The Impact Of Cambodia-ASEAN Free Trade Agreement On Trade Flow: An Application Of The Gravity Model

This paper attempts to focus on the dynamic impact of the ASEAN free trade area(AFTAs) on Cambodia’s trade and prediction of the trade potential of Cambodia.Cambodia is a small country and a member of ASEAN located in the Southeast Asia witha year-by-year economic and trade development since it became a member of theAssociation of Southeast Asian Nations (ASEAN) in1999and WTO (World TradeOrganization) in2004. For Cambodia, economic integration with regional and worldeconomies is seen as one of the national strategies for reconstruction and development.Cambodia’s accession to ASEAN is considered to be the turning point for Cambodia tointegrate its whole national economics through investment and trade, which have beenmajor driving force for Cambodia’s growth and economic development. This studyreveals and tests how Cambodia’s accession to ASEAN affects its bilateral trade withother countries by using the gravity model of trade specifically adopted for the study ofCambodian trade, and then estimating Cambodia’s trade potential. Panel data for theperiod2000-2010across31countries is employed in the analysis. The coefficient of thegravity model for trade obtained from the model is then used to predict Cambodia’s tradepotential. The results of this empirical study reveal that ASEAN (AFTA) membership hashad a significant effect in increasing Cambodia’s bilateral trade with other ASEANmember countries by3.2percent for the past decade, but doesn’t divert its bilateral tradefrom outside the ASEAN bloc to inside the ASEAN bloc. Likewise, the results also provethat Cambodia’s trade potential is highest with countries in the South East Asian Nationsand East Asia. Specifically, the maximum potential trade exists with Indonesia, Thailandand the Philippines, China, Japan, Sri Lanka, and Pakistan. Moreover, under the scenarioof Cambodia-China FTA in2015, currency appreciation, and the outlook of economicgrowth for China and nine other ASEAN countries for2013-2015, this paper also foundthat the trade potential of Cambodia with China will be17.33percent and with the othernine ASEAN countries will range from12.54percent to14.50percent.