Intra-Industry Trade and the ASEAN Free Trade Area

The decision to establish the ASEAN Free Trade Area (AFTA) by the year 2005 has resulted in producers in all ASEAN countries except Singapore raising concerns relating to potential loss of market share and adjustment pressures. Underlying these concerns is the view that the expected growth in intra-ASEAN trade will be dominated by inter-industry or net trade rather than intra-industry trade. If most of the expected growth in trade is intra-industry, however, then the short-run resource re-allocation costs are likely to be low. This study employs a new methodology to analyse the dynamics of intra-industry trade in ASEAN. Problems associated with using movements in the value of the Grubel–Lloyd (GL) index are overcome by deriving a formula that decomposes the growth in trade into the contributions of growth in intra-industry and net trade. The results suggest that the role of intraindustry trade in trade growth has been increasing in importance, and thus much of the recent concern that threatens the viability of AFTA may be misplaced.