ASEAN-China Free Trade Area (ACFTA) : Impacts on Indonesia’s manufactured goods trade flow: the gravity model approach

Free trade agreements (FTA) have been proliferated since the last two decades in various forms. Indonesia as one of the leading traders across the globe also has been actively involved in those FTAs. Started initially with the ASEAN Free Trade Area (AFTA), Indonesia’s involvement in the FTAs grew in number rapidly, reaching 20 FTAs in the present. The most essential FTA for Indonesia seen from its economic and market size is the ASEAN-China Free Trade Area (ACFTA). Therefore, the investigation of its impacts on Indonesia’s trade flows is vital to depict its effect on Indonesia’s trade performance. The purpose of this paper is to study the impacts of ACFTA on Indonesia’s manufactured goods trade flow. This paper focuses on the manufacturing sector since it is the vital sector for Indonesia’s economy with a large proportion of GDP share, high employment numbers, and Indonesia’s most competitive goods are mostly manufactured goods. Indonesia’s participation in establishing the FTA with China in the manufacturing sector raised some concerns about whether Indonesia’s manufactured goods can compete well with China’s or not. Therefore, it is interesting to investigate the impacts of ACFTA on Indonesia’s manufacturing sector, particularly on its trade flows. The gravity model is used to estimate the impacts of ACFTA on Indonesia’s manufactured goods trade flows from both the export and import side. The gravity model is used with cross-sectional and panel data regression method covering 104 trade partner countries across the world from 1991 to 2012 period. The main finding of this study is to point out clearly that the ACFTA does not have a significant impact on Indonesia’s manufactured commodities export and import flow. Besides, impacts of other variables apart from the ACFTA on Indonesia’s manufactured goods trade flow also presented in this paper.