Investment creation and diversion effects of the ASEAN¬タモChina free trade agreement

a r t i c l e i n f o The ASEAN–China free trade agreement went into effect January 1, 2010 and became the world's third largest FTA by trade volume after the European Economic Area and the North American Free Trade Agreement. This paper focuses on highlighting the impacts of the reduction of barriers to trade on investment in a dynamic general computable equilibrium framework. We present and compare two alternative views/models of investment which yield different investment creation and diversion effects. As a first step, we adapt the dynamic GTAP model to take account of bilateral ownership of investment. Two versions of the model are considered. The first version is an example of applied models of investment demand, while the second is a model of investment supply. The two versions are based on different assumptions in their determination of cross-border investment. We simulate the implementation of ACFTA and we focus on the welfare impacts of investment creation and diversion. At the ASEAN–China summit in November 2001, China proposed the establishment of a free trade area with ASEAN countries. 1 The agreement (ACFTA) was signed in November 2002 and the free trade area came into effect on 1 January 2010. ACFTA became the world's third largest free trade area in volume after the European Union and the North American Free Trade Area. China and ASEAN had a combined GDP of $6.6 trillion, population of 1.9 billion and total trade of $4.3 trillion in 2008. Although before the 1990's there was no official relationship between China and ASEAN as a block, between 1995–2008 bilateral trade between China and ASEAN increased more than tenfold. By 2009, China was ASEAN's second largest trading partner (with 11.6% of total trade), while ASEAN was China's fourth largest (10.1% of total trade). 2 In addition, ASEAN is a key investor in China, FDI flows reached $5.46 billion, while FDI flows from China to ASEAN amounted to $1.4 billion in 2008. ACFTA is expected to deepen regional integration and to have significant impacts on intra-regional trade and investment. On the one hand, ASEAN will benefit from China's economic growth and investment potential through access to an expanding and diversified market. On the other hand, the increased access to the natural resource and raw material intensive economies of ASEAN countries will benefit China. As a drawback, ASEAN manufacturers are expected to face higher competition from cheaper …