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Introduction 

 

The recent proliferation of regional trading blocs is striking with the signing of 

numerous new and overhauled preferential trade agreements (PTAs) since 1990.

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There remains however, an ongoing debate between economists and politicians as to 

whether regional trade agreements (RTAs) represent “building” or “stumbling” blocks 

(Bhagwati 1991).   The welcome for the opportunities this new wave of regionalism 

is supposed to bring is not therefore, all encompassing with some fearing that regional 

economic integration corrupts and undermines progress towards global free trade 

expounded by the General Agreement on Tariffs and Trade (GATT) and more recently 

the World Trade Organisation (WTO).  Others however, are more positive (see e.g. 

Summers 1991, Lawrence 1991, Ethier 1998, IDS 1999 and the World Bank 1999) 

and see any trade liberalisation as good whatever its source and PTA’s as a second 

best means of achieving trade liberalisation when multilateral negotiations stall.

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Closer European integration and a number of regional initiatives from the United 

States transformed the global economic climate in the late 1980’s and meant that it 

was increasingly important for smaller developing and newly industrialised countries 

to generate closer regional economic ties.  One of the more influential regional 

                                                 

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  A PTA is an agreement between two countries where the tariff imposed between them is 

lower than that on goods from countries outside the agreement.  PTAs include regional 

trade agreements between countries within a given geographical area and free trade 

agreements that have no tariffs between member countries but individual tariff structures 

with non-members. 

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 In addition to existing agreements such as the European Union (EU) and the European 

Free  Trade  Association (EFTA)  other  new  or rejuvenated regional trade agreements 

include the Common Market of the South (MERCOSUR, 1991), the North American Free 

Trade  Association  (NAFTA,  1994),  the  ADEAN  Pact  (ANDEAN),  and  the  Central 

American Common Market (CACM) in the Americas.  In Africa the 1990’s saw the 

creation  of  the  Union  Duaniere  et  Economique  de  l’Afrique  Central  (UDEAC),  the 

Common Market for Eastern and Southern African States (COMESA) and the Union 

Economique et Monetaire Quest-Africaine (UEMOA).  According to the WTO (2001) all 

WTO members have taken part in at least one episode of regional integration. 

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developments was in the Southeast Asian region where me mbers of the Association of 

Southeast Asian Nations (ASEAN) agreed in 1992 to establish the ASEAN Free Trade 

Area (AFTA) that currently has a membership of ten countries and a population of 

over 500 million.  Moreover, the recent emergence of China as an economic power 

in the region following its membership of the WTO has led to a renewed vigour 

among ASEAN nations to pursue the goal of regional cooperation. 

 

Broadly speaking, the last thirty years has seen a robust economic performance from 

ASEAN countries.  One reason for this apparent success was that the engine of 

growth was primarily extra-regional rather than intra-regional trade and questions 

therefore, the need for a Southeast Asian regional grouping.  Krugman (1991) 

introduced the notion of a “natural trading block” based on geographical proximity 

that could be both efficient and welfare increasing.  He also noted however, that an 

RTA based on being a member of a political club could induce regional bias to trade 

patterns that can be welfare reducing if trade diversion is greater than trade creation.  

This raises the question of whether AFTA has any real economic rationality over its 

mere political and symbolic meaning. 

 

The primary objective of this paper therefore, is to investigate the effect of AF TA and 

the “anticipation” effect of AFTA on intra- and extra-regional trade flows by a 

comparison of trade patterns before and after the start of the AFTA process.  Given 

the “openness” of ASEAN countries it is important to consider not only intra-ASEAN 

trade but also the effect of AFTA on non-members trade.  By doing so we hope to be 

able to reveal whether AFTA; (i) increases trade among members (ii) harms 

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non- member countries and (iii) contributes to or undermines future liberalisation 

negotiations. 

 

Any post-1992 AFTA analysis is however, further complicated by the ramifications of 

the Asian economic crisis that began with a massive speculative attack on the Thai 

baht May 14-15, 1997.  The years following the crisis saw ASEAN members suffer 

significant structural and financial difficulties (including reduced aggregate growth 

and job losses) associated with large currency depreciations and capital outflows.  

Relatively few studies examine the period during and after the Asian crisis even 

though the affects on the economies of the region were often profound (Clarete et al. 

2002 is one exception).  For example, according to World Bank data, Indonesia 

moved from a GDP growth rate of 4.9% in 1997 and a financial account surplus of 

10.8 (US$ billion) in 1996 to a GDP growth rate of  -13.7% and a financial account 

deficit of  –10.3 (US$ billion) in 1998.  Likewise, Thailand moved from a positive 

growth rate of 5.5% in 1996 to –10.2% in 1998 and a change from a financial account 

surplus of 19.5 (US$ billion) in 1996 to deficits of  –16.9 and –14.6 (US$ billions) in 

1998 and 1999 respectively. 

 

In this paper we are interested in whether ASEAN countries attempted to solve their 

problems with the help of newly strengthened intra-ASEAN relations and whether the 

result of the crisis was to significantly change the structure of imports and exports and 

result in the collapse of long-standing trade relationships.  As a consequence, we 

address whether the aims of AFTA to increase intra-regional trade and cooperation 

were helped or hindered by the Asian crisis. 

 

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The existing empirical literature suggests two main approaches for measuring the 

economic impact of PTAs.  Partial or general equilibrium models provide an  ex ante 

approach that includes computable general equilibrium models to empirically predict 

the impact of AFTA on the economy and constituent trade flows (see e.g. Imada et al. 

1991, Adams and Park 1995 and DeRosa 1995).  The second approach focuses on ex 

post investigations of bilateral trade values using the so-called gravity equation.  

Simple examples of the application of a gravity type approach to intra-regional trade 

bias of selected regional groupings (one being ASEAN)  include  Hamilton and 

Winters (1992), Frankel (1993) and Sharma and Chua (2000) while Elbadawi (1997), 

Frankel and Wei (1998), Endoh (1999, 2000) and Soloaga and Winters (2001) present 

useful extensions of the basic model. 

 

The core methodology in this paper is based upon Endoh (2000) and Soloaga and 

Winters (2001) but the analysis concentrates on ASEAN intra- and extra-regional bias 

in bilateral trade flows and how these trade relationships have altered over time 

paying particular attention to the periods before and after the signing of AFTA as well 

as the crucial years prior to and following the Asian crisis. 

 

The paper is organized as follows.  Section 2 provides some historical background to 

regional cooperation in the Southeast Asian region.  Section 3 describes the 

methodology and estimates a modified gravity equation while Section 4 discusses the 

results and Section 5 concludes. 

 

 

 

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