consumption activities, so the expected value for β4 is
positive.
Trade data of exports and imports across Indonesia,
China and other ASEAN members are obtained from the
United Nations Commodity Trade Statistics Database and
from the Publication of Foreign Trade Statistics, In-
donesia Central Bureau of Statistics. The GDP and
population data are obtained from the World Bank. Data
on exchange rates are from Bank Indonesia, Bank Negara
Malaysia, Bangko Sentral ng Pilipinas, Monetary
Authority of Singapore, Bank of Thailand, and the data on
distance across the two countries data obtained from
www.indo.com. The sample data are from 2002 to 2010.
3. Analysis Results and Discu s sion
3.1. Comparing Impact of CAFTA on Exports
between Countries
The results of the effects of CAFTA on exports model are
shown in Table 1. The empirical results are almost as
expected. The result shows, except for Thailand, GDP
have significant effect on regional trade. The expected
value of β1 is positive. All countries, include Thailand
have positive elasticity. The larger the GDP, the greater
the amount of goods and services can be traded.
Distance has significant effect for all countries. The
expected value of β2 is negative. Results for Indonesia,
Thailand, Malaysia and Singapore show the appropriate
sign as expected. Only Philippines and China have
positive elasticity. Among the six ASEAN countries, the
farthest distance between China is to Indonesia, follow by
Singapore and Malaysia. These three countries are the
largest countries of China’s export destination. China’s
relatively lower cost of production compared to ASEAN,
decreases the export competitiveness of ASEAN, so even
the distance is relatively far, China’s export is still
increase. This explains why China has positive distance
elasticity.
In the other hand, Philippines has the relatively same
distance to China and all the other ASEAN countries, with
range of 1,300 to 2,800 miles. Among these countries, the
farthest distance is to China. China is the third largest
country’s export destination for the Philippines in the
Asian region. Philippines has ten products that export to
China which has a comparative advantage, such as fruits
and edible nuts, animal fats and oils and derivative
products. Four of the ten sectors are food items (primary
product) while the other six were processed goods which
require high technology (medium and high-tech manu-
facture product). The goods that imported by China from
Philippines are industrial intermediate inputs, such as
electronic equipment, textiles, and copper. All of these
products are comparative advantage products for Philip-
pines. This explains why Philippines has positive elasticity.
Exchange rate have significant effect for China,
Indonesia, Malaysia and Philippines but not significant for
Thailand and Singapore. Expected value of β3 is negative.
China and Indonesia have negative and significant
elasticity. Thailand still has negative elasticity, but
Malaysia, Philippines and Singapore have a positive
elasticity. The elasticity was significant for Malaysia and
Philippines, but not significant for Singapore.
Population has significant effect for all countries except
Philippines. The expected for β4 is positive. Except for
Philippines, all countries have appropriate sign as
expected.
The fffect of CAFTA implementation on exports in this
study can be divided in four categories. Firstly, positive
and significant effect. Singapore and Malaysia are two
countries from ASEAN gaining this effect. Positive effect
for Singapore is most significant, and still significant for
Malaysia. This two countries are gaining more benefit
compare from China and other ASEAN countries.
Table 1. Estimated results of impact of CAFTA on exports between China and ASEAN countr ies.
China Indonesia Thailand Malaysia Philippines Singapore
(Constant) −23,426***
(−3,744)
18,405***
(8,287)
8,243**
(2,339)
14,941***
(42,180)
−87,511***
(−3,742)
−.854
(−1,197)
tt
cj
GDP GDP 1,285***
(3,066)
1,219***
(4,713
,240
(0,849)
,421***
(8,157)
1,829**
(2,604)
.211*
(1,689)
cj
D
IST 2,375***
(3,851)
−4,504***
(−14,277)
−,209***
(−3,296)
−1,511***
(−36,895)
11,106***
(3,667)
−.927***
(−11,296)
cj
E
R −0,326***
(−5,992)
−,306**
(−2,496)
−1,583
(−0,918)
,193***
(17,904)
,339*
(1,951)
.017
(0,611)
j
P
OP 0,767***
(10,629)
1,020***
(14,164)
,438***
(5,058)
,503***
(22,434)
−,705
(−1,507)
.477***
(9,457)
_t
cj
I
NCAFTA
0,144
(0,308)
−,088
(−,384)
,334
(0,710)
,281***
(3,826)
−5,529***
(−5,607)
.324*
(1,908)
R Square 0,750 0,928 0,663 0,980 0,577 0,898
N
ote: Number in parentheses are t statistics. *** Denotes significant at 1%, **at 5%, and *at 10% level.

