The Determinant Effect of ACFTA on Palm Oil Trade Between China and Indonesia

This research determines the effect of the ASEAN-China Free Trade Agreement (ACFTA) on the palm oil trade between China and Indonesia. This study discusses the analysis of the ACFTA and the effects on the economies of China and Indonesia. This research was analyzed using the gravity model and the analysis of the unit root test, lag selection criteria, co-integration, vector error correction model (VECM), long-run analysis test, short-run analysis test, and granger causality test using Eviews 8. The dependent variable used is palm oil export and independent variables include are Gross Domestic Product (GDP), Real Exchange Rate (RER), Foreign Direct Investment (FDI) and dummy variable (ACFTA) for both countries using data of 28 years (1990-2017). The case of China, the results shows that there is a long-run relationship between palm oil export with GDP, RER, FDI, and ACFTA and the palm oil export has a short-run relationship with GDP, FDI, and ACFTA, and palm oil export is showing causality with GDP, RER, FDI, ACFTA. Meanwhile, in the case of Indonesia, there is no long-run relationship between palm oil export with GDP, RER, FDI, and ACFTA but there is has a short-run relationship between palm oil export with GDP and palm oil export is showing causality with GDP, RER, and FDI. The implementation of ACFTA on palm oil trade between China and Indonesia have positive impacts on both countries and increase bilateral trade flows. Keywords: China, Indonesia, ACFTA, Palm oil, Gravity model. DOI: 10.7176/JCSD/58-04 Publication date: April 30 th 2020