I.

Introduction
A free trade agreement (FTA) is a legally binding agreement between two or more
countries to liberalise trade and bring about closer economic integration. FTAs allow the partners
to give each other preferential market access. Free Trade Agreements (FTAs) aim to remove the
barriers to trade and investment. These barriers are supposedly in place for the protection of local
markets and industries, yet often end up doing more harm to economies than good. Along with
strengthening economies, FTAs are also designed to benefit consumers, with the idea being that
increased competition results in a greater diversity and abundance of products available to
consumers at lower prices. They create a freer flow of goods, services, investment and people.
Through free trade, regions and companies are able to focus on the goods or services that they are
best able to provide.
East ASEAN is probably the region that has been most active over the last decade in
seeking the rapid expansion of Preferential Trade Agreementd (PTAs). ASEAN as one of the
international trade blocs that became one of the attractive target market. ASEAN FTA caused by
three main reasons: (1) the failure of the Asia Pacific Economic Coooperation (APEC) group and
the World Trade Organization (WTO) to have a substantial impact at either the continental and
global levels; (2) the need of the East Asia economies to establish their own institutional identity
in order to strengthen mutual cooperation following the adverse impacts on their economies of the
Asian financial crisis in 1997; (3) the continued highly discriminatory nature of intra-regional trade
in East Asia, which remains a major obstacle to expanding trade within the region
(Kitwiwattanachai, Nelson and Reed 2010).
Kawai et. al (2010) said the major factors that determine the current expansion of FTA in
Asia can be distinguished as follows: (i) The slow pace of the World Trade Organization (WTO)s
Doha negotiations makes FTAs a viable alternative; (ii) FTAs can support Asias market-driven
economic integration through additional liberalization of trade and foreign direct investment
policy; (iii) European an North American economic regionalism motivated policy makers in Asian
countries to enhance international competitiveness; (iv) Asian financial crisis in 1997-1998 proved
that regional initiatives are required to maintain growth and stability by overcome common
challenges (Kawai and Wignaraja 2010).
Association of Southeast Asian Nations (ASEAN) was established on 8 August 1967 in
Bangkok, Thailand, and was marked by the signing of the ASEAN Declaration (or Bangkok

1
Declaration) by its founder members, namely Indonesia, Malaysia, the Philippines, Singapore and
Thailand. The ASEAN population is around 635 million people by 2013 and continue to increase.
ASEAN countries are economically developing with varying degrees of growth per country.
ASEAN covers a land area of 4.4 million square kilometres, 3% of the total land area of Earth.
Member countries have a combined population of approximately 625 million people, 8.8% of the
world's population.
Figure 1 shows total population in ASEAN and country in the world in 2015. ASEAN is
among the top 3 regions with the most populations. In 2015, ASEANs population increased by
11.1% from 2007. ASEANs population was the third largest in the world, after China and India.
Figure 1
Total Population in ASEAN and Other Countries

Sumber: ASEAN Economic Community Chartbook

Figure 2 describes GDP from ASEAN member countries. The GDP OF Singapura is the
biggest compared another countries with US$ 52.743,9, followed by Brunei and Malaysia. And
GDP od Cambodia is the lowest GDP in 2015 with US$ 1.198,5.

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 Figure 2
Gross Domestic Product in ASEAN At Current Price (Nominal) in US$

Source: ASEAN Economic Community Chartbook

The scheme of cooperation of international trade can be in the form of bilateral or regional
cooperation. ASEAN is an economic block in the Southeast Asia area which has a relatively fastest
and dynamic grow (Shohibul, et al. 2016). In a free trade area, member countries eliminate tariffs
among themselves but maintain individual tariff schedules on imports from non-member countries.
As members maintain their own external tariffs, import could enter through the member country
wih the lowest tariff and then be re-exported to other members (Bowen, Hollander and Viaene
2001). The purpose of forming a free trade area is to create trade among members, avoid the shift
of global investment, attract investment to enter ASEAN and want to become a full participants in
the global economy as a form of new regionalism and open it for free trade cooperation with the
Other regions. So to implement these goals, ASEAN has made FTA with several countries in the
world (Naya and Plummer 1997).
ASEAN international trade cooperation agreements with ratified partnership countries are
ASEAN FTA, ASEAN - Korea FTA, ASEAN - India FTA, ASEAN - Australia New Zealand FTA
and ASEAN - China FTA. ASEAN established a free trade area with several partner countries.
Free trade agreements (FTAs) which improve market access and strengthen trade flows, are an
important vehicles for enhancing bilateral trading relationships (Siriwardana dan Yang 2007).
This paper seeks to investigate the long-run impact of the ASEAN Japan Korea China
FTA using a computable general equilibrium (CGE) modeling approach. In this paper uses the
Global Trade Analysis Project (GTAP) model to simulate the effects of the agreement. The GTAP
model has been widely used in studies examining the effects of preferential trade treaties.

3
 The paper is organized as follows: Section I provides an introduction. Section II
emphasizes the trade between ASEAN and Japan. Section III presents a brief description of the
main features and database of the GTAP Model used in this paper. Section IV outlines the GTAP
model, its database and the design of GTAP simulations. The results from the simulations are
reported and discussed in Section V. The paper ends with some concluding remarks in Section VI.

