Analysis Of Effect And Mechanism Of Trade To CAFTA Economic Convergence

January 1,2010, the world's largest free trade area-China-ASEAN Free Trade Area (CAFTA) was officially established. This move will undoubtedly promote bilateral trade and economic cooperation between China and ASEAN. Will those relatively backward countries in CAFTA benefit from faster economic growth rate through rapidly expanding intra-regional trade? And will this trade liberalization process promote its members' economic growth and economic convergence? Although economic growth theories and trade-related theories have explained what the role of trade played on economic convergence is, the empirical effect of trade on convergence is still controversial. How does intra-regional trade affect economic convergence in CAFTA? What measures can CAFTA take to promote common economic development of Members, thus forming a virtuous circle, which will further promoting the regional cooperation process? This paper attempts to answer the above questions by theoretical analysis and empirical testing.Analysis is made in terms of the following aspects:PartⅠ, the essay begins with reviewing the economic growth theories and trade theories relative to economic convergence, and then summarizes empirical literature about the relationship between trade and economic convergence. Existing empirical researches have focused on the description of time conformity of trade liberalization, trade expansion and economic convergence. Most of these researches have come to the conclusion that convergence keeps pace with trade expansion. Furthermore, the existing studies proved that trade can promote convergence by comparing different country groups which are different connected by trade. But few literatures have analyzed the mechanism of of trade to convergence. And most of current studies are based on states of US, EU and provinces of China, while few are about developing regions, like CAFTA. Therefore, this paper use existing literature as its references, and study the relationship between trade and economic convergence of CAFTA.PartⅡ, by reviewing the cooperation process, we can summarize characteristics of CAFTA's cooperation as follows:Trade in CAFTA was country-focused. Trade among CAFTA members is both competitive and complementary. And after the establishment of CAFTA, relatively backward countries benefit more than developed members. Theoretically, these features will contribute to regional economic convergence. This part also shows indications of Beta convergence and Sigma convergence of CAFTA.PartⅢ, first empirical model is built in this part to test the relation between trade expansion in CAFTA and regional economic convergence. The model is developed from the method of Dan Ben-David (2004) by adding dummy variables to divide the effect of establishment of CAFTA into trade increases and other institutional arrangements. The result of comparing CAFTA and ASEAN shows that CAFTA converges faster than ASEAN. Furthermore, the increases of trade in CAFTA, as an important result of trade liberalization, promote the regional economic convergence. While in ASEAN, other institutional arrangements except tariff measures promote economic convergence.PartⅣ. This part further explores the mechanism of intra-regional trade in economic convergence of CAFTA through two steps. Firstly, a theoretical model on the basis of trade and economic development theory is built, which divides the mechanism of trade to economic convergence into factor price mechanism, factor quantity mechanism, technology spillover mechanism and human capital mechanism. Then by doing path analysis of the mechanisms of trade to economic convergence by panel data via three steps, this paper has also shown that among the four mechanisms, factor quantity mechanism has the maximum effect, while technology spillover mechanism shows the minimum effect. Besides, current human capital of CAFTA will lead to larger gap among income-per-capita of each nation and will further lead to economic divergence.PartⅤ, recommendations of policy on better promoting common development of CAFTA members have been given after all the above analysis, with the hope of forming a virtuous circle between CAFTA economic convergence and deeper cooperation.