The impacts of CAFTA on trade and FDI in China

The China and ASEAN Free Trade Area (CAFTA) was established on 4th November 2002. Since then, trade flows, trade structure, trade
complementarities，trade competition and FDI between China and ASEAN have grown rapidly. Nevertheless, the basic issue remains - whether these growth are due to CAFTA. Thus, this study examines the effects of CAFTA on China’s
trade flow, trade structure, trade complementarities and competition and, the
flow of FDI. A gravity model is used to estimate these effects, while the qualitative method is used to analyze the economic integration. Data for the analysis is obtained from UN database, WTO database, World Bank database and China Statistical Yearbook. This study employed five models to examine the
effects of CAFTA on trade structure, trade complementarities and competition, the FDI flow and the effects on different regions in China. The overall results indicate that CAFTA produces trade creation effect and greatly improves the trade structure of China. CAFTA has caused an expansion of inter-industry trade
of the main products (crude materials and manufactured goods) between China and ASEAN countries. It has strengthened the trade complementarities between China and Cambodia, Indonesia, Singapore, Malaysia and Thailand. However, there are tendencies of weakening trade complementarities between China, the
Philippines and Vietnam. On the other hand, trade competition for some products between two sides indicated a different trend. Several ASEAN
countries have experienced increasing export comparative advantages in agriculture products, food, fuels and mining products. Meanwhile, China has obvious export comparative advantages in manufactured products and machinery and transport equipment. In addition, the domestic analysis revealed a very promising effect. CAFTA has promoted trade growth for 17 provinces and 7 regions, with positive effect on the geographically advantaged provinces and
regions in China. Surprisingly, CAFTA caused a reduction of FDI outflow and inflow in China. In conclusion, CAFTA has improved the trade growth and trade structure in China, while promoting the expansion of trade between China and ASEAN. However, FDI reduced due to CAFTA.