Blog Post

What does China’s ‘belt and road initiative’ mean for EU trade?

Much has been written about the Belt and Road initiative since Xi Jinping made it Beijing’s flagship initiative in September 2013. There are many interpretations of the initiative’s ultimate objectives, but one objective is clear. The belt and road scheme will bring huge improvements in regional and international connectivity through infrastructure upgrades and trade facilitation across a massive geographic area.

By: and Date: September 20, 2016 Topic: Global Economics & Governance

Indeed, the regional potentially affected covers as many as 63 countries (even if vaguely defined), sixty percent of the world’s population and thirty percent of global GDP.

This massive project is centered in two main routes, along which connectivity is to be fostered: land and sea. On land the focus is on transportation infrastructure and energy. For the sea, investment in ports and new trade routes are the main pillars. Both routes will have a major impact on Europe. In fact, the land route ends up in Europe, while the sea route is currently the most heavily used for trade between Europe and China. Undoubtedly, the belt and road initiative will affect Europe and the European Union (EU).

More specifically, the huge investments in infrastructure have the potential to ease bottlenecks in cross-border transportation. Among the many benefits of improved connectivity, trade stands out. The idea that improved transport infrastructure should generally foster trade is of course very intuitive. However, it is less sure that such benefits can be spread across countries and, more specifically, which countries stand to win/lose the most depending on their proximity to/distance from the improved infrastructure, among other considerations.  In a working paper recently published by Bruegel, we addressed exactly this question by assessing empirically how the belt and road initiative, through a substantial reduction in transportation costs, may foster trade. Beyond the relevance of trade for Europe, our results show that a reduction in transportation cost can indeed increase international trade. A 10 percent reduction in railway, air and maritime costs would increases trade by 2 percent, 5.5 percent and 1.1 percent respectively (see on this scenario and others below).

While the current belt and road initiative is centered on building infrastructure, there are other ways in which it may evolve. One obvious objective, as far as trade is concerned, is dismantling trade barriers. In fact, Chinese authorities have started considering free trade agreements (FTA) with the belt and road countries[1]. Because most of the EU countries are not directly included in the initiative, and it is only possible for China to jointly strike an FTA with all EU countries, the chance for the EU to benefit from an FTA is slim. The previously mentioned Bruegel working paper also develops this scenario by focusing on the impact on EU trade of China-centered free trade bloc among belt and road countries. As one could imagine, a scenario where the belt and road initiative focuses on trade barriers is much less appealing than the previous one in which only transport infrastructure is built. In fact, the EU would no longer benefit from a free lunch (we are assuming that China and the belt and road countries will finance the infrastructure and not the EU – indeed, this is the case so far) and would be excluded from a very large free trade area just outside its borders.

Finally, the paper develops a third scenario in which both transport infrastructure is improved and a FTA is agreed among belt and road countries. This scenario is relatively neutral for the EU as a whole, although there are clear winners and losers within EU.

Our analysis has special policy implications for the EU. China has been advocating for the EU’s involvement in the project since 2013. We believe it is in the EU’s interest to actively take part in the initiative and push for more emphasis on cooperation in transportation and infrastructure. This makes sense, as it stands at the other end of the road from China and there are clear gains to be made. In a nutshell, if we focus on trade, the belt and road is very good news for Europe under the current set up, namely one in which the EU benefits from the infrastructure without a financial cost attached to it, because it is so far being financed by China and other belt and road countries.

It is, thus, quite striking that the discussion on the impact of the belt and road on Europe is still very embryonic. It goes without saying that more research is needed on the topic, as trade is only one of the many channels through which the belt and road initiative may affect Europe. Financial channels, such as FDI and portfolio flows are also very relevant and should also be analysed.

