EAEU-China agreement could increase FDI flows in Belt and Road land transport by 30 percent

_ Yuri Kofner, non-residential research fellow, Skolkovo Institute for Emerging Market Studies, editor-in-chief  analytical media “Eurasian Studies”. Munich, 25 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 foreign direct investment (FDI). As a case study the author will look at the effects of easing restrictions on FDI on land transport, which is defined as a 20 percent mutual reduction in non-tariff barriers against FDI 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 a mutual reduction in restrictions on FDI in land transport.

For the simulation in this article the author used the following input data: 1. Bilateral data for FDI flows in land transport from 2004 for four parties (EAEU, China, EU and the “rest of the world”) taken from the CEPII FDI Map. 2. The OECD FDI Restrictiveness Index for 2018 was used for the ad-valorem equivalents of non-tariff measures (AVEs of NTMs) for each party. 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. After the simulation the results were adjusted for inflation and changes in gross country FDI inflows between 2004 and 2018.

Results

A 20 percent mutual reduction in NTBs (restrictions) on foreign direct investment in land transport between the EAEU and the People’s Republic of China, would increase Chinese annual FDI flows in land transport to the EAEU member states by 22 percent (USD 2.6 mln) and increase yearly Eurasian investmnt flows to Chinese land transport by 29 percent (USD 0.2 mln). The annual gross welfare effect would be USD 0.5 mln for China and USD 0.7 for the EAEU.

Thus, the implementation of the provisions of the China-EAEU non-preferential agreement could lead to the fact that annual Chinese and Eurasian direct investment flows in land transport of the Belt and Road project in this region could be almost 30 percent or USD 2.8 mln higher than they are now.

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