Belt and Road: The China Dream?

38 Pages Posted: 5 Feb 2018 Last revised: 21 May 2020

See all articles by Karen Jackson

Karen Jackson

University of Westminster

Oleksandr Shepotylo

Aston University - Aston Business School

Date Written: May 20, 2020

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

Suggested Citation

Jackson, Karen and Shepotylo, Oleksandr, Belt and Road: The China Dream? (May 20, 2020). Available at SSRN: https://ssrn.com/abstract=3111258 or http://dx.doi.org/10.2139/ssrn.3111258

Karen Jackson

University of Westminster ( email )

35 Marylebone Road
London NW1 5LS
United Kingdom

HOME PAGE: http://karen-jackson.com

Oleksandr Shepotylo (Contact Author)

Aston University - Aston Business School ( email )

Aston Triangle
Birmingham, B47ET
United Kingdom

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