ASEAN - China Free Trade Area : A quantitative study of Trade diversion and Trade creation effects on ASEAN - China trade flows

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1 Introduction ... 1

1.1 Preface ... 1

1.2 Purpose of study ... 1

1.3 Disposition of the Thesis ... 2

2 Background ... 3

2.1 Association of South-East Asian Nations (ASEAN) ... 3

2.2 ASEAN – China Free Trade Area (ACFTA) ... 3

2.3 ASEAN – China trade interactions ... 4

Trade interactions with the ASEAN-5 economies ... 4

Trade interactions with the newer ASEAN economies ... 5

2.4 China’s development and concerns over ACFTA ... 6

3 Previous literatures ... 8

4 Theoretical Framework ... 10

4.1 Free Trade Agreement ... 10

4.2 Trade Creation and Trade Diversion ... 10

4.3 Viner’s Model of a Free Trade Agreement ... 11

5 Empirical Framework ... 13

5.1 Theoretical foundation of the Gravity Model ... 13

5.2 Variables and Data construction ... 13

5.3 Augmented Gravity Models ... 15

5.4 Descriptive Statistics and Data sources ... 17

6 Empirical Analysis ... 19

7 Conclusion and recommendations for further

research ... 22

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0 5000 10000 15000 20000 25000 30000 35000 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 Indonesia - China Malaysia - China Philippines - China Singapore - China Thailand - China Vietnam - China

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0 5000 10000 15000 20000 25000 30000 35000 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 China - Indonesia China - Malaysia China - Philippines China - Singapore China - Thailand China - Vietnam

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0 50 100 150 200 250 300 350 Brunei - China Cambodia - China Laos - China Myanmar - China 0 200 400 600 800 1000 1200 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 China - Cambodia China - Laos China - Myanmar China - Brunei

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εa,b

(β_1,β_2,β_3,β₄) (Β5)

β6

(1) LnTFa,b = β0 + β1LnGDPa + β2LnGDPb + β3LnGDPCAPa + β4LnGDPCAPb +

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β6 β

β₇

β7

DIST_c,b

εc,b

The standard coefficients β_1,β_2,β_3,β₄ Β5

Β6

(2a) LnTFc,b = β0 + β1LnGDPc + β2LnGDPb + β3LnGDPCAPc + β4LnGDPCAPb +

β5LnDISTc,b + β6ACFTA + εc,b

(2b) LnTFa,c = β0 + β1LnGDPa + β2LnGDPc + β3LnGDPCAPa + β4LnGDPCAPc +

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DISTa,c

ε_a,c

β1, β2, β3, β4 Β5

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Model (1) TFa,b * GDPa GDPb GDPCAPa GDPCAPb DISTa,b TFa,c * TFc,b * GDPc GDPCAPc DISTc,b DISTa,c ACFTA

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β₆ β₇

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β₇

β_1,β_2,β_3,β₄

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