Does Democracy Cause Regional Disintegration? The Effect of Democracy on ASEAN Intra-regional and Extra-regional Trade

Association of Southeast Asian Nations (ASEAN) is a regional organization that has successfully formed a free trade agreement, namely ASEAN Free Trade Area (AFTA). Despite AFTA’s success in decreasing internal tariff among its member countries, another form of trade barrier, which is non-tariff barrier (NTB), has increased over time. On the other hand, ASEAN member countries have diverse levels of democracy, which implies different political motives of trade policy determination, which in turn affect their trade pattern. This study attempts to explore the effect of ASEAN member countries’ democracy on ASEAN trade with other ASEAN countries and non-ASEAN countries. By utilizing the data panel of trade from 2005 to 2014 and polity score as the proxy for democracy and conducting an inferential analysis based on gravity model of trade, it is found that democracy has different effects on intra-ASEAN trade and extra-ASEAN trade. Democracy has a negative effect on ASEAN intra-regional trade, yet it has a positive effect on ASEAN extra-regional trade. From these two results, it is found that democratization of ASEAN countries causes a trade diversion from ASEAN country to non-ASEAN country, which eventually implies a decrease in regional economic integration.