AN ASEAN-EU FTA, REGIONAL PRODUCTION SHARING, AND REGIONAL COHESION. FOCUS ON CAMBODIA, LAOS AND...

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AN ASEAN–EU FTA, REGIONAL PRODUCTION SHARING,

AND REGIONAL COHESION. FOCUS ON CAMBODIA,

LAOS AND MYANMAR

•• ••

AbstractThis article focuses on the potential effects of an Association of South East Asian Nations(ASEAN)–European Union (EU) FTA for Cambodia, Laos and Myanmar (C-L-M), the leastdeveloped economies of ASEAN. The authors explore how the particular structure of the ASEANproduction sharing network might shed light on the transmission of effects. Gravity models forintra-regional trade are estimated for that purpose. Whereas the existing computable generalequilibrium (CGE) analyses consider C-L-M as one rest category, a country-level analysis for theC-L-M countries is presented.

It is shown that it is not straightforward that C-L-M would win from an ASEAN–EU FTA. Atbest, marginal absolute positive effects might be expected for the C-L-M economies. In relativeterms, an FTA is not likely to contribute to more economic (and political?) cohesion in the region.It is therefore argued that it makes sense to (re-) connect C-L-M to the negotiation process.JEL Classification: ••Keywords: ••

1. INTRODUCTION

After obtaining green light from the European Union (EU) member states in December2009 to start negotiations with individual countries of the Association of South EastAsian Nations (ASEAN), bilateral trade negotiations with Singapore were officiallylaunched in March 2010 and with Malaysia in September 2010.1 Negotiations withVietnam were also agreed upon in principle. The EU has emphasised, however, that theultimate aim continues to be to negotiate in an inter-regional (i.e. region-to-region)

* Corresponding author: ••.1 This was preceded by the launching of the Trans-Regional EU–ASEAN Trade Initiative in 2003,the preparatory work of the Vision Group on ASEAN–EU Economic Partnership set-up byCommissioner Mandelson in April 2005, the adoption by the Council of the EU of the EuropeanCommission’s (EC) recommendation to open negotiations in April 2007, and a first phase ofnegotiations that started in May 2008 and was “paused” in February 2009 (Adamrah, 2009;Cuyvers et al., 2010). The EU has also concluded so-called ‘trade co-operation agreements’ with anumber of the ASEAN countries on issues that are not yet covered by the WTO (investment,government procurement, trade facilitation, mutual recognition and competition, among others)or are seen as enhancing WTO compliance (such as intellectual property rights and anti-dumpingpractices). In addition, EU member countries have concluded bilateral investment treaties withmany Asian (including ASEAN) countries since the 1960s (Dolzer and Stevens, 1995; LizarazoRodríguez, 1997; Chaisse, 2006; UNCTAD Investment Instruments Online). The first fivenegotiation rounds with Singapore took place between March 2010 and January 2011. The firstround of negotiations with Malaysia took place in Brussels in December 2010.

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South African Journal of Economics Vol. ••:•• •• 2011

© 2011 The Authors.Journal compilation © 2011 Economic Society of South Africa. Published by Blackwell Publishing Ltd, 9600 GarsingtonRoad, Oxford OX4 2DQ, UK and 350 Main Street, Malden, MA 02148, USA.

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framework and that bilateral agreements should be considered building blocks towardsachieving that aim.

In this article, we will focus on the potential effects of an ASEAN–EU FTA forCambodia, Laos and Myanmar (C-L-M), the least developed economies of ASEAN. Wewill explore how the particular structure of the ASEAN production base (the ASEANproduction sharing network) might shed light on the transmission of effects. Gravitymodels for intra-regional trade will be estimated for that purpose. Whereas the existingcomputable general equilibrium (CGE) analyses consider C-L-M as one rest category, wewill present a country-level analysis for the C-L-M countries.

Section 2 first explains why a focus on C-L-M is justified. Our argumentation refersto the marginalisation of C-L-M from the negotiations, their vulnerability and thepossibility of indirect effects. Section 3 reviews the existing empirical research on theeffects of an ASEAN–EU FTA. Section 4 presents our research questions and method.Section 5 presents the results while our conclusions and policy recommendations arepresented in section 6.

2. WHY FOCUS ON THE FTA EFFECTS FOR C-L-M?

We see at least three reasons that justify a focused study of the potential effects of anASEAN–EU FTA on C-L-M countries: their marginalisation from trade negotiations,their vulnerability and the possibility of indirect effects.

2.1 Marginalisation from Trade NegotiationsWhen the EU and ASEAN started exploratory talks concerning the negotiation of anFTA, three negotiation scenarios were contemplated: EU FTA negotiations with ASEANas a whole; negotiations with ASEAN minus C-L-M; or the negotiation of seven bilateralFTAs with Brunei, Indonesia, Malaysia, the Philippines, Singapore, Vietnam andThailand – countries with which the EU was already in the process of negotiatingindividual partnership and cooperation agreements. As the EU was participating inongoing negotiations for “Partnership and Co-operation” with Thailand, Singapore,Indonesia, Malaysia, the Philippines, Brunei and Vietnam, it soon opted for having FTAnegotiations with only 7 of the 10 ASEAN members, thus excluding C-L-M (Cuyvers,2007:6).

At first sight, this option goes against the EU’s preference for organising andpromoting its economic and trade relations with third world countries in an inter-regional context (Pietrangeli, 2009). However, the EU has not completely shied awayfrom bilateral (i.e. region-to-country) trade negotiations, particularly when its economicinterests were at stake (e.g. with Mexico, Chile and South Africa) (De Lombaerde, 2003).And there are even indications that bilateralism is again gaining importance (Heydon andWoolcock, 2009).

On the Asian side, in spite of the existence of the ASEAN framework, the choice of thebilateral negotiation modality is less surprising. Bilateral FTAs have proliferated in theregion, resulting in a noodle bowl consisting of more than 50 FTAs with even a highernumber in the pipeline (Kawai and Wignaraja, 2009; Sally, 2009). However, most ofthese FTAs are limited to tariff reductions, leaving NTBs in goods, services andinvestment largely unaffected, which makes them, in combination with complex rules oforigin, not necessarily very effective.

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Being de facto marginalised from these negotiations, it means that the likely effects forthe C-L-M countries cannot easily be monitored and anticipated by them or taken intoconsideration by the negotiating parties.

2.2 Vulnerability of C-L-MA second reason that justifies particular attention to the three countries is related to theirobvious vulnerable economic situation. C-L-M are the least developed countries inASEAN and at the same time the three newest member states. Laos and Myanmar becameformal members in 1997, while Cambodia became the tenth member state in 1999. Asa group, C-L-M accounts for one-quarter of the total land area that ASEAN covers and14% of ASEAN’s total population. However, C-L-M only contribute less than 3% toASEAN’s total gross domestic product (GDP) and less than 2% to its total trade. TheirGDP per capita was still under 1,000 USD in 2009 compared with the average annualGDP per capita of the whole region (ASEAN), which has been over 2,500 USD(Table 1).

Table 2 shows that about one-third of the inhabitants in these countries are still livingbelow the national poverty line. The agricultural sector dominates their economies.

