Does afta create More Trade for Thailand? An Investigation of Some Key Trade Indicators

Keywords: Thailand, free trade agreements, ASEAN, AFTA, trade creation, 

trade diversion 

Piriya Pholphirul, Ph.D., Graduate School of Development Economics, 

National Institute of Development Administration, Bangkok, Thailand. 

E-mail:
 

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1 Introduction 

Having the fourth-highest GDP per capita in ASEAN (USD3,740 of the 

constant price in 2007), Thailand has maintained its commitment to free 

trade liberalization by believing that free trade agreements can be an effec-

tive catalyst promoting long-term economic growth. The country’s foreign 

policies are therefore focused on strengthening regional links with its 

immediate neighbors and deepening ties through free trade agreements in 

the wider Asian region, such as ASEAN, BIMSTEC, and the further exten-

sion of the ASEAN Free Trade Area (known simply as “ASEAN+”).  

The ASEAN Free Trade Area (AFTA) was established in 1992 by six 

ASEAN members: Indonesia, Malaysia, the Philippines, Singapore, Brunei, 

and Thailand. It aims to be the most influential preferential trade arrange-

ment (PTA) concerning the regional trade structure. The agreement recently 

became active (in January 2010) to allow zero tariffs. Even though AFTA’s 

main objectives are to develop competitive industries within ASEAN by 

promoting intra-ASEAN trade, there are also other factors that have 

contributed to the formation of the Free Trade Area. One of these is the 

realization of the need to capture export markets in the face of increasing 

PTAs in other parts of the world. Another factor is the emergence of China 

and other emerging economies, such as India and South Korea, as competi-

tors for foreign direct investment. Besides making the AFTA agreement, 

ASEAN’s members have also been active in seeking additional free trade 

agreements with other countries

1

 both as a group and individually. 

The mere fact that free trade agreements between countries increase 

the flow of trade between them does not necessarily mean that it will en-

hance the welfare of the trading partners, however. From the perspective of 

a traditional theory of international trade, the increase in trade volume is 

achieved at the expense of domestically produced goods in a process known 

as “trade creation,” but this happens at the expense of imports from other 

countries outside the FTA bloc, which is known as “trade diversion.” In 

terms of Viner’s classic analysis (1950), trade creation (or trade enhancement) 

improves economic efficiency and welfare status because the partner coun-

tries in the FTA bloc turn out to be lower-cost producers of the product 

compared with producers at home, with the goods being imported more as 

a result of trade liberalization. Trade diversion (or trade inhibition), however, 

1  

Nevertheless, compared to other regional trade agreements around the world, 

AFTA is claimed to reduce trade without changing intra-trade within the region. 

The literature on the matter includes a host of voices criticizing AFTA’s failures. 

One of the main reasons for this is that AFTA is reportedly driven by bureaucrats 

rather than the market (see Low 2004, for example). 

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Does AFTA Create More Trade for Thailand? 

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is detrimental not only to the welfare of the world, but to the importing 

country as well because the increased imports may not actually be the best 

choice due to price discrimination from the countries that are in the bloc.  

Nevertheless, since trade liberalization has both trade-creation and 

trade-diversion effects, a comparison between these effects can be used to 

identify possibly ambiguous effects on the economic welfare of the Thai 

people that might make them reluctant to join the free trade agreement. The 

impact on efficiency and welfare enhancement depends on which effect 

dominates. In practice, however, it is rather difficult to accurately measure 

the magnitude of effects caused by trade creation and trade diversion. What 

is more important, and, indeed, necessary for an evaluation, is the sectoral 

pattern of trade between the prospective partners making the free trade 

agreement.  

A number of scholars have used the gravity model to quantify the trade 

creation/ diversion effect in major PTAs.

2

 For AFTA, Hapsari and Man-

gunsong (2006) investigated the determinants of trade flows of AFTA mem-

bers, including the impact of AFTA’s creation on the intra-regional and 

extra-regional trade flow by comparing trade patterns of AFTA countries 

with AFTA members and non-members. They found that the reduction of 

tariffs under the AFTA scheme had a significant effect in increasing the 

bilateral exports of ASEAN members. Similarly, Siah et al. (2009) adopted a 

gravity model to examine whether ASEAN integration promoted intra-

ASEAN trade between Indonesia, Malaysia, the Philippines, Singapore, and 

Thailand. The results indicate that the effects of ASEAN are mixed and 

inconclusive. Trade creation and/or trade diversion can exist, depending on 

the specific country. The results show that ASEAN countries may not, as a 

whole, benefit from the formation of AFTA. Moreover, Sudsawasd and 

Mongsawad (2007) showed that the ASEAN-5 would benefit more if they 

fully liberalized trade among themselves. This is partly due to less trade 

diversion, better resource allocation, and an improvement in the terms-of-

trade effect.  

The studies conducted by Ramasamy (1995) are able to fill in some of 

the gaps in Sudsawasd and Mongsawad’s research by estimating the negative 

effect of trade diversion among ASEAN member countries. They also reveal 

that trade creation is greater than trade diversion for Indonesia, the Philip-

pines, and Thailand, while the reverse is true for Malaysia and Singapore due 

to misallocated resources.

3

 Frankel (1993) and Elliott and Ikemoto (2004), 

2  

Take Rose (2002) for WTO members and Krueger (1999) for NAFTA members, 

for example. 