T. SUPRIANA 14
Secondly, positive effect but not significant, China and
Thailand are two countries gaining this effect. Thirdly,
negative but not significant. Indonesia is having negative
but not significant effect. Fourthly, negative and sig-
nificant. Philippines is having this effect. Negative effect
is happened to Indonesia and Philippines, not significant
for Indonesia, but significant for Philippines. These two
countries are getting less compare to other ASEAN
countries, after CAFTA implementation.
3.2. Comparing Impact of CAFTA on Imports
between China and ASEAN Countries
The empirical results analysis on imports model shown in
Table 2. GDP, distance, exchange rate, and population are
determinant factors for regional trade, even though the
elasticities are different between countries. The most
important result is, the effect of CAFTA on exports
happened in the same direction with the effect on imports.
The effect also can be divided in to four categories.
Positive and significant effect, positive effect but not
significant, negative but not significant effect and,
negative significant effect. Similar with the previous
result, Singapore and Malaysia are two countries that have
positive and significant elasticities. China and Thailand
have positive effect but not significant. Indonesia and
Philippines, have negative effect, not significant for
Indonesia, but significant for Phi- lippines.
Overall analysis result show, after implemented, we can
rank the ASEAN countries that receive the greatest effects
of CAFTA to the smallest one, that is: Singapore, Ma-
laysia, Thailand, Indonesia and the last Philippines. The
same result is shown on the ASEAN Trade Aggregates
and ASEAN Trade Dependency. Table 3. shows that
from all the trade indicators (total trade to ASEAN and
China, total import to ASEAN and China, and total export
to ASEAN and China), Singapore is in the first place
follow by Malaysia, Thailand, Indonesia and Philippines).
The result shows, in accordance with the theory that the
differentiation in cost of production and similarity sectors
of commodities production and exports are the determi-
nant factors in trading. In this condition, theoretically only
countries which have the lowest of cost production will
gain. The rank of ASEAN countries in trading is similar
with the rank of countries Total Factor Productivity (TFP)
growth rate. The result of [8] for the period 1978-1996
show a very impressive growth rate of TFP in Singapore
(2.2 percent), Malaysia (2.0 percent), Thailand (2.0 per-
cent), a relatively strong rate for Indonesia (1.2 percent),
and a negative rate for the Philippines (−0.8 percent). The
proportion of output growth per person attributable to FTP
growth is not systematically different in the ASEAN
economies.
China still has a greater effect on exports compared to
imports, but both effects have positive sign. This result
shown as expected. Since early harvest program, China
and ASEAN bilateral trade volume reached average in-
crease rate of 289.26%, in the same year, increase of
volume exports of China to the World about 260.03%. To
boost China’s exports to the world, China needs greater
imports, including from ASEAN countries.
4. Conclusions
GDP, distance, exchange rate, population and CAFTA are
determinant factors for China and ASEAN countries. The
effects of CAFTA implementation in this study can be
divided in four categories. Firstly, positive and significant
effect. Singapore and Malaysia are gaining this effect. The
positive effect for Singapore is most significant, and still
significant for Malaysia. This two countries gain more
benefit compare from China and other ASEAN countries.