II. Overview Trade Between ASEAN-Japan-China-Korea

ASEAN FTA in cooperation with China (ASEAN-China FTA) in 2004, with Korea
(ASEAN-Korea FTA) in 2007 and with Japan (ASEAN - Japan Comprehensive Economic
Partnership) in 2010. Figure 3 shows ASEAN and international trade coorperation in the World.
According to Ekanayake (2010) countries that are larger in size will have the ability to absorb
imports more powerful than the small countries, and are more capable to achieve economies of
scale, thus the development of their comparative advantage is better than small countries. While
income per capita of the people shows income from each individual in a country.
Figure 3
ASEAN and Partnership Countrie

Source : BKF Kemenkeu

4
 ASEAN expansion into ASEAN + 1 (ASEAN China FTA) and ASEAN + 3 ( ASEAN
China Korea Japan ) indicates that shallow integration have changed into deep integration and
develop into regionalism. For Asian countries, regionalism is a continuation of regionalization
where formal trade agreements have formed part of the reform process and are used to reinforce
the goal of economic development strategy of export-oriented member states (Asian Developmnet
Bank 2008).

ASEAN Japan Comprehensive Economic Partnership

ASEAN and Japan formally established a free trade agreement in October 2003. The
establishment of the ASEAN-Japan CEP aims to strengthen economic integration between
ASEAN and Japan, including the establishment of a free trade area, include ASEAN and Japan's
competitiveness in world markets and facilitate trade in goods and services including investment.
For Southeast Asia, Japan is the third largest export destination after China and the European
Union. However, in real terms it is estimated that the value of dependency between the two is the
largest.
ASEAN - Japan Closer Economic Partnership will increase ASEAN's exports to Japan with
44.2% until 2020. On the other hand, Japan's exports to ASEAN will increase by 27.5% or
nominally, ASEAN's exports to Japan will increase to US $ 20.6 billion and Japan's exports to
ASEAN will increase by US $ 20.2 billion. In addition, ASEAN GDP can increase by 1.99%, as
the GDP of Japan will increase by 0.07% (Kemendag RI, 2005).
International trade between Japan and ASEAN countries has taken place long before
ASEAN was formed. As for the background of Japan-ASEAN trade relations are: First, to meet
the needs of raw materials and energy. As an industrial-based country, Japan is very poor of
industrial resources. Japan requires the supply of mining products that are widely available in
ASEAN countries. Secondly, Japan's desire to develop its industrial marketing area. ASEAN
countries whose coverage area is so vast to be a potential market for Japan. During this time,
ASEAN countries are the main customers of Japan-made products such as electronics, equipment,
machinery, and vehicles in large quantities (Pop 2007).
According to Hadi (2005) consistency of Japan products with affordable price and high
quality, a special attraction for consumers in Asian countries. Increasing the wage of labor and the
high cost of domestic production became the reason for Japan to relocate its industry and open

5
MNC (Multinational Corporation) in a number of ASEAN countries. The goals are to make the
wages of labor and production costs become cheaper, so that Japan-made products are more
competitive compared by other country.
Figure 4
ASEANs Trading Partners

Source : ASEAN Secretariat

Figure 4 shows that For ASEAN, Japan is the third largest trading partner after China and
the EU and Japan is the second largest investor after the EU.

ASEAN China Free Trade Area

Since the mid-1990s, China and the Association of Southeast Asian Nations (ASEAN)
have developed a growing partnership in security cooperation, economic/ trade interdependence,
and the development. Today, China and ASEAN have formed a strategic partnership for peace and
prosperity, signed a framework agreement on ASEAN China Free Trade Area. For the past 25
years, ASEAN-China relations have been multi-dimensional including politics and security as
well as the social and cultural fields but the success stories have been concentrated in economic
relations. Obviously, every statistic on trade and investment shows remarkable progress and

6
potential. There are several reasons for the establishment of ASEAN China FTA, (1) facilitate a
more peaceful regional security environment critical to ASEAN and Chinas continued economic
rise. (2) It addresses concerns in the region over ASEANs growing power by more closely
integrating itself with China and vice versa. (3) By taking the lead in forming an FTA, China also
hopes to play a more prominent role as the regions center of economic growth (Yuan 2006).
In 2011, China was the top trading partner of ASEAN, following intra-ASEAN trade. Its
2011 share in ASEAN trade of 11.7 percent represented a dramatic increase in its importance, with
a rise from its earlier levels of 2 percent in 1993 and 7 percent in 2003. Similarly, China became
an important destination for ASEANs exports, rising from 2 percent in 1993 to 6 percent in 2003
and to 11 percent in 2010. In addition, over this interval the share of Chinas imports sourced from
ASEAN rose from 2 percent in 1993 to 12 percent in 2010 (Yean and Yi 2014).
Over the past decade, trade and investment ties between ASEAN and China as well as
Singapore and China have expanded significantly. China has consistently maintained its position
as ASEANs largest trading partner. Figure 4 in 2015, ASEANs total merchandise trade with
China reached US$346.5 billion, accounting for 15.2% of ASEANs total trade. ASEAN also
received US$8.2 billion in foreign direct investment (FDI) from China in 2015, placing China as
ASEANs fourth largest source of FDI.
Figure 4
ASEAN China Trade (in billion US$)

