Article
The impact of RTAs on trade in Indonesia
Bagwell Center for the Study of Markets and Economic Opportunity, Kennesaw State University
(2022)
Abstract
We use the case of Indonesia to answer the question if signing regional trade agreements (RTAs)
should be expected to serve as a direct tool to increase the level of bilateral trade between the
signatories. We study the impact of RTAs on change in imports and exports between Indonesia
and forty-two other countries, and use two gravity models - exports and imports - of trade to
conduct the analysis. Four different measures of RTAs are included to reflect the agreements that
Indonesia had used in conducting its international trade from 1989 to 2019. This strategy allows
us to determine the cases of trade creation, diversion and contraction due to each of those
agreements. To support the findings associated with the aggregate analysis of exports and
imports, nine product groups are introduced and the same strategies are applied, which test the
basis of our findings disaggregated by products. The Poisson pseudo-maximum likelihood
technique is used to run the econometric analysis. The study estimates that the exports from
Indonesia do not utilize the benefits available to this country through the ASEAN free trade area
(AFTA). Whereas, the AFTA is a significant driver of imports to the large Indonesian market,
which are higher by $702,000 for these partners. It was assessed that the ASEAN Plus format of
free trade agreements has a significant negative impact on exports from Indonesia and contracts
it by $273,000. It leads to a combination of consequences, which include a significant
contraction of some of the exports and a diversion of the share of exports to the countries that
build their cooperation on partial scope agreements with Indonesia. In contrast, the ASEAN Plus
trade partners exploit the full potential of the Indonesian market for their imports, which rise, on
average, by $352,000. The most balanced and beneficial form of integration for Indonesia is the
partnerships set forth in the form of partial scope agreements (PSA). Not having a regional trade
agreement with Indonesia has a negative impact on bilateral trade of this country, which, reduces
exports by $452,000 and imports by $65,000. The balanced trade is also determined with the
WTO member countries. The recommendation is to define the comparative advantages that
would turn around and lead to the gains from trade within the ASEAN Plus and AFTA
partnerships. The PSAs seem to be a better fit for the trade objectives of Indonesia, therefore
expanding the list of PSA partnerships would benefit this country’s trade. The product level
analysis of trade supports our findings that were generated on the aggregate level.
Keywords
- Regional Trade Agreements (RTA),
- International trade,
- AFTA,
- ASEAN PLUS,
- Indonesia,
- Gravity models of Trade
Disciplines
Publication Date
Fall August 12, 2022
DOI
https://coles.kennesaw.edu/econopp/docs/FTA-Indonesia-Sedrakyan.pdf
Citation Information
Gohar Sedrakyan. "The impact of RTAs on trade in Indonesia" Bagwell Center for the Study of Markets and Economic Opportunity, Kennesaw State University (2022) Available at: http://works.bepress.com/gohar-sedrakyan/15/