Possible Dynamic Effects of Afta for the New Member Countries

We discuss the possible benefits of economic integration for the new members of ASEAN. Direct evidence on regional integration and growth is weak, but three indirect channels are possible. Openness increases access to foreign knowledge, which could help productivity growth. Trade liberalisation is likely to stimulate investment and might promote the integration of the regional production network. Binding liberalisation under AFTA would help 'lock-in' and accelerate liberal economic reforms. These gains are not automatic, however. Discriminatory liberalisation will switch imports from sources with high stocks of knowledge towards ASEAN countries, which have lower stocks, and so may lower productivity growth. We term this 'dynamic' trade diversion. In addition, local absorptive capabilities must be developed to benefit fully from technology transfer. Finally, we recommend extending AFTA commitments on an MFN basis in order to avoid static and dynamic trade diversions