The gaps in development levels are also reflected by the different speed of tradeliberalisation within AFTA between the old ASEAN members and the newer ones. Thenewer members were allowed more time to reduce their tariffs: when Vietnam became anASEAN member in 1995, it committed itself to reach a 0-5% level of import duties in2006, and Laos and Myanmar in 2008 and Cambodia in 2010. Full liberalisation of tradefor these countries is scheduled to be achieved in 2015.

Table 1. Selected economic indicators for C-L-M

Cambodia Laos Myanmar

2008 2009 2008 2009 2008 2009

GDP, billion USD 11.3 10.8 5.3 5.6 28.2 27.6GDP per Capita, USD 825 775 849 878 479 459Real GDP growth, annually 6.7% -2.5% 7.8% 7.6% 3.6% 4.8%Inflation rate, average 25% -0.7% 7.6% 0.0% 22.5% 7.9%Export/GDP ratio1 43.9% 39.6% 26.6% 20.2% 22.7% 21.2%Import/GDP ratio1 61.4% 43.7% 47.3% 42.9% 22.1% 22.7%Population, million 13.7 13.9 6.3 6.4 58.8 60FDI inflows, million USD2 815 530 228 319 976 579

Source: IMF, World Economic Outlook Database, 2010.1 Authors’ calculation based on trade data retrieved from UN COMTRADE database and GDPdata retrieved from World Economic Outlook Database.2 UNCTAD, World Investment Report 2009, 2010.GDP: gross domestic product.

Table 2. Selected development indicators for C-L-M

Cambodia Laos Myanmar

Percent of population in urban areas 21.6 (2008) 30.9 (2008) 32.6 (2008)Percent of labour force in agriculture 75 (2004 est.) 80 (2005 est.) 70 (2001)Percent of population living below the national poverty line 30.1 (2007) 30.7 (2005 est.)1 32.7 (2008 est.)1

Under-5 mortality rate per 1,000 live births 90 (2008) 61 (2008) 98 (2008)Percent of population using an improved drinking water source 65 (2006) 60 (2006) 80 (2006)

Source: ADB (2009a, 2009b, 2009c).C-L-M: Cambodia, Laos and Myanmar.

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The effects of an extra-regional FTA for C-L-M should be closely looked at, especiallygiven the possibility of preference erosion for Cambodia and Laos, who currently benefitfrom the Everything But Arms (EBA) regime. The underlying – and more general –questions are thereby related to the compatibility of north–south FTAs with the aims ofregional cohesion in a south–south regional arrangement. Even if the impact of an FTAin absolute terms might be limited because of the limited direct linkages between C-L-Mand the EU (see below), in relative terms they might be significant and counterproductivefrom the perspective of regional cohesion.

2.3 Indirect Effects and the Asian Production Sharing NetworkA third reason for focusing on C-L-M is related to the fact that even if they are not or lessdirectly affected by an FTA compared with the other ASEAN countries, they still mightbe indirectly affected because of the particular character of the East Asian productionsystem. In effect, production sharing has contributed to the formation of a highlyintegrated manufacturing system and has played a fundamental role in the “East Asianmiracle” of fast economic growth. The region is characterised as “Factory Asia,” whereAsian countries “share” their production and compete as a de facto integrated group in theglobal market. And although the “leap forward” of the Chinese and Vietnameseeconomies has broken the sequence of industrialisation in Asia, the “flying geese”formation of economic growth is still a good starting point to understand the basicstructure of East Asian production sharing.

According to this model of “wild geese flying” (“Ganko Keitai”) (Akamatsu, 1962),Asian economies can be seen as “a comparatively small [wild-geese-flying] group with Japantaking the lead.”2 This model of East Asian economic growth explains how cross-sectorshifts of comparative advantages from relatively labour-intensive production to relativelycapital-intensive or technology-intensive production can lead to industrialisation andeconomic growth in the region. It examines comparative advantages in a dynamic ratherthan a static scenario.

When arranging the East Asian “wild geese” into a four-tiered formation, one mayregard Japan as the lead goose, followed by the four Asian NIEs (South Korea, ChineseTaiwan, Singapore and Chinese Hong Kong SAR), the four biggest ASEAN countries(Indonesia, Malaysia, Thailand and the Philippines), and finally other developingeconomies.3 As the nation(s) in the higher tier find new comparative advantages in fieldswith greater value-added production, the relatively lower value-added production will beleft to the nations in the following tier. The industrialisation will be transmitted from theleader(s) to the followers via the production sharing network. Similarly, the 10 ASEANmember states are arranged into 3 ties. Singapore will take the leadership in this subgroup.

2 Akamatsu launched this idea already in the 1930s. Terry (2002) points out that the “flying geese”paradigm represents not only the characteristics of a descriptive model but also those of anormative design. Therefore, the paradigm can also be used to understand Japanese post-warforeign policies, especially that of foreign aid and FDI in East Asia.3 Ozawa (2003), however, emphasises the role of the American market. He believes the USA to bethe real leader of East Asian flying geese, and Japan is itself also a following goose or “a distinctlysecondary sector when compared to the U.S.” (Cummings, 1984). Even today, the regional economyis still highly dependent on that of the USA. The share of the trade deficits in the USA that camefrom East Asian economies continued to increase up until 1992 when it reached the peak at about48%. It declined gradually afterwards and stayed at a level slightly less than 40% in the 2000s.

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It is then consequently followed by the four biggest ASEAN countries (and Brunei) andthen the other and poorest four (C-L-M and Vietnam) at the tail of the flying-geeseformation. They have rich endowments of labour and natural resources, but theirproductivities are constrained by lack of capital, skills and technology. Almost 90% ofC-L-M exports to ASEAN5 correspond to agricultural products and raw materials(Table 3); their roles as providers of parts and components or as assemblers remainmarginal.

The C-L-M–EU trade pattern illustrates and confirms that the competitive advantagesof C-L-M are built on labour-intensive, low value-added activities (Table 4). Thedevelopment in the export sectors became more and more important for their economicgrowth, especially after Cambodia and Laos joined the WTO. The export/GDP ratioranged from 20% (Myanmar) to 50% (Cambodia). Similar to many other LDCs, thelevel of their export diversification is very low. Exports concentrate on limited groups ofproducts. For instance, over 80% of Cambodia’s total exports were articles of apparel and

Table 3. Pattern of trade between C-L-M and ASEAN5

SITCcode

Sections Exports to other ASEAN member states Imports from other ASEAN member states

C-L-M KHM LAO MMR C-L-M KHM LAO MMR

Total, billion US dollar at currentprice

4.5 0.2 0.6 3.7 9.6 4.4 2.0 3.2

0 Food and live animals, (%) 7.8 21.9 4.4 7.0 9.2 10.3 8.6 8.21 Beverages and tobacco, (%) 0.4 3.6 0.3 0.0 4.6 6.3 3.2 3.12 Crude materials, inedible, except

fuels, (%)14.8 57.0 23.7 7.7 0.5 0.4 0.4 0.7

3 Mineral fuels, lubricants andrelated materials, (%)

63.8 0.0 13.3 83.3 29.0 28.6 26.9 30.8

4 Animal and vegetable oils, fats andwaxes, (%)

0.0 0.1 0.0 0.0 4.0 0.9 0.4 10.3

5 Chemicals and related products,n.e.s. (%)

0.1 0.3 0.2 0.1 8.9 7.5 7.0 12.0

6 Manufactured goods classifiedchiefly by material (%)

10.0 2.2 51.9 0.8 20.1 22.5 24.0 14.5

7 Machinery and transportequipment (%)

1.4 1.0 4.7 0.6 17.6 16.4 25.2 14.8

8 Miscellaneous manufacturedarticles (%)

1.1 8.0 0.9 0.3 4.0 4.4 3.9 3.6

9 Commodities and transactions notclassified elsewhere (%)

0.7 5.9 0.6 0.0 2.0 2.6 0.5 2.0

Source: UN COMTRADE database, SITC rev.3. Data retrieved on 24 September 2010.ASEAN: Association of South East Asian Nations; C-L-M: Cambodia, Laos and Myanmar.

