Trade and welfare effects of trade liberalization in financial services between China and the EAEU

_ Yuri Kofner, non-residential research fellow, Skolkovo Institute for Emerging Market Studies, editor-in-chief  analytical media “Eurasian Studies”. Munich, 24 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.

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 financial 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 financial services.

For the simulation in this article the author used the following input data: 1. Bilateral data for trade in financial 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 financial 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 financial services to the EAEU member states by almost 50 percent (USD 21 mln) and increase Eurasian exports to China of financial services by almost 60 percent (USD 7.3 mln). The gross welfare effect (producer surplus + consumer surplus) would be USD 9.6 mln for the PRC and USD 7.2 for the EAEU. According to the simulation results, neither Eurasian, nor Chinese banks offering financial services would incur economic losses from the mutual opening of their capital markets.

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