11 Dec 2018
Trade linkages between the belt and road economies
By Mauro Boffa, World Bank Group
This paper studies the production and trade linkages between a selected group of economies belonging to the Belt and Road Initiative (BRI). After defining a group of Belt and Road Economies, the paper uses three standard trade databases to analyze trade and production linkages among these economies. With the help of state of the art economic decompositions of input-output tables, coupled with standard international trade statistics, the analysis quantifies the amount of production sharing between the economies of the area. The main finding is that trade integration among Belt and Road Economies has largely increased: Intraregional exports went from 30.6 percent in 1995 to 43.3 percent in 2015. Since the increase in gross exports was driven mostly by intermediate goods, the study investigates the evolution of regional production networks across Belt and Road Economies.
Integration within the economies of the B&R has already begun. We find that our selected group of B&R Economies are well integrated with regard to both backward and forward linkages. Still, they source some of the value-added in exports from third partners.
There are two important interconnected production networks around China and Russia. They are central in the value-added as both providers and users of inputs. With their strong linkages, they are well connected to other B&R partners and they leverage on their domestic markets by building value-chains around them. In fact, the share of exports that returns to be consumed in their domestic markets is as high as that of some developed countries.
There is substantial scope for further integration in the key sector of Computer, Electronics and Optical Equipment sector which accounts for over 15 % of gross exports from the B&R Economies. Surprisingly, in this key sector only 15% of the value added comes from B&R partners, while around 30 % comes from mostly developed economies. Therefore, there is substantial room for further integration and a more intensive use of B&R inputs.
China’s role in GVCs is evolving once again. From an exporting structure based on assembly and intensive in foreign inputs, China is moving up the value chain to become one of the most important GVC hubs. We observe that while overall the use of foreign value-added has diminished, the composition of the vertical specialization index with B&R Economies revolves around the double counted terms. This suggests that trade between China and B&R Economies is intensive in GVCs. China is nowadays at the center of the trade network under all angles. It occupies a dominant position together with Germany and the United States. B&R Economies are among its main partners and they are the most important partners for circular value chains that leverage on the domestic economy.
In the paper, we find that an eventual reduction of trade costs, generated by improved connectivity, is likely to increase not only trade but also the vertical specialization linkages in the region from the exporting and importing side. Given the increasingly large domestic market in China, it is not surprising that most of the gains from lower trade costs would come from domestic value-added that returns home (the circular value chain). The finding is encouraging as this is a win-win value chain were countries specialize in their comparative advantage and leverage their own domestic economies.
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