Table 4. C-L-M’s export structure based on UN SITC rev.3 classification, 2008

SITCcode

Sections Export to the world Export to EU


Total, billion US dollar at current price 12.8 5.0 1.4 6.4 1.5 1.1 0.2 0.30 Food and live animals (%) 11.2 2.3 6.6 19.1 3.9 0.3 14.5 10.61 Beverages and tobacco (%) 0.2 0.3 0.2 0.0 0.0 0.0 0.0 0.02 Crude materials, inedible, except fuels (%) 14.6 5.6 24.2 19.5 1.0 0.1 0.7 4.83 Mineral fuels, lubricants and related materials (%) 25.9 0.0 8.5 49.9 0.0 0.0 0.0 0.04 Animal and vegetable oils, fats and waxes (%) 0.1 0.1 0.0 0.0 0.0 0.1 0.0 0.05 Chemicals and related products, n.e.s. (%) 0.2 0.0 1.0 0.1 0.0 0.0 0.0 0.06 Manufactured goods classified chiefly by material (%) 5.5 0.9 38.0 1.8 1.3 1.4 0.4 1.57 Machinery and transport equipment (%) 1.3 1.7 3.2 0.6 4.3 6.1 0.3 0.28 Miscellaneous manufactured articles (%) 40.7 88.3 17.8 8.8 89.3 92.1 84.1 82.49 Commodities and transactions not classified elsewhere (%) 0.4 0.6 0.5 0.1 0.1 0.0 0.1 0.4

Source: UN COMTRADE database, SITC rev.3. Data retrieved on 24 September 2010.C-L-M: Cambodia, Laos and Myanmar; EU: European Union.

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clothing accessories; more than 70% of exports from Laos concentrated on refined copper(37%), articles of apparel and clothing accessories (17%), and woods (17%); Myanmar’sexports were mainly composed of natural gas (49%), woods (14%) and leguminousvegetables (11%).

The EU is the third largest market for C-L-M’s exports, in 2008 corresponding toabout one-eighth of total C-L-M exports. The main products exported to the EU werearticles of apparel and clothing accessories (78%) and footwear (11%). While the EUmarket represented one-fourth of C-L-M’s total exports of articles of apparel and clothingaccessories in 2008, exports from C-L-M only accounted for about 1% of EU’s totalimports of clothing and footwear products.

ASEAN as a group is currently the second largest exporter of clothing and footwear tothe EU market. It accounted for over 11% of the total market share in 2008. Currentlyboth Cambodia and Laos benefit from the EU’s Generalised System of Preference (GSP)scheme, which grants them duty-free market access to the EU. As LDCs, Cambodia andLaos have received de facto preferential treatment when exporting to the EU. This can beseen from the effectively applied tariff rates (weighted average) faced by ASEAN memberstates (Table 5).

The free access to the EU market for Cambodian textile products is additionallyformalised by the “Agreement between the European Community and the Kingdom ofCambodia on trade in textile products” that entered into force on 1 July 1999 andprolonged in 2004. According to this bilateral treaty, the EU further liberalised twoconditions of Cambodia’s access to the EU’s GSP scheme: first, it considers thoseintermediate textile products imported by Cambodia from another ASEAN country as ofCambodian origin; second, it permits Cambodia to import woven or knitted fabric andthen export garments produced with these materials to the EU market. It seems exportsof textile to the EU are mainly constrained by the production capacity instead of tradebarriers.

For Cambodia and Laos, the potential direct “trade creation” effects of a formalEU–ASEAN FTA seem to be limited given the fact that around 90% of their exports tothe EU market are already duty-free, while for Myanmar, sales to the EU market onlyaccounted for 4.3% of its total exports in 2008. Its direct link to the EU is even looserthan that of Cambodia and Laos. Thailand absorbed over half of its total exports in 2008.

Table 5. EU’s imports of clothing and footwear products from ASEAN member states

EU’s imports of articles of apparel and clothing accessories EU’s imports of footwear

MFN appliedrate1

Effectivelyapplied rate1

Marketshare (%)

MFNapplied rate1

Effectivelyapplied rate1

Marketshare (%)

World 11.18 5.6 100.0 11.11 6.79 100.0Vietnam 11.38 8.93 2.1 12.13 7.9 17.5Indonesia 11.19 8.82 1.8 8.97 5.24 5.4Thailand 9.51 7.21 1.5 9.19 5.44 1.9Malaysia 5.07 2.65 1.1 11.16 7.09 0.4Cambodia 11.94 0 0.9 10.21 0 0.9Philippines 10.42 8.11 0.3 13.12 8.73 0.0Myanmar 11.78 11.78 0.2 7.67 7.67 0.0Laos 11.91 0 0.2 12.12 0 0.0Singapore 11.26 11.26 0.0 8.78 8.78 0.0Brunei 11.96 9.57 0.0 7.66 4.16 0.0

Source: UN COMTRADE database, SITC rev.3. Data retrieved on 24 September 2010.1 Weighted average based on trade in 2008.ASEAN: Association of South East Asian Nations; EU: European Union.

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Myanmar may expect to benefit from the potential EU–ASEAN FTA via its closeconnection to Thailand, supposing that such an FTA could generate some “linkageeffects” and eventually promote Myanmar’s exports.

Cambodia’s and Laos’s exports of textile and clothing already face serious competitionfrom its ASEAN neighbour states, particularly Vietnam, which also builds its advantageon labour-intensive activities. In comparison, Vietnam has a larger economic size and alarger pool of cheap labour compared with C-L-M. With zero-tariff treatment,Cambodia’s textile exports to the EU have tripled from 2000 to 2008. During the sameperiod, Vietnam’s exports of clothing and footwear to the EU increased by 140%. Onecould imagine that the removal of trade barriers may facilitate and expand the EU’simports from other ASEAN member states at the cost of C-L-M’s exports.

All the C-L-M countries are currently showing a trade deficit. ASEAN and China arethe two main trade partners of C-L-M. The main import products are industrialmachinery and transportation equipment, textile fabrics, steel, and oil. In terms of theoverall size of commodity trade, the EU’s market share in C-L-M is still relatively small.It only accounted for around 3% of C-L-M’s total imports in 2008. Yet C-L-M registersa trade surplus in their bilateral trade with the EU. The main products imported from theEU include industrial machinery, telecommunication and transportation equipment,medicinal and pharmaceutical products, and diamonds (Table 6).

