Tuuli McCully (BOFIT) and Riikka Nuutilainen (BOFIT): Bilateral trade relationships with Chinese characteristics – a gravity model approach to Chinese imports

BOFIT Seminar - Tuuli McCully (BOFIT) and Riikka Nuutilainen (BOFIT)
Bilateral trade relationships with Chinese characteristics – a gravity model approach to Chinese imports

Co-author: Eeva Kerola (Bank of Finland)

Abstract:

Over the past twenty years China has become the world’s largest trading nation and a significant trading partner for most countries globally. Despite important economic links, concerns regarding China’s commercial and diplomatic goals persist on the back of the nation’s state-centric economic structure that differs from other leading economies. The paper uses an augmented gravity model to get clarity on what drives China’s bilateral trade relationships, i.e., why some countries are more important than others as sources of Chinese imports. Using such data as Belt and Road memberships and UN voting records, the paper assesses whether China’s trade relationships are impacted by diplomatic/geopolitical considerations in addition to business opportunities. The results show that political “friendliness” has a positive impact on trade with China, as measured by UN general assembly voting records and established trade agreements. The results also suggest that having diplomatic political relations with Taiwan are punished by China via lesser imports. Meanwhile, a membership in China’s Belt and Road Initiative does not translate to a significant increase in Chinese imports from the member country.  

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