EAEU-China agreement could increase construction services in Belt and Road by USD 207 mln

_ Yuri Kofner, non-residential research fellow, Skolkovo Institute for Emerging Market Studies, editor-in-chief  analytical media “Eurasian Studies”. Munich, 20 March 2020.

In May 2018, the Chinese Ministry of Commerce and the Eurasian Economic Commission signed the “Agreement on Trade and Economic Cooperation between the People’s Republic of China and the Eurasian Economic Union”. It entered into force in October 2019.

The agreement is “non-preferential”, i.e. its provisions do not provide for the reduction of import tariffs. Its main aim is to decrease non-tariff barriers (NTBs) by mutually improving the transparency of regulatory systems, simplifying trade procedures, as well as developing industrial cooperation ties. The scope of the agreement covers, inter alia, technical barriers to trade, electronic commerce, intellectual property, competition and public procurement, as well as industrial cooperation.

The agreement can be seen as an important new part of the “soft infrastructure” of China’s Belt and Road Initiative, i.e. the liberalization of non-tariff measures in trade, which is no less important for the implementation of the BRI, than its better known “hard infrastructure” component, i.e. the existing and planned construction of railway, pipelines, roads, ports, logistical hubs, optical fiber cables, etc.

Model


Using a partial equilibrium model, the purpose of this article is to estimate the trade and welfare effects of this “non-preferential” agreement on trade in services. As a case study the author will look at the effects of trade liberalization in construction services, which is defined as a 20 percent mutual reduction in non-tariff barriers in this sector. This could be achieved by tasking the joint PRC-EAEU commission, which is outlined in the agreement, with devising and implementing a roadmap on mutual trade liberalization in construction services.

For the simulation in this article the author used the following input data: 1. Bilateral data for trade in construction services from 2012 for four parties (EAEU, Singapore, China and the “rest of the world”) taken from the OECD Statistics and UN Comtrade databases using the EBOPS 2020 classification. For the bilateral trade flows imports were preferred. 2. Ad-valorem equivalents of non-tariff measures (AVEs of NTMs) for each party taken from (Fontagné et al. 2016). 3. Import elasticities taken from (Ghodsi et al. 2016). The export supply (1.5) and substitution (5) elasticities were taken as constants across all sectors and regions.

Results


Trade facilitation in construction services between the EAEU and the People’s Republic of China, defined as a 20 percent mutual reduction in NTBs in this sector, would increase Chinese exports of construction services to the EAEU member states by 29 percent (USD 122.8 mln) and increase Eurasian exports to China of construction services by 38 percent (USD 84.2 mln). The gross welfare effect (producer surplus + consumer surplus) would be USD 50.7 mln for both parties. According to the simulation results, neither Eurasian, nor Chinese companies offering construction services would incur economic losses from the mutual opening of their construction markets.

Thus, the implementation of the provisions of the China-EAEU non-preferential agreement could lead to the fact that Chinese and Eurasian construction services, including those for the construction of Belt and Road objects in this region, could be USD 207 million higher than they are now.

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