Although the market in C-L-M is relatively small, none of C-L-M’s imports solelyrelies on the EU’s supply, and China is more competitive for many products. This doesnot mean that C-L-M is not of interest to the EU. For example, in the services sectorthere is certainly scope for the EU to develop more business. However, it is still difficultfor EU companies to enter the sector because of the high protection levels and the lackof solid legal systems in C-L-M. Under the WTO framework, C-L-M countries areallowed to protect their service sector for a certain period because of their status as lessdeveloped countries. An EU–ASEAN FTA might give them better access to the servicessector.

In sum, direct trade linkages between C-L-M and the EU are limited. In the case ofCambodia and Laos, most of their exports enter the European market already free ofduties. However, independently of preference erosion, indirect effects of an FTA can beexpected because of the trade linkages of C-L-M with the other ASEAN economies. Butbecause of their peripheral role in the East Asian production sharing system, effects (if

Table 6. C-L-M’s import structure based on UN SITC rev.3 classification, 2008

SITCcode

Sections Import from the world Import from EU


Total, billion US dollar at current price 15.7 6.9 2.5 6.2 0.5 0.2 0.1 0.20 Food and live animals (%) 6.6 7.2 7.0 5.8 5.0 5.4 2.3 6.11 Beverages and tobacco (%) 3.4 4.9 2.8 2.0 6.6 11.4 4.5 1.02 Crude materials, inedible, except fuels (%) 0.9 1.0 0.5 0.9 1.0 0.2 2.3 1.33 Mineral fuels, lubricants and related materials (%) 18.5 18.6 21.0 17.3 1.2 2.3 0.0 0.44 Animal and vegetable oils, fats and waxes (%) 2.4 0.6 0.3 5.3 0.1 0.1 0.3 0.25 Chemicals and related products, n.e.s. (%) 8.6 6.8 6.2 11.5 18.6 20.0 4.6 25.16 Manufactured goods classified chiefly by material (%) 27.1 32.4 22.6 23.0 20.1 26.4 26.5 7.27 Machinery and transport equipment (%) 25.8 20.8 34.8 27.8 35.5 24.0 52.1 42.18 Miscellaneous manufactured articles (%) 5.1 5.8 3.9 4.9 8.9 8.8 6.2 10.79 Commodities and transactions not classified elsewhere (%) 1.6 2.0 0.6 1.6 1.3 1.2 0.8 1.8

Source: UN COMTRADE database, SITC rev.3. Data retrieved on September 24, 2010.C-L-M: Cambodia, Laos and Myanmar: EU: European Union.

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any) are rather to be expected through the demand for raw materials (along the intensivemargin), and only to a lesser extent (and not immediately) through the demand for partsand components (along the extensive margin).

3. WHAT DO WE KNOW ABOUT FTA EFFECTS FOR C-L-M?

So far, little empirical research has been undertaken to obtain an estimate of net trade andwelfare effects of an ASEAN–EU FTA.4 In preparation of its proposal for startingnegotiations with the ASEAN countries, EC-DG Trade contracted two major studies,which led to the reports by Boumellassa et al. (2006) and Andreosso-O’Callaghan et al.(2006).

In the study by Boumellassa et al. (2006), three scenarios are modelled, simulated andassessed using MIRAGE, a CGE model developed by CEPII,5 as follows:

• a first scenario with import duties on goods fully dismantled, and 50% of trade barriersin services removed, also allowing a comparison with a situation where trade in servicesis not liberalized;• a second scenario with a list of sensitive products excluded from the FTA;• a third scenario that endeavours to assess the impact of a changing environment in theworld economy as a result of other FTAs in which the EU and ASEAN are partners.

The reduction of the trade barriers between the EU and ASEAN was assumed to start in2008 and be fully implemented by 2015. Unlike in the GTAP model, non-tariff barrierswere taken into account as well as liberalisation of trade in services. It should be stressedthat the impact of trade liberalisation on FDI was also taken into account in theMIRAGE simulations (Table 7). C-L-M and Brunei were treated as “Rest of ASEAN.”

4 A first, rather exploratory study was performed by van der Geest (2004), following the approachof a previous study on an EU–Singapore FTA (van der Geest et al., 2003) and drawing attentionto the major contentious issues of the EU–ASEAN FTA negotiations.5 Centre d’Etudes Prospectives et d’Informations Internationales.

Table 7. Estimated impact of an EU–ASEAN FTA on welfare (variation in %), by country,2020

Region Scenario 1 Scenario 2 Scenario 3

Goods and services Sensitive products New other FTAs

ASEAN 2.16 2.28 2.58Indonesia 1.81 1.77 1.77Malaysia 8.30 7.95 7.83Philippines 1.12 1.87 2.93Rest of ASEAN 0.29 0.10 0.32Singapore 0.41 0.51 0.74Thailand 2.63 2.74 3.05Vietnam 2.22 2.26 2.35EU25 0.10 0.11 0.09China -0.00 -0.02 -0.04India -0.04 -0.02 -0.02Other developed countries 0.00 0.01 0.01Other developing countries -0.04 -0.04 -0.05

Source: Boumellassa et al. (2006).ASEAN: Association of South East Asian Nations; EU: European Union.

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From the results of these simulations some important conclusions can be drawn:

• The welfare gains for ASEAN are very large, amounting to 2.5-2.6% of GDP in 2020.• Of these welfare gains for ASEAN, about three-quarters are associated withliberalisation in services.• The introduction of a list of sensitive products, i.e. products that are excluded from theFTA, will increase the overall expected welfare gains for ASEAN and the EU. This is aremarkable result from the point of view of mainstream economic theory but canprobably be explained by some characteristics of the MIRAGE model, namely imperfectcompetition and increasing returns to scale in the production of goods and services.• For most ASEAN countries, the welfare gains in the third scenario are even larger thanin the second, thus confirming the desirability of an EU–ASEAN FTA in the light of theinvolvement of both regions in other new FTAs (EU–Mercosur and ASEAN FTAs withJapan and the USA).

Some words of caution are needed, however (see also Andreosso-O’Callaghan et al.,2006:9 for a long list of factors that explain the lack of consensus in empirical work onFTAs). Boumellassa et al. (2006) do not consider, for example, the impact of the removalof NTBs on goods in their estimations (except quotas). The barriers to trade in servicesare measured in an ingenious way using restrictiveness indicators, which are subsequentlytransformed into tariff equivalents. In the scenarios described, it is assumed thatprotection in services is halved. It is far from clear what the implications of the use of thetrade barriers indicators for the simulation results are, but it seems that they are quitesensitive to these data and the uncertainty surrounding the real values.

More recently, the EC commissioned a Trade Sustainability Impact Assessment for theASEAN–EU FTA from a consortium led by ECORYS. Its draft final report was publishedin May 2009 (ECORYS, 2009a, 2009b). The study models three possible FTA scenarios(a limited FTA, an ambitious FTA, and an ambitious-plus FTA with further removal ofNTBs) (Table 8) and analyses both the short-term and the long-term impacts of eachscenario. A selection of the main aggregate findings is presented in Table 9. These effectsare quite substantial for most of the ASEAN countries, although – as always – the resultsof CGE models should be considered with caution (Hazledine, 1990; Flôres, 2011).

