Trade with Chinese characteristics : economics versus politics
Kerola, Eeva; McCully, Tuuli; Nuutilainen, Riikka (11.09.2024)
Numero
8/2024Julkaisija
Bank of Finland
2024
Julkaisun pysyvä osoite on
https://urn.fi/URN:NBN:fi-fe2024091170372Tiivistelmä
Over the past twenty years, China has become the world’s largest trading nation and a significant trading partner for most countries. Despite these important links, concerns regarding China’s commercial and diplomatic goals persist due to its unique state-centric economic structure. This paper applies an augmented gravity model to tease out drivers of China’s bilateral trade relationships, asking why some countries are more important than others as sources of Chinese imports. Our results show that both business and political considerations drive China’s import decisions. Political friendliness with China, as measured by UN General Assembly voting records, or established trade agreements, has a positive impact on exports to China. The results further suggest that countries with official diplomatic ties with Taiwan export less to China. Membership in China’s Belt and Road Initiative, however, does not generally translate into a significant increase in Chinese imports from the member country.
Julkaisuhuomautus
NON-TECHNICAL SUMMARY
FOCUS
China is the world’s largest trading nation and a significant trade partner for all countries. It also has a long history of using economic coercion as a foreign policy instrument. Understanding how China operates in international markets is particularly important in the current period of elevated geopolitical tensions. This paper studies the drivers behind China’s bilateral trade relationships, assessing the political factors that enter into play when China sources import goods.
CONTRIBUTION
The paper deepens the existing understanding on how business and politics go hand-in-hand in the Chinese economy. It contributes to the trade literature in three ways. First, because China’s economic structure differs from that of other leading economies, generic gravity models of trade flows can fail to capture factors unique to China’s political environment. We therefore present comprehensive analysis of Chinese trade. Second, we take a broad approach by capturing Chinese import flows from the majority of countries globally, regardless of geographic location or participation in trade agreements. Third, we combine two strands of the literature on gravity modeling of international trade to examine both economic and political factors impacting trade flows. Our model includes both traditional gravity variables and variables that capture the political alignments of China’s trading partners.
FINDINGS
Both business and political considerations motivate China’s import decisions. Trade is used as a foreign policy tool to punish or reward the political stance of its trading partners. China like-mindedness (for example, voting as China does in the UN General Assembly or not maintaining official relations with Taiwan) is rewarded with increased exports to China. Not aligning with China’s political views tends to reduce a country’s exports to China.
FOCUS
China is the world’s largest trading nation and a significant trade partner for all countries. It also has a long history of using economic coercion as a foreign policy instrument. Understanding how China operates in international markets is particularly important in the current period of elevated geopolitical tensions. This paper studies the drivers behind China’s bilateral trade relationships, assessing the political factors that enter into play when China sources import goods.
CONTRIBUTION
The paper deepens the existing understanding on how business and politics go hand-in-hand in the Chinese economy. It contributes to the trade literature in three ways. First, because China’s economic structure differs from that of other leading economies, generic gravity models of trade flows can fail to capture factors unique to China’s political environment. We therefore present comprehensive analysis of Chinese trade. Second, we take a broad approach by capturing Chinese import flows from the majority of countries globally, regardless of geographic location or participation in trade agreements. Third, we combine two strands of the literature on gravity modeling of international trade to examine both economic and political factors impacting trade flows. Our model includes both traditional gravity variables and variables that capture the political alignments of China’s trading partners.
FINDINGS
Both business and political considerations motivate China’s import decisions. Trade is used as a foreign policy tool to punish or reward the political stance of its trading partners. China like-mindedness (for example, voting as China does in the UN General Assembly or not maintaining official relations with Taiwan) is rewarded with increased exports to China. Not aligning with China’s political views tends to reduce a country’s exports to China.