Bilateral Trade Between China and Other Countries: Role of “One Belt, One Road”

Introduction

Trade openness and bilateral trade creates many opportunities for businesses and the economy; however, trade imbalance can be a direct cause for friction among trade parties. To protect some or all domestic industries, an importing state can adjust its import quota, exchange rate, and imposition of tariffs on imported products (Kim et al., 2014). Trade friction occurs when an exporting country takes retaliatory measures along with the removal of trade barriers. Such an act can either directly or indirectly adversely affect the aggregate welfare of both countries. Meanwhile, the degree of restriction or trade friction is often linked with the closeness of the trade ties among countries (Borchert et al., 2020; Hook et al., 2011; Wu, 2020).

Turning toward the economy of China, One Belt One Road (OBOR) is a Silk Road Economic Belt. The 21^st century maritime Silk Road policy focuses on significant integrations in the form of trade between China and regions like Africa, Europe, and Asia. The OBOR initiative aimed to promote regional trade relations and global economic development. Unblocked trade, one of the “five links,” is a core content of the new initiative. Chunbao and Jinping (2020) stated that China and the other countries have huge trade potential. On the one hand, strong economic development and the willingness of countries along the route have set the foundation for trade cooperation. Over 60 have 60% of the world’s population. In addition, they generate 30% of the world’s output. On the other hand, China and the countries along the route have strong economic complementarities and potential for trade cooperation. The Belt and Road initiative (B&R) has strengthened the ties between countries, promoting the development of trade and sustainability.

The Chinese government’s OBOR initiative provides a blueprint of the country’s effective integration into the world economy. OBOR offers a commitment from the Chinese government to be a more open economy to the world. The strategy was formed at a critical point of China’s economic transformation. The contemporary world observes that the Chinese overseas direct investment (ODI) is increasing with rapid speed, promoting China’s domestic production and identifying significant structural transformation. Additionally, the OBOR initiative is accepted as a significant means to enhance skills, expanding the global reach of Chinese governments and business ventures (Du & Zhang, 2018).

OBOR plays a significant role in the economic and financial development of China’s economy. However, the initiative presents several issues that need attention and meaningful solutions. For this reason, it is natural to ask whether the initiative has promoted bilateral trade, especially in countries with which this track is directly or indirectly linked. This issue will attract the attention of policymakers, industry experts, and the academic community. It is an important and interesting issue for the international community; however, there is no serious research to analyze whether this initiative has had a real impact on the economic integration of China and the B&R countries. This study attempts to fill this gap by assessing the moderating role of B&R in the bilateral trade along the route.

Current literature focuses on the correlation between the geographical distance and trade volume among economies. Huang (2007) claimed that transportation costs and unfamiliarity can significantly and negatively determine the correlation between geographical distance and bilateral trade volumes among economies. Furthermore, Huang (2007) explained that geographical distance and bilateral trade factors have a negative association. Li and Ren (2015) also addressed this issue, claiming that geographical proximity affects trade. Christen (2017) investigated the impact of distance and time zones on the service trade, confirming that time zone differences and latitudinal and longitudinal distances are major drivers for outward service sector sales in the United States. However, a bigger research gap is observed when investigating distance and bilateral trade between key members of the OBOR. The current study was propelled in an attempt to find answers to this gap and contribute to the current literature.