The CGE outcomes suggest that the EU–ASEAN FTA can have positive impacts inmany ASEAN countries while its impacts in the EU will be quite limited. Generallyspeaking, in the long term, the EU and Singapore will gain the most in terms of incomeeffects. Of these gains, 51% and 78% for the EU and Singapore, respectively, are due tothe removal of the barriers to services trade. The EU will gain more than ASEAN from

Table 8. Trade liberalisation scenarios applied in CGE modelling (trade SIA)

Description Food Non-food Services Trade facilitation

Scenario 1 Limited FTAagreement

90% bilateral tariffreductions


25% bilateral reduction ofrestrictions in services

1% of the value of trade

Scenario 2 AmbitiousFTA agreement




2% of the value of trade

Scenario 3 Ambitious plusFTA agreement




2% of the value of trade +additional 1% reductionon certain sectors

Source: ECORYS (2009a:18-19).CGE: computable general equilibrium.

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the removal of NTBs. Within ASEAN, Vietnam and the Philippines will be the biggestwinners in both relative and absolute terms.

According to ECORYS, the four small ASEAN countries (C-L-M and Brunei), againconsidered together, may experience negative effects in some scenarios. Even though tradeliberalisation initiatives are probably not the main cause of structural transformations, theEU–ASEAN FTA is likely to accelerate these ongoing processes. In the short term,substantial shifts within and between sectors may cause losses for groups and individuals,while in the long term, more efficient allocation of resources and a higher degree ofspecialisation will increase countries’ competitive advantages (ECORYS, 2009b).

Both studies thus point in the direction of an EU–ASEAN FTA contributing to awidening income gap between ASEAN5 and C-L-M if no accompanying measures aretaken by ASEAN and supported by the EU. The differences in results between CEPII(Boumellassa et al., 2006), which included C-L-M, and ECORYS’s assessment (ECORYS2009a, 2009b) further suggest that C-L-M might be worse off when left out of thenegotiations, although one should again be cautious when comparing the two assessments.

Finally, we should not forget that an ASEAN–EU FTA would add to the noodle bowleffect and that its consequences will depend on the interaction of these consequences withthe effects of the other FTAs in place or being implemented in the near future.6

6 For recent micro-economic evidence on the cost of the noodle bowl for business, see, forexample, Kawai and Wignaraja (2009).

Table 9. Selected macro-economic impact of an ASEAN–EU FTA (trade SIA)

Scenario/variable EU-27 Indonesia Malaysia Philippines Singapore Thailand Vietnam OtherASEAN

Scenario 1: Limited FTA (short run)GDP (% change) 0.02 0.32 0.38 0.24 0.99 0.11 1.92 0.08Skilled real wage (% change) 0.05 0.53 1.61 0.85 1.23 0.48 3.59 0.13Unskilled real wage (% change) 0.04 0.63 1.84 0.93 1.12 0.59 3.7 0.65Value of exports (% change) 0.48 4.23 1.75 0.87 1.99 4.11 10.28 6.11Scenario 1: Limited FTA (long run)GDP (% change) 0.10 1.64 3.43 2.51 4.18 2.84 10.17 2.39Skilled real wage (% change) 0.11 1.45 4.15 2.51 3.61 3.22 9.06 0.75Unskilled real wage (% change) 0.10 1.52 3.43 1.72 3.14 2.85 9.22 1.46Value of exports (% change) 0.59 6.28 4.07 3.84 4.79 5.83 22.84 8.17Scenario 2: Ambitious FTA (short run)GDP (% change) 0.05 0.99 1.17 0.60 3.55 0.39 3.46 0.29Skilled real wage (% change) 0.10 1.18 3.05 1.30 4.00 0.88 4.87 0.08Unskilled real wage (% change) 0.07 1.17 3.44 1.23 3.66 1.04 5.60 0.69Value of exports (% change) 0.78 7.72 3.04 2.45 5.77 6.35 15.37 7.94Scenario 2: Ambitious FTA (long run)GDP (% change) 0.20 3.39 6.85 4.12 12.32 4.81 14.02 3.71Skilled real wage (% change) 0.19 2.76 7.83 3.90 10.30 5.34 11.48 1.13Unskilled real wage (% change) 0.17 2.75 7.98 2.44 8.94 4.70 12.28 2.03Value of exports (% change) 0.99 11.96 7.45 7.22 12.79 9.20 31.84 11.38Scenario 3: Ambitious plus FTA (short run)GDP (% change) 0.06 0,88 1.22 0.63 3.66 0.36 3.22 0.27Skilled real wage (% change) 0.10 1.09 3.31 1.56 4.29 0.91 4.78 0.46Unskilled real wage (% change) 0.08 1.15 3.72 1.35 3.86 1.06 5.50 1.08Value of exports (% change) 0.85 8.35 3.49 3.00 6.09 7.15 16.10 8.89Scenario 3: Ambitious plus FTA (long run)GDP (% change) 0.23 3.66 7.42 5.02 12.89 5.39 15.27 4.39Skilled real wage (% change) 0.21 3.02 8.56 4.84 10.84 6.02 12.61 1.73Unskilled real wage (% change) 0.19 3.01 8.70 2.86 9.36 5.23 13.30 2.72Value of exports (% change) 1.09 13.07 8.32 8.95 13.82 10.29 34.86 13.02

Source: ECORYS (2009a:23-24).ASEAN: Association of South East Asian Nations; GDP: gross domestic product; EU: EuropeanUnion.

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4. RESEARCH QUESTION AND METHOD

As seen before, direct trade creation effects of an ASEAN–EU FTA for C-L-Mcountries will likely be marginal. Alternatively, C-L-M countries may benefit“indirectly” from the EU’s FTA with ASEAN5 supposing there is a “linkage effect”between ASEAN5 exports to the EU and their imports from C-L-M countries. Thelogic behind this is that C-L-M are participants in the regional production sharingnetwork in Asia, and a shock in other Asian countries’ exports will be transmitted tothis network and partially affect C-L-M exports. The empirical data show that C-L-Mrely deeply on the regional market of ASEAN in terms of international trade: theneighbour states in Southeast Asia absorb most of their exports and provide themajority of their imports. We observed from Tables 4 and 6 that raw materialsdominate C-L-M’s exports, while manufacturing goods take the majority of theimports. The role of C-L-M in the regional production sharing network seems to berather passive. It is more likely that EU–ASEAN5 trade liberalisation will affect C-L-M’s exports to ASEAN mainly from the demand side. The supply of parts andcomponents by C-L-M is not likely to be immediate, although it might openperspectives for the medium and long term.

To investigate the indirect linkage between ASEAN5’s exports and C-L-M’s exports,we start by modelling C-L-M exports using the gravity-type equation (1). Basically, thedeterminants of bilateral trade in the equation are classified into three groups: supply-sidefactors (S), demand-side factors (D) and trade costs (B).

