‘Belt and Road’: The ‘China Dream’?
43 Pages Posted: 5 Feb 2018 Last revised: 18 Oct 2018
Date Written: January 27, 2018
This paper employs a structural gravity approach to model the Chinese-led Belt and Road Initiative (BRI), in terms of changes to trade costs and investment. We explore the impact of these changes on trade flows and consumer welfare in China, the EU and the rest of the World. Furthermore, we look at how these welfare changes compare to the gains from signing shallow and deep FTAs with the EU, as well as analyzing the interplay of the BRI with the US-led mega trade deals: TTIP and TPP. Additionally, we evaluate the dynamics of the welfare changes. Our results indicate substantial gains from the BRI for China and the EU. A 30 percent reduction in transportation costs between China and the EU would increase the welfare of a representative consumer in China by 1.51 percent and the EU by 0.97 percent. Combining the BRI with a deep FTA would increase welfare by 4.90 and 2.94 percent, respectively. Furthermore, the potential negative effect of the TPP on China is more than compensated by the BRI initiative. 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: Suggested Citation