Effects of free trade agreements and exchange rate shocks on trade flow between China and ASEAN-6: the nonlinear gravity model approach

Abstract

In the context of economic globalization, free trade area cooperation is booming all over the world. Since the establishment of the China-ASEAN Free Trade Area(CAFTA), the reduction or abolition of tariffs and non-tariff barriers has led to a substantial increase in bilateral trade flows, which has promoted the economic development of both parties. With the economic development of CAFTA, the old agreement signed between the two parties can no longer meet the needs of the current bilateral economic development. After negotiations, the two sides formally signed the China-ASEAN Free Trade in Kuala Lumpur, Malaysia, on 21st November 2015. The upgraded version of the "Protocol" mainly enriches, supplements, and perfects the original agreement, and improves the standard of the free trade agreement. However, the promotion of trade liberalization is also a double-edged sword. The vast majority of China and ASEAN countries are developing countries, and their resources and products are relatively similar. This has led to fierce competition among member countries in the region, and various industries in some member countries are The impact of free trade, coupled with the adverse effects from outside the region, has brought more challenges to the future development of the CAFTA. This paper analyses the effects of free trade agreements and exchange rate shocks on trade flow between China and ASEAN-6. Based on the panel data that covers 6 ASEAN countries from 2000 to 2019, the threshold regression model is applied with fixed effects to understand the structural break of the exchange rate. Then, Performing a piecewise regression. In brief, according to the estimation results, free trade agreements and exchange rate shocks are of empirical significance on trade flow between China and ASEAN-6. In addition, considering that ASEAN countries that have frequent trade with China are mainly concentrated in countries with better economic development (such as Malaysia, Indonesia, Thailand, the Philippines, Singapore, and Vietnam in this study), they should pay more attention to the optimization and upgrading of trade agreements and exchange rate stability. At the same time, while focusing on economic development, other ASEAN countries must strengthen cooperation with allies. From the perspective of sustainability, both China and ASEAN can benefit.