EX f S GDP GDPPC D GDP GDPPC EX Bi j t i t i t j t j t j t, , , , , , ,, , , , , ,= ( ) ( ). . . DDisti CLM j ASEAN

ij, ,,

. . .( )( )∈ ∈ 5 (1)

where GDP and GDPPC, respectively, denote the countries’ GDP and GDP per capita;Distij denotes the geographic distance between the two countries. In addition to GDPj,t

and GDPPCj,t, we also consider exports from the ASEAN5 countries (EXj, j ∈ ASEAN5)as one of the demand-side factors.

EXGDP GDPPC GDP GDPPC EX

Disti j

i i j j j

i j t,

, ,

.=⋅⋅ ⋅ ⋅α α α α α

α

1 2 3 4 5

6(2)

Parameters a1 to a6 in equation (2) denote the elasticity of EXi,j,t for each exogenousvariable.

However, because EXj,t can also be expressed by a series of gravity equations whereGDPj,t and GDPPCj,t are parts of exogenous variables (as equation (3) illustrates), whenestimating equation (1) we would face a problem of correlation among its exogenousvariables (EXj,t, GDPj,t and GDPPCj,t).

EX EXGDP GDPPC GDP GDPPC

Disj t j k tk

j t j t k t k t, , ,

, , , ,= =⋅ ⋅ ⋅

∑β β β β1 2 3 4

tt

k trade parters of ASEANj k t

k, ,

.β5

5

∑

∈(3)

From equation (3) the correlation between EXj,t and GDPj,t can be derived as

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dEX dGDPj t j t j t, , ,= ⋅γ

where γ βj tj k t

j tk

EX

GDP,

, ,

,

= ⋅− ∑11 Δ

Δ.

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The estimation is therefore based on the following equation:

EXGDP GDPPC GDP GDPPC

Disti j t

i t i t j t j t

ij t, ,

, , , ,

,

=⋅ ⋅ ⋅α α α α

α

1 23

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6

�(4)

where GDP GDP sj t j t j j t�

, , ,= +( )⋅ ⋅−1 1γs EX GDP

EX EX

EXGDP GDPPC

j t j t j t

j t j k t

j k tj t j t

, , ,

, , ,

, ,, ,

=

=

=⋅

∑

�

� �β1 ββ β β

β

2 3 4

5

⋅ ⋅GDP GDPPC

Distk t k t

jk t

, ,

,

.(5)

Based on this, the elasticity of C-L-M’s exports on ASEAN5’s total exports (jj) can beexpressed as ϕ α μ γj j t j= ⋅ ⋅ˆ ˆ

,3 , where mj is county j’s total exports as share of its annualGDP. And the elasticity of C-L-M’s exports on exports of ASEAN5 to the EUϕ α μ γj EU j EU t j, 3 , ,= ⋅⋅ˆ ˆ , where the subscript “EU” refers the EU markets and mj,ke,t denotescountry j’s exports to the EU as share of its annual GDP.

Data on bilateral trade were retrieved from the UN COMTRADE database using theHS1988/92 classification via the World Bank WITS platform. All the trade data areaggregate figures7 reported by the importing countries (CIF data8). Data on GDP andGDP per capita were retrieved from the World Bank WDI online database. The data ongeographic distance, which has also been widely used as a proxy of trade costs, weredownloaded from CEPII’s web site. Data are available from 1988 till 2009. The sampleswith missing data from the original data source(s) are simply excluded from theestimation.

7 The fact that raw materials dominate C-L-M’s exports makes it difficult to analyse C-L-M’sparticipation into the regional production sharing by investigating trade flows of part andcomponents and that of final goods. Employing aggregate trade data into our analysis will at leastallow us to discover the correlation between C-L-M’s exports and ASEAN5’s exports assumingthat C-L-M countries can contribute to ASEAN5’s export capacity to some extent.8 Two reasons to employ the import data: first, the CIF trade value takes into account the tradecosts such as transport and insurance cost; second, as Baldwin (1994) points out, it seems that inmost countries, customs usually pay more attention to (and therefore provide more reliable dataon) imports than to exports.

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The estimation is based on a two-step regression – first of equation (5) and then ofequation (4). The panel data set used in the first step contains exports of ASEAN5 asendogenous variable, and GDP and GDP per Capita of ASEAN5 and ASEAN5’s tradepartners as factors on the supply and the demand side, respectively. Trade costs aremeasured by the distance between exporters and importers. A dummy variable to capturethe properties of the EU’s imports from ASEAN5 is also created, of which the valueequals one if the import country is an EU member state; otherwise the value equals zero.The panel data set employed in the second step uses data of C-L-M countries’ exports asendogenous variable. The exogenous variables include macro data on ASEAN5 (on theexport side) and C-L-M (on the import side) and geographic distance (as a proxy of tradecosts).

We decided to estimate the equation using the Poisson pseudo-Maximum Likelihoodmodel (PML model) instead of the commonly used fixed effects or random effects model.First of all, the random effects model is not feasible in this case because the null hypothesisof the Hausman test was rejected, which means that the coefficients estimated by therandom effects model could be inconsistent. Second, the estimators of the fixed effectsmodel are consistent but not efficient. Because of this, the coefficients of non-timevariables are likely to be overestimated using the fixed effects model. As the efficiency isimportant for our two-step evaluation, we opted for the PML model. Gourieroux et al.(1984) show that PML estimators will be consistent and efficient as long as theappropriate function of regression is defined.9 That is, it can solve the problem ofinconsistency without losing the efficiency of the estimators.

5. RESULTS

The detailed results of the model regressions (step 1 and step 2) are presented inAppendix I. The elasticity of ASEAN5 member states imports from C-L-M ( α3) on GDPequals 1.16, which is statistically significant. Accordingly, the elasticity of individualASEAN5 member states imports on C-L-M’s total exports ranges from 0.06 (Philippines)to 0.15 (Malaysia) (Table 10). The last two columns of Table 10 show that the elasticityof C-L-M exports on ASEAN5’s exports to the EU is indeed marginal. It means that thede facto “linkage-effects” of ASEAN5 exports to EU that may eventually work onpromoting C-L-M exports will be quite limited. If we suppose that the EU–ASEAN FTAwould universally stimulate ASEAN5 exports to the EU with an increase of 10%, thenC-L-M exports would accordingly increase by around 1.2%.

Relatively speaking, Thailand and Malaysia may act as the main “channels” thattransmit the potential trade-creation effects of an ASEAN–EU FTA to C-L-M’s exportsector. From this perspective, it would seem to be in C-L-M’s interest to first see theestablishment of an EU–Thailand FTA in a scenario of the EU proceeding to sign FTAson a bilateral basis with individual ASEAN member countries.

Finally, our estimations, in combination with the ECORYS CGE simulations, allowus to estimate trade and GDP impacts of different FTA scenarios (involving ASEAN5)for individual C-L-M countries (Table 11). As expected, the general impact of anASEAN–EU FTA on C-L-M is positive but marginally small, even when taking into

9 Santos Silva and Tenreyro (2005) further explore the technical advantages of using the PMLmodel to estimate the gravity equation.

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account the potential linkage-effects. Myanmar may benefit the most because of its closeties with Thailand.