3  

The Philippines has experienced the highest trade-diversion rate of all the ASEAN 

nations, which is estimated at around 10 per cent of its GDP in 1990. Singapore 

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Piriya Pholphirul

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who also used a gravity model to detect and quantify a possible gain in intra-

regional trade among ASEAN countries, found that trade volumes were not 

significantly affected in the years immediately following the signing of the 

AFTA agreement. The degree of trade creation should have been even 

smaller from 1988 to 1992, but increased a little after 1993 when the AFTA 

agreement was signed.  

A number of the studies mentioned above took a gravity-model or 

econometrics approach as their central methodology in quantifying and 

comparing the trade-creation and trade-diversion effects of AFTA. Using 

this type of methodology alone is bound to lead to certain technical prob-

lems, however, as it only measures the short-term impacts. In the long term, 

there is a possibility that the positive effects of trade integration due to 

agreements like AFTA will result in a positive gain for all the member 

countries due to greater competition, economies of scale, more product 

variety, and economies of scope from intra-industry trade, which will out-

weigh the short-term effects.  

This paper therefore aims at making simple ex-ante estimations of the 

effects of trade liberalization on Thailand and at determining the possible 

degree of its trade creation due to AFTA. It also analyzes the potential gains 

to Thailand as a member of AFTA. This may be determined by examining 

the similarity of its trade patterns with other ASEAN countries. The 

comparison of trade patterns between nations can be analyzed by using 

three fundamental trade indicators, namely the Export Similarity Index (ESI), 

the Intra-Industry Trade (IIT) index, and Revealed Comparative Advantage 

(RCA) rank correlation. The differences in trade patterns reflect the degree 

of competition between the countries and explain whether or not trade 

creation and trade diversion should exist. 

2 

Thailand’s Trading with ASEAN and Other 

Trading Blocs

A permanent member of ASEAN since it was formed in 1992, Thailand is 

one of the ASEAN-6, six nations that have all made significant progress in 

lowering intra-regional tariffs through the Common Effective Preferential 

Tariff (CEPT) Scheme for AFTA. There is no doubt that intra-ASEAN 

trade has been increasing among ASEAN’s economies. The United States, 

Japan, and the European Union are ASEAN’s main trading

 

partners. In 

addition, trade with China has been growing very quickly in recent years. 

follows with 8 per cent, Thailand with 6 per cent, Malaysia with 5 per cent, while in 

Indonesia’s case, just 3 per cent of its trade was diverted. 

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Even though intra-regional trade among ASEAN members has continually 

increased over time from 17.4 per cent in 1980 to 22.8 per cent in 2002 and 

24.9 per cent in 2006, trade among ASEAN’s members is relatively low 

compared to other trade blocs around the world, such as NAFTA, FTAA,

4

 

or the EU-25, all of which involve more than 50 per cent intra-group trade.

5

 

Thailand’s trading with other ASEAN members fell to as little as 20 per cent 

in 2006 compared to extra-ASEAN countries. 

Intra-ASEAN trade has been 

increasing, but trade with the rest of the world continues to be much more 

important for Thailand and the other ASEAN countries.

6

 As just mentioned, 

the United States of America, Japan, and the European Union are ASEAN’s 

main trading partners. Trade with China has also been growing very quickly 

in recent years, however. Singapore is the most active trader in the ASEAN 

bloc, despite its small size. If one compares 

AFTA with other trade blocs 

around the world, like NAFTA, FTAA, and the EU, the intra-regional trade 

of these groups is found to be continuously increasing as well.  

However, the intra-regional trade of AFTA’s members is still con-

siderably less than for other Preferential Trade Agreements; it was just 17.4 

per cent in 1980 and had only increased to 22.8 per cent by 2002. Intra-

group trade in NAFTA, on the other hand, accounted for 56 per cent in 

2002, which was a large increase compared with the figure in 1980 (33.6 per 

cent). In the same year, trading within FTAA was also at a level of 60.7 per 

cent, increasing from 43.4 per cent in 1980. Intra-EU trade amounted to 66-

67 per cent of the member states’ overall trading from 2000 to 2006. In view 

of this, the amount of intra-regional trade conducted by the ASEAN 

countries cannot be considered to be very large compared to other trade 

liberalization areas – there is still plenty of room for more business in the 

future when trading has been liberalized even further within the region.

7

  

4 

 

The Free Trade Area of the Americas (FTAA) is an attempt to expand the North 

American Free Trade Area (NAFTA) to include every country in Central America, 

South America, and the Caribbean (with the exception of Cuba). Negotiations be-

gan right after the implementation of NAFTA in 1994. 

5  

The Lao PDR and Myanmar prove the exception here, as their intra-ASEAN trade 

volumes were as high as 79.8 per cent and 59 per cent of the total trade volume of 

the two countries in 2006 respectively. 

6  

After the Asian crisis, when economic growth in the region was slow, the low share 

of intra-ASEAN trade relative to total trade proved advantageous; dynamic trade 

with the rest of the world contributed to a speedy recovery in the ASEAN region.  

7  

Ariff (2001) takes this point one step further. He states that there is no incom-

patibility whatsoever between AFTA’s two goals of enhancing intra-ASEAN trade 

and increasing ASEAN’s competitiveness in the world. A high ratio of intra-re-

gional trade may not be in ASEAN’s interest, as this might take place at the ex-

pense of extra-regional trade. 

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Piriya Pholphirul

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Table 1:  

Percentage of Intra-regional Export Volume among Trade Blocs