Intra-Industry Trade and Determinants: Evidence for ASEAN-Australia and New Zealand in the Context of AANZFTA

Abstract

This study examines the changing patterns and direction of trade between Association of South- East Asian Nations (ASEAN), Australia and New Zealand in the context of the ASEAN-Australia-New Zealand Free Trade Area/Agreement (AANZFTA) signed in 2010. It investigates the extent of ASEAN’s intra-industry trade with Australia and New Zealand at the 3-digit disaggregated SITC level for the period 1990 to 2014. The study includes an analysis of intra-industry trade indices of trade intensities, the marginal intra-industry trade and the econometric model to identify the determinants of intra-industry trade. The results show that trade in general has increased and intra-industry trade between ASEAN-Australia increased specifically in manufacturing. New Zealand has developed intra-industry trade in both the manufacturing and agriculture sectors. Marginal intra- industry results suggest that some industries transforming from inter-industry trade patterns to intra-industry trade. The results of regression analysis provide some support to the thesis that increase in IIT comes naturally with high average incomes of trade partners and large average market size. As a country’s level of income goes up and its standard of living rise, its citizens tend demand and consume more high quality differentiated products, leading to higher levels of intra-industry trade. This study differs from the existing literature in terms of its scope, methods and policy perspectives. The findings have policy relevance for the ongoing negotiations for a regional comprehensive economic partnership with ASEAN 10, India, China, Japan, Australia and New Zealand. It is reasonable to suggest that intra-industry trade be given due consideration in ongoing regional and bilateral trade negotiations for potential mutual gains from trade for a sustainable regional economic growth.