6. CONCLUSIONS AND POLICY IMPLICATIONS

The preceding sections and the different methods that were used have shown that it isnot straightforward that C-L-M would win (in absolute or relative terms) from anASEAN–EU FTA. At best, marginal absolute positive effects might be expected for theC-L-M economies. In relative terms, an FTA is not likely to contribute to more economic(and political?) cohesion in the region. This is related to the fact that although the EastAsian model of integration has been described as being a combination of an increasinglydense and concentric trade and investment network, on the one hand, and shallowinstitutionalisation, on the other. Currently the C-L-M economies find themselves still inthe periphery of the system with a very poor participation in production sharing networksand weak linkages to the industrial value chains that ASEAN5 are deeply involved in.

The issue of differential effects is related to the issue of the negotiation architecture butdoes not completely coincide with it. As mentioned before, there were initially differenttheoretical options to organise the negotiations. And although both sides initiallyexpressed a preference for a region-to-region approach, they were both sufficiently flexible

Table 10. The estimated elasticity of C-L-M exports toASEAN5 exports

J g j mj1 j j m j EU,

1 j j EU,

Indonesia 0.19 0.37 0.08 0.08 0.019Malaysia 0.11 1.23 0.15 0.25 0.031Philippines 0.10 0.49 0.06 0.10 0.012Singapore 0.07 1.27 0.11 0.27 0.023Thailand 0.14 0.80 0.13 0.20 0.033

Source: Authors’ calculation based on the data from UNCOMTRADE database and IMF World Economic Outlookdatabase.1 Calculated based on trade data of 2008.ASEN: Association of South East Asian Nations; C-L-M:Cambodia, Laos and Myanmar.

Table 11. Impacts of an ASEAN–EU FTA on C-L-M exports and GDP

Value of exports (% change) GDP (% change)

Cambodia Laos Myanmar Cambodia Laos Myanmar

Scenario 1:Limited FTA (short run) 0.04 0.25 0.37 0.00 0.00 0.00Limited FTA (long run) 0.17 1.54 2.25 0.00 0.00 0.01

Scenario 2:Ambitious FTA (short run) 0.11 0.49 0.77 0.00 0.00 0.00Ambitious FTA (long run) 0.42 2.58 3.90 0.00 0.01 0.01

Scenario 3:Ambitious plus FTA (short run) 0.12 0.51 0.81 0.00 0.00 0.00Ambitious plus FTA (long run) 0.45 2.89 4.35 0.00 0.01 0.01

Source: Authors’ calculation based on the data from UN COMTRADE database, IMF WorldEconomic Outlook database and ECORYS (2009a).ASEN: Association of South East Asian Nations; C-L-M: Cambodia, Laos and Myanmar; EU:European Union; GDP: gross domestic product.

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and pragmatic to move, first, to an EU–ASEAN7 scenario and then to bilateralnegotiations, thus leaving C-L-M out of the actual negotiations.

European private sector pressure groups have also repeatedly stated their position infavour of a bilateral approach. In their opinion, it would be better for the EU to concludebilateral FTAs with some of the ASEAN countries and not limit its room for manoeuvrein the negotiation process by aiming to reach an FTA with all seven ASEAN members.Other civil society organisations have been more supportive of a regional approach andhave voiced concerns about regional cohesion within ASEAN. They have also pointed tothe absence of special and differential treatment (also with respect to ASEAN7) in theinitial negotiation mandate.10

This article supports the claim that it makes sense to (re-)connect C-L-M to thenegotiation process. The likely fact that C-L-M will benefit less than ASEAN5 (orASEAN7) from an FTA will contribute to the widening of the development levels in theregion and will thus become an issue of regional cohesion with possibly politicalconsequences. This is not only an issue for ASEAN as an organisation but also for the EUas it has explicitly – and on several occasions – mentioned the support to regionalintegration and cohesion in other regions in the developing world as one of its policygoals (De Lombaerde and Schulz, 2009). (Re-)connecting C-L-M to the negotiationprocess would allow to address the problem of preference erosion that C-L-M willexperience as the result of an EU–ASEAN7 FTA (or more restricted set of bilateral FTAs),which will also give the ASEAN7 countries duty-free market access to the EU and thusannihilate C-L-M’s comparative advantage. As mentioned, exports from Cambodia andLaos to the EU can now enter the European market duty free under the EBA scheme. Aninclusive negotiation process would also allow to remedy the problem of the restrictiveand complex rules of origin, which historically lead to insufficient utilisation of the EUpreferences granted.11 In addition, the rules of origin of an EU–ASEAN7 FTA relating togoods and services should not only be transparent but should also apply to C-L-M inorder to guarantee that these countries will not lose their attractiveness for foreign andASEAN FDI vis-à-vis China, the Philippines and Vietnam.

Reconnecting C-L-M to the process can be done in several ways. With regard to thesubstance of the connection, this could include development assistance and technicalassistance (aid-for-trade) to Cambodia and Laos (and Myanmar in as far as ademocratisation process there would allow). Such assistance is even more necessary if wetake into account lesser levels of exposure to competition in several sectors and thelow-technology transfer absorption capacity of these countries (Andreosso-O’Callaghanet al., 2006:5).

REFERENCES

ADAMRAH, M. (2009). EU-ASEAN FTA talks frozen. The Jakarta Post (05/07). Available at http://www.thejakartapost.com/news/2009/05/07/aseaneu-fta-talks-frozen.html [Accessed 8 August 2009].ADB. (2009a). Asian Development Bank & Cambodia fact sheet. Available at http://www.adb.org/Documents/Fact_Sheets/CAM.pdf [Accessed 23 September 2010].

10 See e.g. Knottnerus (2007:20-21) and 11.11.11 et al. (2007).11 See e.g. Cuyvers and Verherstraeten (2005:18). On the relative restrictiveness of rules of originregimes in EU-centered trade agreements, see Estevadeordal and Suominen (2004) and Garay andDe Lombaerde (2006).

