Microsoft Word Cheongaftaeffects doc

Conclusion 

 

This paper has found that AFTA had net trade creation effects at a disaggregated level. 

The positive effects of trade creation were felt mainly in the industries covered by the 

HS8 1-digit category. Industries in this category are known to have complex production 

networks and a high level of product differentiation, both vertical and horizontal. As 

such, AFTA appears to have intensified production fragmentation and intra-industry 

trade. The paper’s main finding has one key policy implication:  ASEAN should proceed 

on its path towards an ASEAN Free Trade Area by liberalizing trade in sectors with a 

higher propensity to fragment production as this tends to create trade and, thus, have a 

more positive welfare effect. The trade-diversion effects may be sufficiently mitigated by 

production fragmentation to make the preferential trading arrangement a good second-

best solution. So, if a PTA is the only politically-feasible alternative, policy makers may 

make it a second-best solution by prioritizing sectors that are part of production chains 

However, this paper does not imply that ASEAN or other regional groupings should 

continue to pursue PTAs at the expense of multilateral liberalization as there is still a risk 

that these PTAs induce trade diversion.  

 

 

 

 

 

 

 

 

 

 

 

 

 

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