The Impact of Free Trade Agreements on Indonesia’s Agricultural Trade Flows: An Application of the Gravity Model Approach

Since the end of World War II, regional trade agreements have proliferated across the world. As bilateral and regional trade agreements is becoming increasingly prominent, it is important to ascertain what implications this may have for world trade. In the last two decades, Asian economies have been involved in several FTAs such as ASEAN Free Trade Area (AFTA) and ASEAN-China Free Trade Area (ACFTA). Indonesia, which is the member of ASEAN, has been actively participate in these cooperations. The purpose of this paper is to analyse the impacts of free trade agreements on Indonesia‟s agricultural trade flows and to investigate the existence of Linder effect on Indonesia‟s bilateral trade where trade will be greater when the income per capita of trading countries are more similar. It is focus on agricultural sector because most ASEAN countries, including Indonesia, depend on this sector as a major source of gross domestic product (GDP). Therefore, it is interesting to analyse specifically what the impacts of FTAs on Indonesia‟s agricultural sector, especially on its trade flows. The gravity model is chosed to investigate the determinants of Indonesia‟s agricultural trade flows, from both export and import side. With this objective this paper constructs basic, augmented and gravity model with linder effect and perform cross sectional and panel data estimations. It finds that the fixed effect model is to be preferred than random effects gravity model. The empirical results shows that the membership of AFTA and ACFTA does not bring significant impact on Indonesia‟s agricultural trade flows. From the linder effect investigation, it reaveals that linder effect does not exist in Indonesia‟s bilateral trade. Indonesia tends to trade with countries that have high level of income per capita.