Investment creation and diversion effects of the ASEAN–China free trade agreement

The ASEAN–China free trade agreement went into effect January 1, 2010 and became the world's third largest FTA by trade volume after the European Economic Area and the North American Free Trade Agreement. This paper focuses on highlighting the impacts of the reduction of barriers to trade on investment in a dynamic general computable equilibrium framework. We present and compare two alternative views/models of investment which yield different investment creation and diversion effects. As a first step, we adapt the dynamic GTAP model to take account of bilateral ownership of investment. Two versions of the model are considered. The first version is an example of applied models of investment demand, while the second is a model of investment supply. The two versions are based on different assumptions in their determination of cross-border investment. We simulate the implementation of ACFTA and we focus on the welfare impacts of investment creation and diversion.