Secondly, positive effect but not significant, China and
Thailand are gaining this effect. Thirdly, negative but not
significant. Indonesia is having negative but not signifi-
cant effect. Fourthly, negative and significant. Philippines
is having this effect. The negative effect is happened to
Indonesia and Philippines, it is not significant for Indo-
nesia, but significant for Philippines. These two countries
are getting less compare to other ASEAN countries, after
Table 2. Estimated results of impact of CAFTA on imports between China and ASEAN countries.
China Indonesia Thailand Malaysia Philippines Singapore
(Constant) −9,598*
(−1,898)
15,301***
(4,354)
3.644
(1,084)
19.267***
(19,826)
−121.676***
(−4,182)
.092
(0,094)
tt
cj
GDP GDP 0,740**
(2,186)
2,170***
(5,304)
.583**
(2,163)
−.076
(−0,538)
1.739*
(1,990)
−.105
(−0,616)
cj
D
IST 1,309*
(2,626)
−3,200***
(−6,411)
−.221***
(−3,646)
−2.092***
(−18,614)
15.686***
(4,1634)
−.969***
(−8,622)
cj
ER −0,290***
(−6,609)
−,258
(−1,331)
.740
(0,450)
.255***
(8,654)
.203
(0,941)
.124***
(3,240)
j
P
OP 0,679***
(11,641)
,250**
(2,193)
.258***
(3,133)
1.117***
(18,170)
−.989*
(−1,699)
.784***
(11,355)
_t
cj
I
NCAFTA
0,188
(0,497)
−,043
(−,118)
.246
(0,549)
.825***
(4,087)
−5.020***
(−4,092)
.392*
(1,683)
R Square 0,768 0,736 0,592 0,945 0,534 0,885
Note: Number in parentheses are t statistics. *** Denotes significant at 1%, **at 5%, and *at 10% level.

T. SUPRIANA 15
Table 3. ASEAN trade aggregates and ASEAN trade dependency.
Singapore Malaysia Thailand Indonesia Philippines
ASEAN Trade Aggregates
Total trade (US$ million) 699.273 363.534 385.041 293.442 109.660
Share to GDP (%) 313.600 152.200 120.800 41.400 57.900
Export (US$ million) 371.194 198.801 195.312 157.779 51.432
Import (US$ million) 328.079 164.733 189.728 135.663 58.229
Trade balance (US$ million) 43.115 34.067 5.584 22.116 −6.797
Trade balance (% share of exports) 11.600 17.100 2.900 14.000 −13.200
ASEAN Trade Dependency
Exports
Exports to China (billion US$) 36.400 25.000 21.500 15.700 5.700
Exports to Intra−ASEAN (billion US$) 111.300 50.500 44.300 33.300 11.600
Share exports to China to ASEAN total exports (%) 32.250 22.170 19.000 13.890 5.050
Share exports to Intra−ASEAN to ASEAN total exports (%)41.520 18.840 16.540 12.440 4.310
Imports to China (billion US$) 33.700 20.700 20.000 16.900 4.900
Imports to Intra−ASEAN (billion US$) 78.700 44.800 42.300 47.100 16.300
Share imports to China to ASEAN total imports (%) 26.340 17.370 16.780 14.240 4.150
Share imports to Intra−ASEAN to ASEAN total imports (%)31.260 17.780 16.790 18.710 6.460
Total trade to China (billion US$) 70.200 45.700 41.400 32.600 10.600
Total trade to Intra−ASEAN (billion US$) 190.000 95.300 86.600 80.500 27.800
Share total trade to China to ASEAN total trade (%) 30.250 19.700 17.860 14.070 4.580
Share total trade to Intra−ASEAN to ASEAN total trade (%)36.550 18.330 16.660 15.480 5.350
Source: ASEAN Community in Figures 2011.
CAFTA implementation. The rank of ASEAN countries
that receive the greatest effect of CAFTA to the smallest
one, that is: Singapore, Malaysia, Thailand, Indonesia and
the last Philippines and this result is similar with the rank
of countries Total Factor Productivity (TFP) growth rate.
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