Estimating the Impact of ASEAN China Free Trade Agreement on Indonesia’s Trade Balance

Abstract

Using trade flows data of ASEAN countries and China from 2002 to 2017, this study
estimates the impact of ACFTA on ASEAN countries and China’s trade balance in general,
and also for Indonesia’s trade balance in specific by elaborating the impact of ACFTA on
the trade flows both exports and imports. Using the gravity model and estimating by OLS
and PPML, this paper finds that the impact of tariffs elimination due to the implementation
of ACFTA increased exports and imports for ASEAN countries and China in general, and
for Indonesia in particular. However, the aggregate trade balances of ASEAN member
countries and China is zero since the impact of ACFTA on imports offset the impact of
ACFTA on exports. Tariff’s elimination due to the implementation of ACFTA on Indonesia
shows a negative and statistically insignificant effect on imports and exports. Thus, tariffs
have not played significant role on increasing Indonesia’s exports and imports. As a result,
the impact of ACFTA on Indonesia’s trade balance cannot be quantified clearly since the
impact of tariffs on exports and imports are not significant.