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———. (2009b). Asian Development Bank & Lao People’s Democratic Republic fact sheet. Available at http://www.adb.org/Documents/Fact_Sheets/LAO.pdf [Accessed 23 September 2010].———. (2009c). Asian Development Bank & Myanmar fact sheet. Available at http://www.adb.org/Documents/Fact_Sheets/MYA.pdf [Accessed 23 September 2010].AKAMATSU, K. (1962). A historical pattern of economic growth in developing countries. The Developing Economies, 1(1):3-25.ANDREOSSO-O’CALLAGHAN, B., NICOLAS, F., LOW, L., PETSCHIRI, A., THOMSEN, S., UPRASEN, U.,GEORGESCU, A. and WEI, X. (2006). A Qualitative Analysis of a Potential Free Trade Agreement between the EU andASEAN, Report Prepared for the European Commission and EU-ASEAN Vision Group. Limerick: Euro-Asia Centre.BOUMELLASSA, H., DECREUX, Y. and FONTAGNE, L. (2006). Economic Impact of a Potential Free Trade Agreement(FTA) between the European Union and ASEAN. Paris: CEPII-CIREM.CHAISSE, J. (2006). Adapting the European community legal structure to the international trade. European Business LawReview, 17(6): 1615-1635.CUMMINGS, B. (1984). The origins and development of the Northeast Asian political economy: Industrial sector,product cycles and political consequences. International Organization, 38: 1-40.CUYVERS, L. (2007). An EU-ASEAN Free Trade Agreement: Reflections on Issues, Priorities, Strategies. CAS DiscussionPaper No. 53, Antwerp, University of Antwerp, Centre for ASEAN Studies.———, CHEN, L. and DE LOMBAERDE, P. (2010). ASEAN-EU FTA negotiations: Waiting for Godot? In P. Guglerand J. Chaisse (eds), Competitiveness of the ASEAN Countries. Corporate and Regulatory Drivers. Cheltenham: Edward Elgar,259-299.——— and VERHERSTRAETEN, S. (2005). The EU’s Generalized System of Preferences and Its ASEAN Beneficiaries: ASuccess Story? CAS Discussion Paper No. 47, Antwerp, University of Antwerp, Centre for ASEAN Studies.DE LOMBAERDE, P. (2003) The EU-Mexico free trade agreement: Strategic and regulatory issues. Journal of EuropeanStudies, 11: 100-118.——— and SCHULZ, M. (eds). (2009). The EU and World Regionalism. Farnham: Ashgate.DOLZER, R. and STEVENS, M. (1995). Bilateral Investment Treaties. The Hague: Martinus Nijhoff.ECORYS. (2009a). Trade Sustainability Impact Assessment for the FTA between the EU and ASEAN. Draft Final Report.Brussels: ECORYS.———. (2009b) Trade Sustainability Impact Assessment for the FTA between the EU and ASEAN. Phase 2 – Interim Report.Brussels: ECORYS.ESTEVADEORDAL, A. and SUOMINEN, K. (2004). Rules of Origin in Europe and in the Americas: Issues andImplications for the EU-Mercosur Inter-Regional Association Agreement. INTAL-ITD Working Paper (15).FLÔRES, R. G. (2011). CGE models applied to regional integration. In P. De Lombaerde, R. G. Flôres Jr., P. L. Iapadreand M. Schulz (eds), The Regional Integration Manual. Quantitative and Qualitative Methods. London and New York:Routledge, 219-246.GARAY, L. J. and DE LOMBAERDE, P. (2006). Preferential rules of origin: Models and levels of rule-making. In S.Woolcock (ed.), Trade and Investment Rule-Making. The Role of Regional and Bilateral Agreements. Tokyo: UNU Press,78-106.GOURIEROUX C., MONFORT, A. and TROGNON, A. (1984). Pseudo maximum likelihood methods: Applicationsto Poisson models. Econometrica, 52: 701-720.HAZLEDINE, T. (1990). Why do the free trade gain numbers differ so much? The role of industrial organization ingeneral equilibrium. Canadian Journal of Economics, XXIII: 791-806.HEYDON, K. and WOOLCOCK, S. (2009). The Rise of Bilateralism. Comparing American, European and AsianApproaches to Preferential Trade Agreements, Tokyo: UNU Press.KAWAI, M. and WIGNARAJA, G. (2009). The Asian Noodle Bowl: Is It Serious for Business? ADBI Working Paper Series(136).KNOTTNERUS, R. (2007). EU-ASEAN – Entering a New Phase in Trade Relations. EU-ASEAN FTA Seminar Reader,Bangkok, 7-8 February 2007.LIZARAZO RODRÍGUEZ, C. L. (1997). Acuerdos bilaterales de promoción y protección a la inversión. In P. DeLombaerde (ed.), La inversión extranjera en Colombia. Régimen jurídico y análisis económico. Bogotá: Universidad SergioArboleda, 93-150.OZAWA, T. (2003). Pax America-led macro-clustering and flying-geese-style catch-up in East Asia: Mechanism ofregionalized endogenous growth. Journal of Asian Economics, 13: 699-713.PIETRANGELI, G. (2009). Supporting regional integration and cooperation worldwide: An overview of the EuropeanUnion approach. In P. De Lombaerde and M. Schulz (eds), The EU and World Regionalism. Farnham: Ashgate,9-43.SALLY, R. (2009). The truth about Asian integration. The Wall Street Journal, 28 October.SANTOS SILVA, J. and TENREYRO, S. (2005). The Log of Gravity. CEPR Discussion Paper (5311).TERRY, E. (2002). How Asia Got Rich –Japan, China, and the Asian Miracle. New York: M.E. Sharp Publishing.VAN DER GEEST, W., BRENTON, P., CUYVERS, L. and MESSERLIN, P. (2003). Sharing Benefits of Globalisation: AEU-Singapore Free Trade Agreement. Centre for ASEAN Studies Discussion Paper (44).———. (2004). An EU-ASEAN free trade agreement: Sharing benefits of globalisation? Lecture Delivered at the NinthASEF University Session, Manila, 6 February.11.11.11, et al. (2007). Statement of Concern regarding the proposed EU-ASEAN Free Trade negotiations, Bangkok, 8February.

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APPENDIX I. THE ESTIMATION OF THE GRAVITY EQUATIONS (5) AND (4)

Step one Step two

Endogenous Var. EXj,k,t EXj,k,t EXi,j,t

_Constant -10.83*** -11.02*** -15.14***(3.44) (3.43) (4.95)

Log(GDPexporter) 0.31*** 0.33*** 1.17***(0.12) (0.11) (0.46)

Log(GDPPCexporter) 0.22*** 0.23*** -1.38**(0.07) (0.07) (0.35)

Log(GDPimporter) 0.86*** 0.82*** 1.16**(0.03) (0.02) (0.48)

Log(GDPPCimporter) 0.16*** 0.21*** 0.08(0.03) (0.04) (0.33)

Log(Distance) -1.10*** -1.02*** -2.59***(0.05) (0.05) (0.11)

Dummy_EU -0.61***(0.06)

(1 + sj,t) 4.41***(1.36)

Num. of Obs. 11,513 11,513 284

Notes: *** significant at 99%** significant at 95%

Technical notes on (1 + sj,t):To regress equation (4), we first of all transfer the function into:

log log log log, , , , ,EX GDP GDPPC GDPi j t i t i t j t( ) = ⋅ ( ) + ( ) + ⋅⋅ ⋅α α α1 2 3 11 1

4 6

+ ⋅( )[ ] +⋅ ( ) + ⋅ ( )

−γα α

j j t

j t ij t

sGDPPC Dist

,

, ,log log (4a)

Next, we define a parameter q, for which 1 11 2+ ⋅( ) = +( )−γ α θj j t j ts s, , , and transfer

equation (4a) into:

log log log log, , , , ,EX GDP GDPPC GDPi j t i t i t j t( ) = ( ) + ⋅ ( ) + ⋅ (⋅α α α1 2 3 )) +⋅ +( ) + ⋅ ( ) + ⋅ ( )θ α αlog log log, , ,1 4 6s GDPPC Distj t j t ij t

(4b)

Finally, we regress on equation (4b) and then calculate ˆ, ,

ˆγ θ α

j j t j ts s= ⋅ +( ) −⎡⎣ ⎤⎦−

1 121��.

1

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AN ASEAN-EU FTA, REGIONAL PRODUCTION SHARING, AND REGIONAL COHESION. FOCUS ON CAMBODIA, LAOS AND...

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