An ex-post analysis of trade effects of the ASEAN–Korea Free Trade Area (AKFTA) from Korea’s Perspective

Abstract

This paper empirically analyzes the effectiveness of the ASEAN–Korea Free Trade Area (AKFTA) focusing on the ex-post trade creation and diversion effects with controlling related intra-bloc and extra-bloc regional trade agreements (RTAs) and economic characteristics of interconnected economies. The quantitative analysis applies a gravity model regression analysis by specifying standard pooled ordinary least squares and fixed effects regression models. We observe that the AKFTA turned out to be more favorable for Korea in terms of trade balance with ASEAN. We find that the AKFTA is a desirable trade creating RTA strongly driven by intra-bloc export activities between members and does not divert but generates more export to and import from non-members. Thus, we strongly support that the AKFTA facilitates trade between intra-bloc members and their trade with extra-bloc non-members as well. Besides which, we find that the trade creation effects of the AKFTA are industry-specific and sector-specific. For the manufacturing industry, the trade creation effects of the AKFTA are generated by both intra-bloc and extra-bloc import activity but not from extra-bloc export activity. However, for the services industry, all the intra-bloc and extra-bloc export and import activities contribute to the trade creation effects. Interestingly, we find that the trade creation effects of the manufacturing industry are smaller than those of the services industry. Considering restrictive service schedules of specific commitments in the AKFTA agreement on trade-in services compared to trade-in goods provisions, rearranging the trade-in services provisions is necessary to generate more trade gains in the future.