AFTA and Intra-Industry Trade

Abstract

This article provides an empirical analysis of intra-industry trade of the member states of the Association of Southeast Asian nations (ASEAN) for the period 1986-90. We demonstrate that ASEAN's intra-industry trade is conditioned by direct foreign investment consistent with industrial and export promotion policies of the member countries. Recent patterns of intra industry trade in the ASEAN manufacturing sector show that Singapore's contribution is the highest followed by Malaysia, Thailand and Indonesia for 1990. To the extent that intra industry trade is prevalent in ASEAN countries trade, trade adjustment within the ASEAN Free Trade Area (AFTA) will be easier than if inter-industry trade predominates. The results support the view that intra-industry trade is mainly for intermediate goods to satisfy finished goods producers' demand for diverse components to contain cost. The results also imply that protectionist sentiment will be minimal within AFTA since both producer and consumer interests are at stake.