Source: : ASEAN Trade Statistics Database as of 10 June 2016

7
 ASEAN Korea Free Trade Agreement

In addition to Japan and China, ASEAN conducts economic and trade cooperation with
South Korea, the ASEAN-Korea Free Trade Area (AKFTA). AKFTA was established through the
Joint Declaration on Comprehensive Cooperation Partnership and was enacted in Vientiane, Laos
in 2004. ASEAN and the Republic of Korea signed the Framework Agreement on Comprehensive
Economic Cooperation, which set the stage for the signing of four agreements: Trade in Goods,
Services, Investment, and Dispute Settlement Mechanism. All these formed the legal instruments
for establishing the ASEAN-Korea Free Trade Area (AKFTA). Economic cooperation projects
have also been initiated to promote AKFTA and facilitate trade and investment among parties.
Korea-ASEAN FTA and strengthen and enhance economic cooperation through the
following, progressive elimination of tariffs and non-tariff barriers in substantially all trade in
goods; progressive liberalisation of trade in services with substantial sectoral coverage,
establishment of an open and competitive investment regime that facilitates and promotes
investment among the Parties and establishment of effective trade and investment facilitation
measures (ASEAN Corporation 2006).
ASEAN as an important economic partnership for Korea and vice versa. Because ASEAN
is one of the fastest growing market, one of Korea's most important economic partners. The other
reason for Korea, ASEAN is emerging as the pivot of economic integration in East Asia. ASEAN
is famous as huge economies which have actively engaged in FTA with ASEAN. Korea is
ASEAN's 6th largest trading partner in 2008. Since the 2007 effectuation, trade in goods with
ASEAN amounted to $90 billion in 2008, an increase of 26 percent. This shows that AKFTA has
highly contributed to the expansion of trading between ASEAN Korea and trade in the ASEAN
region with South Korea has a positive impact of increasing the volume of trade and public welfare.
In addition to these impacts, AKFTA cooperation will provide a positive contribution in the form
of increased direct investment (FDI) and improve the quality of domestic products in the ASEAN
region as well as national competitiveness.

8
 Figure 5
Real GDP Growth AKFTA

Source: http://akfta.asean.org/ access : June 16, 2017

Figure 5 describes that the establishment of the AKFTA creates an opportunity for the 670
million people of ASEAN and Korea with a combined real GDP growth of USD 4,85% through a
more liberal, facilitative market access, and investment regimes among the Parties of the AKFTA.

III. Outlines of the Model and Database

The standard GTAP model applied in this paper is a type of CGE model for comparative
static analysis. The analytical framework used to quantify the impact of bilateral tariff reductions
is the well-known GTAP model. GTAP is a software and database used to simulate the effect of
international trade integration. GTAP is created and developed in 1992 by the Department of
Agriculture Economics, Purdue University, United States. Theory structure and comprehensive
documentation of GTAP can be seen in Hertel (1997). The structure of GTAP is based on multi-
region, multi-sector, computable general equilibrium (CGE), perfectly competitive market, and
constant return to scale, while bilateral trade model is formulated using Armington assumption.
In the GTAP model, all markets are assumed to be perfectly competitive. Demand and
supply are balanced in all markets, which imply the price received by the producer the same as the
producers marginal cost (Siriwardana dan Yang, GTAP Model Analysis of the Effect of an
Australia - China FTA: Sectoral Aspects 2007). In the GTAP model there is a one-to-one

9
relationship between producing sectors and commodities. There are two types of inputs
intermediate inputs and primary factors used for production. In each region, each sector is assumed
to mix the input to minimize total cost at a given output level. Each region has a single
representative household. Aggregate household expenditure is determined as a constant share of
total regional income (household consumption plus government expenditure and national savings).
The model has many general features which include product differentiation by country of
origin, explicit recognition of savings by regional economies, a capital goods producing sector in
each region to service investment, international mobility of capital, multiple trading regions,
multiple goods and primary factors, empirically based differences in production technology and
consumer preferences across regions, and exploration recognition of a global transport sector
(Siriwardana, An Analysis of the Impact of Indo-Lanka Free Trade Agreement and Its Implications
for Free Trade In South Asia 2004). It is also featured by many policy variables, including taxes
and subsidies on commodities as well as on the primary factors, making the model more attractive
to policy analysts. Economy openness, which consists of many countries and industries, is the
characteristic of GTAP. In an open economy system, the economic agents include regional
household, private household, government, producer, global saving, and rest of the world
(Shohibul, et al. 2016).
The latest version of the GTAP Data Base, version 9, contains data on 140 regions, 57
sectors and 5 factors (land, skilled labor, unskilled labor, natural resources, and capital). For the
version 9 consists of three reference years: 2004, 2007 and 2011.

IV. Simulation Design

To analyze the impact of ASEAN-Japan Comprehensive Economic Partnership (AJCEP),
AKFTA (ASEAN Korea Free Trade Area) and ACFTA (ASEAN China Free Trade Area) on
the ASEAN8 economies (Indonesia, Malaysia, Philippines, Singapore, Cambodia, Vietnam, Laos
and Thailand), Japan, Korea and China, this section will evaluate the potential impact of AJCEP,
AKFTA and ACFTA using computable general equilibrium (CGE) model.
The simulation in this study is conducted separately by conducting aggregation of member
countries which joined in ASEAN free trade agreement with partner countries, Japan. Which then
run with giving shock from each FTA. Shock given in this study is in the form of tariff reduction
and performed in two ways, tariff reduction of ASEAN member countries (Indonesia, Malaysia,