Some more details on our three scenarios

Scenario I: Simulating the impact on EU trade of a reduction in transportation costs with the belt and road

 From a regional perspective, the EU is the largest winner from the belt and road initiative, with trade rising by more than 6%. Trade in the Asian region is also positively affected by the reduction in transportation costs, with trade increasing 3%, but this is only half as much as for the EU. In fact, Asian countries are found to be neither the top winners nor losers. This is probably explained by the fact that the estimated reduction in maritime transportation costs is quite moderate. Conversely, the cost of railway transportation is halved, which is behind the large gains for rail transit to Europe — in particular for landlocked countries. The rest of the world suffers from the deviation of trade towards the belt and road area but only with a very slight reduction in trade (0.04%). As a whole, our results point to the belt and road being a win-win in terms of trade creation, as the gains in the EU and Asia clearly outweigh the loss in the rest of the world.

Scenario II: Simulating the impact on EU trade of an FTA within the belt and road area

If China established a FTA zone in the belt and road area, the EU, which would be the biggest winner from the reduction in transportation costs, now suffers slightly. This result is intuitive, because we assume that EU members are left out of this trade deal and that no bilateral trade agreement with China is signed either. The rationale for such negative impact is that EU trade with China and other belt and road countries would be substituted by enhanced integration among them. This is true even for countries within the EU which are formally included in the belt and road initiative, such as Hungary and Poland, because they will not be able to enter any belt and road FTA without the rest of the EU joining. The Asian region thus becomes the biggest winner, followed by non-EU European countries since they can also benefit from the elimination of trade tariffs. If we consider countries one by one, the top winners are all from Middle Eastern and Central and East Asian countries, who would see their trade increasing by more than 15%. This compares favorably with the trade gains of 3% stemming from a reduction in transportation costs previously estimated for this group of economies.

Scenario III: Simulating trade gains for both transportation improvement and FTA

Lastly, we consider a combined policy package including both transportation improvement and establishment of an FTA within the belt and road region. Most Asian countries now become the biggest winners since they benefit from both the reduction in transportation costs and the elimination of trade tariffs. Some EU countries also benefit quite significantly but less than Asian ones. This is specially the case for some landlocked countries, such as Slovenia and Hungary. Also Germany benefits slightly more than France or Spain. This is actually very intuitive because these EU countries benefit from the transportation cost reduction but not from the FTA as they are not part of it. Also, as is in the previous two scenarios, there are always some slight losses for countries far from the belt and road project. The biggest loser is Japan, while the impact on the USA and Canada is close to zero.

[1] Ministry of Commerce of China, http://fta.mofcom.gov.cn/article/fzdongtai/201601/30116_1.html.


Republishing and referencing

Bruegel considers itself a public good and takes no institutional standpoint. Anyone is free to republish and/or quote this post without prior consent. Please provide a full reference, clearly stating Bruegel and the relevant author as the source, and include a prominent hyperlink to the original post.

Read about event More on this topic
 

Upcoming Event

Oct
26
17:00

The future of EU-US trade relations after the US election

What shape will the trade relationship between the EU and the US take in the coming years?

Speakers: Cecilia Malmström, Adam Posen and Guntram B. Wolff Topic: Global Economics & Governance Location: Bruegel, Rue de la Charité 33, 1210 Brussels
Read about event More on this topic
 

Upcoming Event

Oct
29
14:00

Disrupted medical supply chains: symptoms, side-effects, and treatment?

How can the EU increase the resilience of value chains in the health industry?

Speakers: Anabel González, Niclas Poitiers and Giuseppe Ruocco Topic: European Macroeconomics & Governance Location: Bruegel, Rue de la Charité 33, 1210 Brussels
Read article More on this topic More by this author
 

Opinion

ECFA重要性遞減 台灣出口未來關鍵 在保持科技優勢和出口多元化

從地緣政治角度來看,ECFA自動延續無疑是個好消息,但協議對台灣經濟的直接影響較過去變得有限。雖然台灣對中國大陸的出口仍然重要,但ECFA占整體出口的重要性因資通訊科技產業快速發展而縮小。由於台灣在全球製造業供應鏈遷移和價值鏈重組中占有重要位置,未來對美國和東南亞出口預計將會加速。

By: Alicia García-Herrero Topic: Global Economics & Governance Date: October 20, 2020
Read article More on this topic
 

Blog Post

What should Europe expect from American trade policy after the election?

