Philippines - ASEAN Trade Potential: An Application of Intra-ASEAN Augmented Gravity Model

Abstract

ASEAN has made great progress toward economic unification and free trade in the area. With the objectives of creating a unified market, expanding intra-ASEAN trade and investment, and attracting foreign investment, ASEAN has been a cornerstone of the Philippines' diplomatic and commercial policies, which is evident in the Philippine policy of creating a more prosperous, secure, and free Southeast Asia through a variety of measures in politics, economics, international trade, and functional cooperation. The researchers revisit Jan Tinbergen’s Gravity Theory by using the adjusted augmented gravity model in a panel data of bilateral trade flows between the Philippines and the ASEAN member countries from 1995 to 2019 at the national level using the Poisson-Pseudo Maximum Likelihood estimator and Ordinary Least Squares, both with fixed effects, in a model-comparison approach. Using the fitted trade values from the PPML estimates and the standardized real values of exports and imports of the trading countries through the index of Average Standardized Trade Potential, it was found that the bilateral trade between the Philippines and other ASEAN member countries has been efficiently performing over the past decades, except for Brunei Darussalam, Cambodia, Lao PDR, and Myanmar. Hence, a dynamic and more inclusive approach should be adopted by both the Philippines and its trading partners to reach the optimum bilateral trade potential in the nearest future.