10
 Philippines, Singapore, Cambodia, Vietnam, Laos and Thailand) on one of partner countries
(Japan, China, and Korea) and vice versa, with equal level of tariff reduction for each country.
Shock in the form of tariff reduction is divided in two scenarios, (i) short-term scenario, in
the form of tariff reduction up to five percent/partial liberalization for all aggregated goods
commodities; (ii) long-term scenario, in the form of tariff elimination up to zero percent/full
liberalization for all goods classification and all regions.
This study used GTAP application version 9 as analysis tool with aggregation data with
2011 as base year. Agglomeration/aggregation of commodity in this study is fit with its
characteristic and type, refers to Park et al., (2008); and McDonald and Walmsley (2003) which
consist of Agriculture Products, Food Products, Extractive Industry, Textiles, Heavy
Manufacturing, Technology-intensive Manufacturing, Utilities, Construction, and Services.
But before simulation with CGE GTAP model will be elaborated database GTAP version
9 is to know comparison of tariff comparison between countries which analyzed for every
commodity that traded.
Table 1
Tariff Comparisons before FTA
Korea Japan China Cambodia Laos Vietnam Thailand Singapore Philippines Malaysia Indonesia
GrainsCrops 2340 229 82,2 144 151 125 379 0 140 470 51,3
MeatLstk 237 204 153 270 202 124 263 0 137 12,9 41,6
Extraction 71,6 10,1 9,7 159 29,7 49,5 36,4 0 19,7 16,2 20,3
ProcFood 490 154 183 283 350 311 235 5,26 71,3 203 133
TextWapp 159 57,2 113 197 107 142 205 0 90,7 113 96,4
LightMnfc 74,5 29,7 93,9 241 303 170 251 0 98,9 123 70
HeavyMnfc 42,5 5,55 68,2 227 105 52,9 72,2 0 25,4 43,3 49,9
Util_Cons 0,009 0 0,005 0 10,9 0 0 0 0 0 0
TransComm 0 0 0 0 0 0 0 0 0 0 0
OthServices 0 0 0 0 0 0 0 0 0 0 0
Total 3415 690 703 1520 1258 974 1442 5,26 583 982 462
Source: GTAP Version 9 Database

V. Simulation Results
This study purpose is to analyze quantitatively the effect of free trade cooperation between
ASEAN Korea, China and Japan. Variables used as parameters in this study are macroeconomic
analysis, which consist of welfare, GDP, export-import, balance of trade and term of trade which

11
is simulated in two schemas. Results of macroeconomic effect of the AJCEP, AKFTA and ACFTA
are reported in Table.2

Table 2
Macroeconomic Effect from ASEAN + 3 FTA
Trade Balance Term of
Equivalent
Export (%) Import (%) (USD Million Trade
Variation
Dollars (%)
Simulation 1 Partial Liberalization
Korea -4635,21 0,446 0,633 -2010,2 -0,16

Japan 4962,68 -0,532 -0,282 444,38 0,29

China -1734,81 -0,441 -0,733 3330,81 -0,01

Cambodia -40,97 1,82 2,399 -109,35 -0,32

Laos -85,61 0,5 -0,321 -40,94 -2,21

Vietnam -41,53 1,863 1,855 -806,66 -0,39

Thailand 1156,8 0,183 0,582 -385,28 0,23

Singapore -1282,22 -1,215 -1,82 -76,44 -0,26

Philippines -1410,65 -0,892 -4,666 2517,93 -1,44

Malaysia -1776,1 -0,078 -1,132 234,61 -0,82

Indonesia -1863,24 0,328 -2,209 3441,09 -0,79

Oceania 564,04 0,028 0,383 -679,97 0,14

East Asia 639,40 0,164 0,363 -178,51 0,11

SE Asia 15,95 -0,037 -0,056 -2,99 -0,1

South Asia 116,65 0,012 0,062 -241,26 0,02

Namerica 604,04 0,003 0,052 -1759,21 -0,02

Latin America 368,00 -0,03 0,062 -541,69 0,03

EU 28 935,43 -0,006 0,036 -2362,49 0,01

MENA 967,20 0,005 0,105 -338,29 0,06

SSA 84,46 -0,056 -0,018 -90,87 0,02

Simulation 2 Full Liberalization
Korea -4201,87 1,225 1,98 -4460,49 -0,04

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 Japan 8612,85 0,353 1,536 -5771,22 0,59

China 1340,89 0,488 0,657 -142,75 0,06

Cambodia -140,93 4,934 5,861 -227,39 -0,78

Laos -59,94 -0,159 0,919 -82,59 -1,21

Vietnam 1554,76 3,328 8,165 -6086 0,6

Thailand 3162,25 2,639 6,123 -5974,43 0,93

Singapore 331,26 0,183 0,297 159,45 0,11

Philippines -306,24 1,151 0,753 -61,94 -0,26

Malaysia 249,18 1,628 3,386 -3727,51 -0,18

Indonesia 1273,95 3,301 2,903 2041,44 0,47

Oceania -883,62 0,081 -0,446 1118,18 -0,18

East Asia -1142,17 -0,128 -0,443 244,97 -0,21

SE Asia -47,51 0,278 -0,579 66,22 -0,31

South Asia -1418,65 -0,003 -0,259 1178,10 -0,12

Namerica -4369,34 0,176 -0,261 10889,75 -0,12

Latin America -1034,67 0,139 -0,22 2295,41 -0,08

EU 28 -2560,33 0,048 -0,07 6372,41 -0,02

MENA -579,496 0,015 -0,097 744,74 -0,03

SSA -597,70 -0,072 -0,248 382,02 -0,09

Source: Model Simulation

Macroeconomic Analysis
ASEAN free trade cooperation in the scheme AJCEP, AKFTA and ACFTA is expected to
provide positive effect for all regions through the creation for all countries. Table 2 shows the
result of AJCEP, AKFTA and ACFTA simulation in two scenarios with using GTAP.
Net welfare of AJCEP, AKFTA and ACFTA is measured based on equivalent variation
(EV). EV is revenue adjustments that alter consumer utility equal to the level that would occur if
the economic changes have occurs. Negative EV value indicates that change in the economy
(income and prices) resulted in a decrease in the level of consumer welfare and vice versa (Widodo,

