The Impact of Direct Bilateral Free Trade Agreement (BFTA) to ASEAN’s Intra-Regional Trade & Individual Country’s Investment Creation : The Case of Indonesia, Malaysia & Thailand 1988-2008

Based on theory & empirical evidence from the experience of the European Union, the economic regional integration process started from a FTA (Free Trade Agreement), CU (Custom Union), CM (Common Market), Single Monetary Union (SMU) and Single Currency (SC). Economic regional integration is transformed from the liberalization of trade (FTA), investment (CU & CM) to financial integration (SMU & SC). ASEAN is currently still in the trade integration process (ASEAN FTA) and moving to investment integration, but without a CU. Different from a CU which regulates tariff rates between the member states and non-member states, a FTA does only regulate internal tariff rates within members and does not regulate external tariff rates between members to non-members. ASEAN with its AFTA implements “open trade discrimination” with “soft-type organization”. Therefore, ASEAN cannot prevent its members to have “direct” bilateral free trade agreements with nonmember states of ASEAN. Due to its open and soft type economic regional integration, ASEAN is dealing with “spaghetti bowl phenomena” in its tradeinvestment relations. There are various and fairly complicated free trade agreements (FTAs) that affect investment creation alongside FTA within members at the regional level (ASEAN Free Trade Agreement/AFTA), such as direct bilateral trade agreements between member & non ASEAN member states (Bilateral Free Trade Agreement/BFTA) and within limited ASEAN members i.e. SIJORI (Singapore, Johor-Malaysia, Riau-Indonesia), IMT-GT (Indonesia, Malaysia & Thailand Growth Triangle), BIMP (Brunei, Indonesia, Malaysia & Philippines) and unilateral trade liberalization towards the rest of the world which is practiced by Singapore and certainly the multilateral level agreement or the WTO. This study will focus on the impact of bilateral free trade agreements (BFTA) between members of ASEAN and non-member states at two levels: ASEAN’s intra regional trade and individual country’s investment creation (net FDI flows). This study applies some criteria to select observed countries from the 10 ASEAN member states and comes up with Indonesia, Malaysia & Thailand. In order to develop a valid and reliable model, this study adopts some macroeconomic variables as exogenous variables from various international academic journals. It adopts dummy-time variables, the time when the first bilateral free trade agreements were officially signed by the individual observed country. It was coded as one starting in that particular year. Time coverage is 21 years (1988-2008)