Is Bilateral Value Added in Trade between China and EU Countries Efficient?

• Published date: 01 May 2022
• Author: Haiou Mao,Ling Xiong
• Date: 01 May 2022
• DOI: http://doi.org/10.1111/cwe.12424

©2022 Institute of World Economics and Politics, Chinese Academy of Social Sciences

China & World Economy / 210–238, Vol. 30, No. 3, 2022

210

*Haiou Mao, Associate Professor, College of Economics and Management, Huazhong Agriculture University,

China. Email: maohaiou77@163.com; Ling Xiong (corresponding author), Associate Professor, Institute for

International Studies, Wuhan University, China. Email: xiongl2004@126.com. This research was supported

fi nancially by the National and Regional Research Projects of Chinese Education Ministry (No. 2020-G56),

the Humanities and Social Sciences Funding of Wuhan University (No. 2020SK033), the Youth Academic

Team Project in Humanities and Social Sciences of Wuhan University (No. 4103-413100001), and the

Fundamental Research Funds for the Central Universities (No. 2662021JGQD007).

Is Bilateral Value Added in Trade between

China and EU Countries Effi cient?

Haiou Mao, Ling Xiong*

Abstract

By applying stochastic frontier analysis, and replacing total export with value added

in exports as a more accurate measure of domestic content embodied in exports, we

estimate the trade effi ciency between China and EU countries and analyze the determinant

factors. The results show that the value added in trade between China and EU countries

is running at a low level of effi ciency, and the trade effi ciency has an obvious imbalance

between export and import. Our calculation of unexplored trade potential indicates that

western EU countries, such as France, Germany, Italy, and Spain together are China’s

top trading partner with the highest unexploited trade potential. Based on the principal

component analysis of 14 trading-related variables, trade effi ciency determinant results

show that the tangible trade infrastructures of both exporter and importer matters

most, including airports, container shipping, Internet, and broadband infrastructures.

Meanwhile, intangible trade infrastructures, including customs procedures and domestic

business environments, has a significant, but smaller influence on trade efficiency. Our

important fi ndings shed light on practical trade policymaking to encourage Sino-EU trade

collaboration.

Keywords: China–EU trade, stochastic frontier analysis, trade effi ciency, value added in

exports

JEL codes: F13, F14, F15

I. Introduction

Against a background of uncertainties, decoupling, and deglobalization, China is

seeking closer alignment with the EU as a forced reaction to the US–China trade

©2022 Institute of World Economics and Politics, Chinese Academy of Social Sciences

Bilateral Value Added in Trade between China and EU Countries 211

conflict (Hackler, 2020). At the same time, challenged by US retaliation, Brexit, and

COVID-19, EU countries are also faced with external negative impacts on their GDP

growth and employment (Hübler and Herdecke, 2020; Ortiz and Latorre, 2020). A stable

and trusted economic relationship is thus crucial for both the EU and China. Politicians

from both the EU and China are reaching out to each other to push bilateral relations

to a newer, closer, and deeper stage, as we see with China’s Minister of Foreign

Aff airs, Yi Wang, who made his fi rst overseas trip after the outbreak of COVID-19 in

Europe.1 China’s growing domestic market, and possible diverted trade volumes from

the US, are the economic driving forces for these two entities engaging in further trade

collaboration (Chung, 2020; Goulard, 2020).

Ever since 2006, China and the EU have been each other ’s largest trade partners.

From 2006 to 2019, bilateral trade between the EU and China has averaged an annual

increase of 6.97 percent, totaling US$718.28 billion in 2019, and this accounted for

15.7 percent of the EU’s total trade volume in that year.2 With such large numbers

for bilateral trade volumes and a high growth rate for so many years, one cannot help

wondering whether the bilateral trade is already running at its limits (i.e., trading in the

most effi cient way). If not, how large is the trade effi ciency or ineffi ciency? What factors

increase trade effi ciency?

Trade efficiency is defined as the ability to obtain a maximum trade volume, or the

degree to which a country reaches its trade limits (Kalirajan and Findlay, 2005; Ravishankar

and Stack, 2014),3 as measured by the ratio of actual trade volume to maximum trade

volume. Specifi cally, a trade frontier representing the maximum possible level of bilateral

trade is constructed for a panel of exports between sample countries by using stochastic

frontier analysis (SFA).4 The effi ciency score is then generated from the estimated frontier

of a gravity model. A deviation of observed or actual trade levels from the trade frontier

indicates an insufficient level of trade, implying possibilities for further trade expansion.

There are a few papers studying the trade relationship between the EU and China (Herrero

and Xu, 2017; Mau, 2017; Jiang et al., 2019), but we found virtually no analyses with

1Refer to http://www.xinhuanet.com/english/2020-08/26/c_139319101.htm (online; cited April 2022).

2Data are from the United Nations Comtrade Database and have been calculated by the author. The trade

numbers here only relate to the trade of goods.

3Efficiency, defined as the ability to obtain a maximum outcome, is originated from studies investigating

the technical effi ciency of production (Aigner et al., 1977; Färe and Lovell, 1978; Battese and Coelli, 1992;

Kumbahkar and Lovell, 2003). Technical effi ciency is a term describing the ability to obtain maximum output

from a given input factor in the stochastic frontier production model (Kumbahkar and Lovell, 2003). Later,

this concept was used in the literature on trade.

4The estimation of frontier function and effi ciency terms are introduced in detail in Kumbahkar and Lovell

(2003). We also introduce this briefl y in Section II.