13
2009). EV is how much money the consumer would be willing to give up (or be paid) to prevent
prices from changing - it is the change in income that would get them to the same new utility level
as the change in price would if it happened (Sanders 2007).
Based on Table 2, first scenario shows that all ASEAN member countries face declining
welfare, which also applies in China and Korea, except Thailand and Japan. Thus, for Thailand
and Japan, the existence of ASEAN + 3 will create a trade creation. For Rest of World (in this
paper Oceania, East Asia, SEE Asia, South Asia, Namerica, Latin America, EU 28, MENA and
SSA has a negative welfare, this implement that these FTA do not cause trade diversion. The
opposite condition occurs in second scenario, all countries experience positive welfare (except
Korea, Cambodia, Laos, Filipina, and Rest of World). This shows that full liberalization gives
positive effect in terms of improving welfare for member countries compared to partial
liberalization. In second scenario, country with the biggest welfare is Japan with USD 8.612,85
million, followed by Thailand USD 3.162,25 million, Vietnam USD 1.554,76 million, China USD
1.340,89 million and Indonesia USD 1.273,95 million. While the smallest change in welfare
received by Malaysia USD 249,18 million.
Based on Table 2 ASEAN + 3 also has an effect on international trade performance (export
and import) of each country. As in previous analysis, full liberalization provides greater effect on
international trade performance than other scenario. All countries (ASEAN, Japan, Korea and
China) face increasing international trade performance, except Laoss export.
Vietnam is a country with the biggest trade performance with 3,38% export and 8,16%
import. The increase in international trade performance in this free trade area scheme indicates
that all countries experience bigger import expansion than export in all cases, tariff reduction in
various sectors substitutes with import. So that trade creation will be formed from a decrease in
high cost used by domestic industry, which is replaced by bigger import because of low import
cost for ASEAN + 3 FTA member. Trade creation provides trade transactions among FTA
members that have never occurred before, this is due to incentives due to the formation of FTAs
where regional economic cooperation of the original products of its member countries is not levied
on import duty.
Then, the condition of balance of trade in scenario 2 from each country joined in ASEAN
+ 3 are in deficit state, except Singapura and Indonesia. This condition caused by inefficient
domestic products replaced by more effective import from within FTA area. Singapura and

14
Indonesia experience a surplus in international balance of trade with USD 159,45 million and USD
2041,44 million. The same thing happened to RoW (Oceania, East Asia, SEE Asia, South Asia,
Namerica, Latin America, EU 28, MENA and SSA).
Last, the other purpose of free trade cooperation is term of trade. In the context of foreign
trade, the terms of trade (ToT) are one of the most important indicators of the quality of a country's
integration into the international trade. The higher are terms of trade, the greater a country's
advantage from price developments in foreign trade (Taillard 2012). The economic basis of the
terms of trade is represented by the existence of a causal relationship between the ratio of the prices
of two products and the ratio of the volume in which these two products will be bartered.
Liberalization that fully implemented by countries joined in ASEAN + 3 FTA brings negative and
positive effect in each country. Thailand is a country that gets the biggest positive effect in terms
of trade, followed by Vietnam, Japan and Indonesia. Cambodia gets the negative effect in term of
trade with -0,78%. Worsening terms of trade lead to a decline in the relative price of exportable to
importable goods and thus to a spending effect and a resource-movement effect (Cordon 1984).
Lower export prices, for example as a result of a decline in the world market price for the export
good, lead to a decline in national wealth and hence lower demand for both tradables and
nontradables. A decline in the terms of trade means the price of exports falls relative to imports.
Typically a country will have lower living standards and less ability to import.

Table 3
National Income of Each Region
Change Change Change
Change in Change Change
in GDP in GDP in GDP
GDP in Value in Value
Price Price Quantity
Quantity of GDP of GDP
Index Index Index
Index (%) (%) (%)
(%) (%) (%)
Partial Liberalization Full Liberalization
Korea -0,579 -0,304 -0,880 -0,289 -0,326 -0,614
Japan 0,23 0,037 0,267 0,698 0,05 0,748
China -0,031 -0,022 -0,053 0,075 0,001 0,076
Cambodia -0,469 0,016 -0,453 -0,456 -0,336 -0,792
Laos -2,584 0,031 -2,554 -1,211 -0,071 -1,281
Vietnam -0,331 0,304 -0,028 2,005 0,633 2,648
Thailand 0,03 0,145 0,175 1,363 0,21 1,575
Singapore -0,567 -0,140 -0,707 0,204 0,003 0,207
Philippines -2,501 -0,092 -2,591 -0,293 -0,016 -0,309

15
 Malaysia -1,447 0,002 -1,445 -0,483 0,107 -0,377
Indonesia -0,298 -0,034 -0,332 0,636 0,028 0,663
Source: Model Simulation

The effect of ASEAN + 3 FTA cooperation will be explained by national income, GDP
Price Index, GDP Quantity Index and Change in Value of GDP. Results of National Income effect
of the ASEAN + 3 FTA are reported in Table 2. The economic condition of a region is measured
by GDP, If GDP is rising, the economy is in good shape, and the nation is moving forward. But
if GDP is falling, the economy is in trouble, and the nation is losing ground.
Firstly, GDP Price index is percentage GDP in region r multiplied by price of GDP in
region r (Hertel 1997) . In full liberalization scenario, change in the GDP Price Index for each
member country tend to increase. Vietnam is a country with the biggest change in the range -
0,331% to 2,005%, Thailand in the range of 0,03% to 1,363% and Japan with 0,698%. Cambodia
face declining GDP Price Index. A declining GDP, for instance, indicates a recessionary trend,
which can be reflected in a business slowdown.
Secondly, the value of percentage change in GDP quantity index which shows the changes
in real value of GDP. The second scenario shows that all ASEAN member countries face
increasing GDP Quantity Index, although Korea, Cambodia, Laos and Philippines has negative
change in GDP Quantity index.
Thirdly, change in value of GDP is a percentage GDP in region r multiplied by value of
GDP in region r. The biggest percentage change in value of GDP is faced by Vietnam (2,648%),
Thailand (1,575%), Japan (0,748%) and Indonesia (0,663%).

