An Analysis On The Trade Creation Effect In CAFTA

Thanks to the wide development of CAFTA (China-ASEAN Free Trade Area) and the gradualelimination of regional barriers to trade, the trade scale among China and ASEAN countriescontinues to expand while its volume keeps increasing. But, according to the late empirical analysis,CAFTA’s net trade creation effect (now known as the Wiener’s trade creation effect) is not thatsignificant, and tariff reduction or trade diversion may bring about the increase of the trade volume.This is a new issue that free trade area is facing in its long term evolvement.Firstly, bases on the Comparative Advantage and Factor Endowments theory, this articleanalysis the cause of competitive(that means high export similarity index) in CAFTA’s free trademerchandise trade, and later verifies a fact that China and ASEAN countries’ related commodityproduction abundance of elements are quite close to each other, because of which, the comparativeadvantage between the two sides are too close to one another, and eventually leading to theconclusion that the trading competition among these countries is strong. The later revealedcomparative advantage index calculation also well test and verified the above achievement.Secondly, in response to the above fact, the paper explains the cause. And according to theresult of Chinese and ASEAN’s2007-2009bilateral export similarity index which is57.76,53.87and62.91respectively, comes a conclusion that CAFTA’s competitiveness is strong. Then fromWiener’s trade creation effect definition, the article takes reasonable assumptions and analysis therelationship between trade creation effect and trade competitiveness, certifying the result that a freetrade area will not form a significant trade creation effect when its competitiveness is strong.Then, this paper focuses on the research of CAFTA, choosing China and ASEAN’srepresentative countries such as Philippines, Malaysia, Thailand, Singapore, and Indonesia,adopting their GDP and import data from the year1991to2009to investigate the elasticitychanges in CAFTA by Balassa Model. The changes of the income elasticity of import demand afterthe CAFTA’s establishment are as follows:(1) From China’s point of view, its total income elasticity of import demand has increased;elasticity within the region has declined, while elasticity outside the region has also increased.(2) From ASEAN’s point of view, its total income elasticity of import demand has declined;elasticity within the region has increased, while elasticity outside the region has also declined. Thus, comes to a fact that net trade creation effect is not well formed in CAFTA.Finally, relevant policy recommendations are put forward, that is China and ASEAN countriesshall unleash their comparative advantages respectively, implement the dislocation developmentstrategy according to their own industry needs or industrial characteristics. If so, tradingcomplementarities will be strengthened, export status similarity will be improved and thedisadvantage of competitive will be well reduced.