China's Belt and Road Initiative: Can Europe Expect Trade Gains?
| DOI | http://doi.org/10.1111/cwe.12222 |
| Author | Jianwei Xu,Alicia Garcia Herrero |
| Date | 01 November 2017 |
| Published date | 01 November 2017 |
©2017 Institute of World Economics and Politics, Chinese Academy of Social Sciences
China & World Economy / 84–99, Vol. 25, No. 6, 2017
84
China’s Belt and Road Initiative:
Can Europe Expect Trade Gains?
Alicia Garcia Herrero, Jianwei Xu*
Abstract
The Belt and Road Initiative (BRI) aims to improve cross-border infrastructure to reduce
transportation costs across a massive geographical area between China and Europe.
We estimate how much trade might be created among Belt and Road (B&R) countries
as a consequence of the reduction in transportation costs (both railway and maritime)
and find that European Union countries, especially landlocked countries, will benefit
considerably. This is also true for Eastern Europe and Central Asia and, to a lesser
extent, South-East Asia. In contrast, if China were to seek to establish a free trade
area within the B&R region, EU member states would benefit less, while Asia would
benet more. Xi Jinping’s current vision for the B&R, centered on improving transport
infrastructure, is advantageous for Europe as far as trade creation is concerned.
Key words: China, Belt and Road Initiative, infrastructure, international economic
system
JEL codes: F02, O19, O53
I. Introduction
The Belt and Road Initiative (BRI) is undoubtedly the most important international
project that China has embarked on since 2013 (Swaine, 2015; Winter, 2016). It aims to
stimulate economic development over a vast area covering sub-regions in Asia, Europe
and Africa. Although there has been no ocial announcement about which countries are
covered by the BRI, some ocial sources point to the involvement of at least 63 countries,
including 18 European countries.1 Particularly relevant to Europe is that the Road ends
*Alicia Garcia Herrero, Senior Fellow, Bruegel, Belgium and Natixis, France, Hong Kong Branch. Email:
aligarciaherrero@gmail.com; Jianwei Xu, Associate Professor, Beijing Normal University, China and Natixis,
France, Hong Kong Branch. Email: xujianwei@gmail.com.
1Dierent sources have varying denitions of Belt and Road countries. We choose a conservative denition of
63 countries, the number of countries invited by the Belt and Road Forum held by the General Administration
of Customs of China in 2015. However, there are other sources indicating more extensive coverage. For
example, The Industrialization Process of the Belt and Road Countries Report (Li et al. 2016) published by
the Chinese Academy of Social Science includes 65 countries.
©2017 Institute of World Economics and Politics, Chinese Academy of Social Sciences
BRI: Can Europe Expect Trade Gains? 85
where the European Union (EU) starts. Most importantly, this massive bloc between
the EU and China accounts for 64 percent of the world’s population and 30 percent of
global GDP.2
One of the BRI’s key objectives is to ease bottlenecks for cross-border trade, in
particular through developing transport infrastructure. This can reduce the cost of
transportation, thus stimulating trade between China and these countries. The same
effect should be expected for the other end of the road (the EU) because cheaper
transportation can also foster EU trade with other Belt and Road (B&R) countries,
as well as with China. The present paper will measure whether the reduction in
transportation costs, shipping or railway costs will have a positive impact on trade ows
for countries in the B&R bloc and, most importantly, for EU countries.
In addition to estimating the size of the trade gains stemming from a reduction in
transportation costs, we explore the possibility that the B&R may eventually go beyond
its current objectives towards the creation of a free trade area (FTA). To that end, we
establish a scenario in which China embarks on an FTA with the 63 countries of the BRI.
In other words, we aim to identify empirically what kind of trade gains countries could
expect from a reduction of transportation costs and to compare them with potential trade
gains from reductions in taris stemming from a potential FTA. Our analysis estimates
gains/losses for a large number of countries with a focus on EU member states. The
results indicate that the reduction in transportation costs from the BRI should benet the
vast majority of EU countries, especially landlocked countries. In comparison, if China
reached a deal to establish an FTA with BRI countries, the benets would be concentrated
among Asian and non-Western European countries. EU countries’ trade, in turn, would
be harmed, although in a relatively limited way. The reason for this is substitution of EU
trade with countries within the B&R as their intra-regional trade taris are dismantled.
In a nutshell, the present paper points to the benets for the EU of Xi Jinping’s current
vision for the BRI, which focuses on improving transport infrastructure rather than on
establishing an FTA within the B&R region.
The present paper is organized as follows. Section II provides background on the
BRI and its relationship with international trade. Section III empirically analyses the
impact of the BRI on trade, with a special focus on the EU. In Section IV we conduct
simulation exercises for three scenarios: transportation cost reduction, tari reduction,
and both transportation cost and tari reduction. Section V concludes.
2The population data is from the World Bank WDI database, and trade data is sourced from the UN Comtrade
database in 2016.
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