International Shipping
In the process of international trade, there are many parties involved. Exporters and
importers, which is definitely a big company in each country. In addition, there are Customs,
Banks, Ports, Forwarders, and many more. When shipping goods between countries, there are
terms about the rules of loading in international trade logistics, such as FOB (Free On board).
FOB, Free On Board, is a transportation term that indicates that the price for goods includes
delivery at the sellers expense to a specified point and no further. The risk of loss or damage to
the goods is transferred to the buyer, and the seller (exporter) is responsible for delivering the
goods from his place of business and loading them onto the vessel of at the port of export.

16
 With free trade cooperation, the value of regional merchandise exports by commodity
(FOB) is changing. Each countries face increasing in value of regional merchandise exports by
commodity (full liberalization), except Cambodia, Laos, and Malaysia for several commodities.

Table 4
Value Of Regional Merchandise Exports (%)

vxwfob Korea Japan China Cambodia Laos Vietnam Thailand Singapore Philippines Malaysia Indonesia

GrainsCrops 29,849 5,688 0,995 2,825 -3,827 13,712 49,238 -4,977 -1,216 -2,643 185,877
MeatLstk 37,505 0,08 0,663 -14,364 -4,444 -11,561 -6,97 6,25 13,75 -1,181 -12,21
-
Extraction 0,119 -3,467 12,609 -8,334 -5,259 -8,936 -1,254 -16,501 -4,252 -7,134
5,206
ProcFood 35,552 2,516 0,051 -2,541 1,928 -1,06 10,741 1,499 7,548 1,503 -3,854
-
TextWapp 2,58 0,495 2,551 4,65 10,662 -0,216 1,539 3,363 3,511 -3,181
1,132
LightMnfc 2,218 3,647 -0,029 -0,802 -14,07 2,798 1,804 -2,548 -5,715 2,518 -4,033
-
HeavyMnfc -0,909 -0,829 4 ,491 4,262 -5,718 -4,693 -2,013 -4,496 -1,939 -0,762
1,474
-
Util_Cons -0,324 -1,124 0,499 7,966 -3,35 -0,636 -8,605 5,542 1,258 1,759
1,997
-
TransComm 0,137 -0,33 -2,476 3,162 -1,74 -1,209 -1,191 4,291 0,585 0,405
0,877
-
OthServices -0,439 -0,623 -3,838 6,345 -2,278 -0,68 0,099 6,509 1,706 2,401
2,182
Full Liberalization

vxwfob Korea Japan China Cambodia Laos Vietnam Thailand Singapore Philippines Malaysia Indonesia

36,308 5,763 10,083 1,711 -6,318 13,985 57,608 -4,013 3,979 -3,432 209,983
GrainsCrops
MeatLstk 60,792 5,535 1,215 -9,362 -8,48 -16,697 -0,098 5,761 12,5 -5,767 -15,781
Extraction 1,737 0,394 0,328 32,797 4,815 -3,365 -2,872 2,079 0,529 -0,509 1,08
ProcFood 44,316 5,267 2,412 -5,557 -2,371 -1,577 14,003 5,353 4,668 4,321 -3,011
-
TextWapp 7,876 0,314 6,826 0,805 23,257 -4,207 -0,014 1,602 4,335 0,982
0,021
LightMnfc 1,901 4,417 0,133 5,799 -21,81 2,974 4,061 -1,618 -2,442 2,838 -1,856
HeavyMnfc 0,483 0,184 0,656 1,029 -0,375 -3,488 0,675 0,542 0,917 1,67 1,811
Util_Cons -0,632 -2,6 -0,226 2,199 7,491 -9,751 -2,49 0,49 0,883 -0,24 0,467
-
TransComm 0,46 0,085 -3,969 1,782 -5,098 -4,876 0,15 0,444 -0,598 -0,638
0,434
-
OthServices -1,467 -0,554 -7,126 6,601 -13,586 -5,921 -0,688 0,284 -1,752 0,269
2,482
Source: Model Simulation

For example, Korea, Japan and China has increasing value of regional merchandise exports
for almost all commodities, because with the cooperation between countries through free trade

17
area increases trade of goods and services with partnership, ASEAN. But different condition
accurs in the Cambodia, for some commodities decreased in value of regional merchandise exports
FOB except Extraction, Text Wapp, light and manufactures. Cambodia mainly imports petroleum
products, rice, fabrics, vehicles, wholesale yarn, cigarettes, electrical communications equipment
and medicine. Cambodias main import partners are China, Thailand, Viet Nam, and South Korea.
For commodity, grains crop, China is a bigger export market for Cambodian rice because,
cambodian rice exports have dramatically declined. Major export commodities of Cambodia are
Clothing, Timber, Rubber, Fish, Tobacco, Footwear declined.

Sectoral Analysis
Trade liberalization will have a significant effect benefit from the liberalization of trade in
ecah country allocates its resources on sector that have a comparative advantage (Siriwaranda and
Yang 2007). The result of sectoral effect effect from ASEAN + 3 FTA scheme, is presented in
Table 5 and 6.
Table 5 represents the output of export trade, generated by ASEAN member countries
toward partner countries (Japan, Korea and China) in full liberalization. Cambodia export to Japan
and China decreased in all sectors (except in textile and technology-based industry sectors).
Technology-based industry and textile in Cambodia experience an increase for all export
destination countries. While the industries that face a decrease for all export destination countries
are extractive industries, equipment, construction, and services. For Malaysia experiences an
increase for textile, food, heavy equipment, and technology-based industry sectors to Korea, but
decrease in sector agriculture to Japan and Korea. Philippines face a decrease for agriculture and
meat. The same thing happens to Laos, Singapore, Thailand, and Vietnam. Indonesia export also
experience an increase for export destination countries for agriculture for Korea (except Japan and
China), food (except to Korea). Whereas equipment, construction, and services sectors face a
decrease for all export destination countries.

