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negative export trade diversion has been strengthening and means that the volume of 

trade between members and non- members has been increasing (and not falling as 

would be the case with trade diversion and welfare losses to non- members).  The 

slight fall in  imASEAN after 1997 does reveal a weakening of the  negative import 

trade diversion effect as ASEAN members begin to prefer to import goods from 

members rather than non- members but the effect is only small against a large increase 

in intra-regional trade in general.  These results seem to suggest that ASEAN 

countries retained their openness and outward orientation despite AFTA and the Asian 

economic crisis. 

 

One explanation for the lack of any export diversionary effect and the slight 

weakening of the negative import diversion effect after 1997 is that ASEAN countries 

may have increased their exports to the rest of the world due to changes in their real 

exchange rates (as exASEAN rose sharply after 1997 in Table 2).  The devaluation of 

ASEAN currencies during the Asian crisis should have contributed to an increase in 

the competitiveness of their products with the rest of the world (as exports and 

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20

imports became less and more expensive respectively).

25

  Appendix C illustrates the 

real exchange rate of ASEAN countries and demonstrates the simultaneous 

depreciation of ASEAN currencies relative to non- member countries and the relative 

stability of intra-ASEAN rates after 1997 that may explain some of the trend.  The 

inclusion of a real exchange rate variable made little difference to the results however 

(see Section 3 for a discussion). 

 

Finally, in Table 3 we investigate the nature of the AFTA process on ASEAN bilateral 

trade.  The observations of basic gravity variables in Table 3 are broadly in line with 

the results in Table 1 although two related findings are worth mentioning.  First the 

ASEAN coefficient increases constantly over time especially after the AFTA 

formation period.  This suggests that the AFTA process may have had some effect 

on intra-regional trade ever since its inception that has accelerated since the Asian 

crisis.  Second, there is little difference in the coefficients on the GDP variables 

between the pre- and the post crisis period while the ASEAN coefficient rose.  This 

supports the argument that even accounting for the upheavals of the Asian crisis there 

are no dramatic changes in the way other economic factors determine intra-ASEAN 

trade flows.