A Joe Biden Administration would have to decide to what extent to unpick the major United States trade policy shifts of the last four years. A quick return to comprehensive trade talks with the European Union is unlikely and the US will remain focused on its rivalry with China. Nevertheless, there would be areas for EU/US cooperation, not least World Trade Organisation reform.

By: Uri Dadush and Guntram B. Wolff Topic: Global Economics & Governance Date: October 8, 2020
Read article More on this topic More by this author
 

Opinion

Trump’s International Economic Legacy

If Donald Trump loses the United States presidential election in November, he will ultimately be seen to have left little mark in many areas. But in the US's relationship with China, the decoupling of economic links could continue, and that could force Europe into hard choices.

By: Jean Pisani-Ferry Topic: Global Economics & Governance Date: September 29, 2020
Read about event More on this topic
 

Past Event

Past Event

From playing field to player: Europe’s strategic autonomy as our generation’s goal

At this online event Charles Michel spoke about the importance of Europe's strategic autonomy.

Speakers: Charles Michel and Guntram B. Wolff Topic: European Macroeconomics & Governance Location: Bruegel, Rue de la Charité 33, 1210 Brussels Date: September 28, 2020
Read article Download PDF More on this topic
 

External Publication

Diversification and the world trading system

Diversification is important because it is associated with economic growth and reduced volatility.

By: Uri Dadush, Niclas Poitiers, Abdelaaziz Ait Ali, Mohammed Al Doghan, Muhammad Bhatti, Carlos Braga and Anabel González Topic: Global Economics & Governance Date: September 16, 2020
Read article More on this topic More by this author
 

Opinion

Non-summit shows EU-China ties at new low

There was nothing concrete to justify calling this video conference an EU-China Summit.

By: Alicia García-Herrero Topic: Global Economics & Governance Date: September 16, 2020
Read article More on this topic More by this author
 

Opinion

China's 'dual circulation' plan is bad news for others' exports

This opinion piece was originally published in Nikkei’s Asian Review. Minds in Beijing are focusing increasingly on the upcoming meeting of the Chinese Communist Party Central Committee next month. High on the body’s agenda will be sketching out a new official five-year plan for Asia’s largest economy. A freshly coined buzzword looks set to play […]

By: Alicia García-Herrero Topic: Global Economics & Governance Date: September 15, 2020
Read article More on this topic More by this author
 

Blog Post

全球為數不多 台灣今年經濟有望正成長

台灣的貨幣政策和大多數國家相比仍屬相對緊縮,台幣升幅也是相對有限。總的來說,台灣第二季的GDP與其他國家相較算是非常優異,主因是行動管制少,所以衝擊也小得多。

By: Alicia García-Herrero Topic: Global Economics & Governance Date: August 28, 2020
Read article More on this topic More by this author
 

Opinion

Relocating production from China to Central Europe? Not so fast!

Western European imports from central Europe have fallen dramatically, while imports from China fell much less, and had already recovered to pre-COVID level by April 2020. Central European governments should instigate new measures to foster the transition towards knowledge-intensive economic activities.

By: Zsolt Darvas Topic: Global Economics & Governance Date: August 20, 2020
Read article More on this topic More by this author
 

Opinion

Coronavirus recovery: invest rainy day savings to boost Hong Kong’s economy

The Hong Kong government might want to consider diversifying its economy by using part of the savings earmarked for rainy days. Beyond cushioning the negative impact of Covid-19 on SMEs and households, it is one more reason to spend.

By: Alicia García-Herrero Topic: Global Economics & Governance Date: August 6, 2020
Load more posts