Table 5
The Estimation of Change in Trade Output of ASEAN Member Countries Based On
Sector in Formation ASEAN + 3 FTA (%)
qxs[*Cambodia*] Korea Japan China qxs[*Indonesia*] Korea Japan China
GrainsCrops 563,042 -37,249 -0,413 GrainsCrops 24509,24 -58,107 -28,333
MeatLstk -18,925 -12,015 -9,775 MeatLstk -8,232 -15,319 -19,442
Extraction 327,114 -27,245 -24,59 Extraction 7,711 -0,276 -0,352

18
 ProcFood 23,484 -2,855 -11,336 ProcFood -10,149 0,995 10,124
TextWapp 69,246 9,79 8,92 TextWapp 43,642 2,347 2,859
LightMnfc 42,831 13,341 9,729 LightMnfc 14,215 18,373 6,53
HeavyMnfc 5,464 4,8 61,917 HeavyMnfc 11,293 1,638 20,303
Util_Cons 3,199 4,973 3,49 Util_Cons 0,971 2,708 1,267
TransComm -5,41 -4,072 -5,189 TransComm -0,7 0,704 -0,471
OthServices -8,631 -8,015 -9,114 OthServices 1,428 2,114 0,892

qxs[*Malaysia*] Korea Japan China qxs[*Philippines*] Korea Japan China

GrainsCrops -48,886 -35,13 15,315 GrainsCrops 59,169 -4,466 -2,184
MeatLstk 131,836 -4,787 -10,179 MeatLstk 42,655 37,789 -2,276
Extraction 19,002 -2,152 -1,927 Extraction 6,209 0,228 0,015
ProcFood 0,515 5,121 27,56 ProcFood 45,811 23,798 25,757
TextWapp 45,194 9,365 15,585 TextWapp 64,305 5,092 1,734
LightMnfc 43,386 26,486 19,151 LightMnfc 20,291 6,869 7,992
HeavyMnfc 12,788 3,329 6,723 HeavyMnfc 7,509 2,902 2,047
Util_Cons 0,064 1,785 0,347 Util_Cons 1,325 3,068 1,614
TransComm -1,278 0,118 -1,049 TransComm 0,758 2,163 0,973
OthServices -1,402 -0,736 -1,923 OthServices 1,368 2,053 0,833

qxs[*Laos*] Korea Japan China qxs[*Vietnam*] Korea Japan China

GrainsCrops 20,427 -36,886 -0,696 GrainsCrops 1861,616 -48,906 -18,312
MeatLstk -17,766 -10,77 -8,737 MeatLstk 70,744 -19,464 -20,55
Extraction 6,151 7,917 5,318 Extraction 18,366 -6,374 -6,292
ProcFood 34,09 -6,377 3,613 ProcFood 43,49 -0,171 -10,088
TextWapp 66,445 3,01 2,203 TextWapp 84,767 25,018 23,291
LightMnfc 12,652 39,27 8,726 LightMnfc 33,246 21,622 4,672
HeavyMnfc 12,059 6,011 24,824 HeavyMnfc 6,03 -4,741 17,043
Util_Cons 8,739 10,609 9,047 Util_Cons -12,004 -10,49 -11,755
TransComm 2,676 4,126 2,913 TransComm -9,956 -8,683 -9,748
OthServices 10,2 10,944 9,617 OthServices -17,121 -16,56 -17,558

qxs[*Singapore*] Korea Japan China qxs[*Thailand*] Korea Japan China

GrainsCrops -49,788 -37,139 20,94 GrainsCrops 342,813 2307,244 -40,68
MeatLstk 229,165 -3,974 131,439 MeatLstk 257,431 14,233 -38,38
Extraction 446,771 17,394 28,297 Extraction 34,998 3,225 -7,084
ProcFood 72,726 0,844 59,641 ProcFood 239,396 56,3 40,63
TextWapp 87,382 1,28 127,02 TextWapp 42,773 -1,339 2,877
LightMnfc 39,108 0,328 81,433 LightMnfc 39,623 13,338 19,289
HeavyMnfc 16,767 0,946 26,166 HeavyMnfc 10,27 0,653 13,349
Util_Cons -0,351 1,364 -0,069 Util_Cons -2,811 -1,138 -2,537

19
 TransComm -0,729 0,675 -0,5 TransComm -7,59 -6,282 -7,375
OthServices -0,005 0,669 -0,535 OthServices -7,008 -6,379 -7,499
Source: Model Simulation

Table 6 shows export performance of partner countries (Japan, China, and Korea) to
ASEAN. Japan export to all ASEAN countries experiences an increase for all sectors (except to
Singapura and several commodities to another partner countries). Japan face increase
manufactures, heavy equipment and technology-based industry sectors. Japan's high tech
components are a key element in global production networks was immediately evident in the wake
of the triple crisis of earthquake, tsunami and nuclear accident. All of top 10 most important
exports in Japan are high tech manufacturing. Automobiles and automobile parts is the largest and
they account for 20% of the total exports. Japan has Toyota, Honda, Nissan and Mitsubishi.
Electronics is important too. There are many global electronics companies including Canon,
Fujitsu, Hitachi, Mitsubishi, NEC, Nikon, Nintendo, Panasonic, Sharp, Seiko, Sony, Toshiba and
Yamaha. There are sizable heavy industry such as chemical, ship building, and steel.
Korea face a increase agriculture, food, meat, extraction (except Singapore, Philippines
and Indonesia), textile, manufactures, heavy equipment and technology-based industry sectors.
South Korea has comparative advantage in the production of commodities which are relatively
labor-intensive, such as textile yarn, fabrics and related products and relatively technology
intensive, electrical machinery, other transport equipments, iron and steel, professional and
scientific instruments, metal working machinery and road vehicles.

