Belt and Road: The China Dream?

Abstract

This paper explores the impact of the Belt and Road Initiative (BRI), in terms of changes in trade costs and investment, on trade and consumer welfare in China, the EU, and the rest of the World. We employ a general equilibrium structural gravity approach, where the production side is modeled using mobile capital flows. Our results indicate substantial gains from the BRI for China and the EU where a 15 percent reduction in transportation costs between China and the EU would increase the welfare of a representative consumer in China by 1.27 percent and the EU by 0.5 percent. On the other hand, we find that signing and implementing an FTA between China and the EU is equivalent to transport cost reductions in excess of 30 percent. Combining the BRI with a deep FTA with the EU would increase welfare by 4.37 (China) and 1.99 percent (EU). Where transport cost reductions are 25 percent or more, the potential negative effect of the China-US trade war on China is more than compensated for by the BRI initiative, and Chinese investment would further increase welfare of the countries participating in this project.

Keywords: Belt and Road Initiative, China, EU, Gravity model, trade, FDI, welfare

JEL Classification: F13, F14