The Impact of FTAs on Bilateral Trade Using Gravity Model: The Cases of Korea and Indonesia
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This study used a gravity model to investigate the impacts of FTAs established by Indonesia and Korea between 1995 and 2011. Various technical analyses are used for this model, including a common-effect model, fixed-effect model, and random-effect model. The empirical results show that Korea’s FTAs positively and significantly affect Korean bilateral trade flows under a common-effect model, whereas Indonesian FTAs positively and significantly explained Indonesian bilateral trade flows with 30 countries under a fixed-effect model. The difference of the estimated gravity model analysis in these cases led to similar clues that FTAs brought about a positive impact on increasingly bilateral trade flows. To overcome the uneven situation amid society that is related to trade liberalization, the balanced distribution of the economic development should be taken into account. Therefore, FTAs would yield a positive impact for the country itself.
Abstract
This study used a gravity model to investigate the impacts of FTAs established by Indonesia and Korea between 1995 and 2011. Various technical analyses are used for this model, including a common-effect model, fixed-effect model, and random-effect model. The empirical results show that Korea’s FTAs positively and significantly affect Korean bilateral trade flows under a common-effect model, whereas Indonesian FTAs positively and significantly explained Indonesian bilateral trade flows with 30 countries under a fixed-effect model. The difference of the estimated gravity model analysis in these cases led to similar clues that FTAs brought about a positive impact on increasingly bilateral trade flows. To overcome the uneven situation amid society that is related to trade liberalization, the balanced distribution of the economic development should be taken into account. Therefore, FTAs would yield a positive impact for the country itself.
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