Table 6
The Estimation of Change in Trade Output of Partner Countries on ASEAN Member Countries
Based On Sector in Formation ASEAN + 3 FTA (%)
qxs[*Japan*] Cambodia Laos Vietnam Thailand Singapore Philippines Malaysia Indonesia
GrainsCrops 50,514 26,906 32,631 97,601 17,788 28,833 29,695 43,398
MeatLstk 790,754 852,509 11,238 27,632 5,639 18,729 46,839 52,279
Extraction 337,854 -3,448 35,137 23,53 -2,244 18,808 5,999 20,8
ProcFood 48,066 155,168 70,118 37,174 3,002 16,269 87,282 60,97
TextWapp 31,737 70,558 7,399 15,201 -4,599 -6,382 26,652 49,436
LightMnfc 32,622 159,675 58,553 92,403 -4,644 38,55 114,992 76,682
HeavyMnfc 107,351 35,781 11,762 21,629 -3,486 1,359 39,215 39,443
Util_Cons -0,14 -5,398 12,966 2,321 -2,975 -3,402 -2,366 -3,631
TransComm -0,408 -4,552 3,657 0,988 -2,49 -3,388 -2,324 -2,713
OthServices 0,1 -6,511 4,786 0,03 -2,821 -3,54 -2,336 -3,618

20
 qxs[*Korea*] Cambodia Laos Vietnam Thailand Singapore Philippines Malaysia Indonesia
GrainsCrops 130,037 93,251 152,243 289,887 65,647 74,175 573,793 87,258
MeatLstk 200,005 92,454 131,058 448,786 46,009 120,444 65,268 46,964
Extraction 317,216 66,146 13,504 308,294 -3,166 -3,274 1,91 -4,363
ProcFood 160,09 494,162 596,282 71,545 35,514 50,658 75,258 156,569
TextWapp 44,073 85,224 39,561 20,261 2,21 14,884 30,263 -0,571
LightMnfc 65,859 162,83 142,814 84,7 -2,071 91,885 80,968 11,037
HeavyMnfc 105,291 83,556 9,554 22,129 -0,615 0,35 41,622 1,828
Util_Cons 1,856 -3,507 15,226 4,368 -1,059 -1,471 -0,436 -1,708
TransComm 2,531 -1,756 6,714 3,967 0,386 -0,538 0,553 0,156
OthServices 1,389 -5,307 6,137 1,319 -1,57 -2,298 -1,079 -2,377

qxs[*China*] Cambodia Laos Vietnam Thailand Singapore Philippines Malaysia Indonesia

GrainsCrops 91,765 111,086 23,334 236,708 12,544 11,523 37,962 26,449
MeatLstk 251,582 35,083 24,213 276,782 3,028 38,249 3,717 6,001
Extraction 182,81 71,362 24,561 36,416 0,009 -0,132 4,024 -1,096
ProcFood 54,995 220,812 19,395 106,975 1,455 6,626 22,905 40,296
TextWapp 24,493 83,221 46,115 50,6 -2,155 0,09 29,646 0,875
LightMnfc 101,337 35,902 38,509 51,239 -0,984 -0,533 12,067 -1,658
HeavyMnfc 109,087 45,141 23,193 25,668 -0,152 1,598 11,603 0,184
Util_Cons 2,656 14,278 16,13 5,186 -0,257 -0,697 0,368 -0,937
TransComm 1,972 -2,272 6,133 3,404 -0,16 -1,081 0,009 -0,389
OthServices 2,653 -4,126 7,46 2,582 -0,341 -1,079 0,155 -1,16
Source: Model Simulation

China has the best performance after the implementation of ASEAN + 3 FTA, because
China export to all ASEAN countries experiences an increase for all sector (except TransComm
and Other Services). China export also experience an increase for agriculture, meat, extraction
(except Singapore and Indonesia), food, manufactures, heavy equipment and technology-based
industry sectors.
Agriculture is a vital industry in China, employing over 300 million farmers. China ranks
first in worldwide farm output, primarily producing rice, wheat, potatoes, tomato, sorghum,
peanuts, tea, millet, barley, cotton, oilseed and soybeans (Carter 2011). China is not only rich with
plant and animals but also is a global hub for manufacturing, and is the largest manufacturing
economy in the world as well as the largest exporter of goods in the world. China manufacturing
is becoming very complex and high technology oriented. Chinese companies are now competing

21
globally in Component Design & Manufacturing, Surface Mount Technology, PCBs, Network
Hardware, PCs, TVs, refrigerators, auto parts, and much more.

VI. Concluding Remarks

In summarising the economic relations between ASEAN China, ASEAN Korea and
ASEAN Japan, it is evident that there is continuing growth trend between the two economies based
on a strongly complementary trading relationship. ASEAN FTA partner countries have a stronger
economic and positive effect of ASEAN country members, so ASEAN members must to take the
benefits from it, to increase economic growth, standar of living and the annual per capita income
of nation.

To optimize the positive impact of trade, ASEAN member countries should continue to
increase national exports to several countries among partner countries. In addition, efforts should
also be made to replace imports. And every country should have a comparative advantage to boost
exports and economic activities. As such, the integration of ASEAN with China, Japan, and Korea
can entice more foreign corporations, which each market alone cannot otherwise attract. With a
larger market, more intense competition, increased investment and economies of scale, investors
will be more inclined to locate in the integrated region.

22
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