#1China-Russia Trade Relations and Their Impact on Europe Alicia Garcia Herrero and Jianwei Xu bruegel IMPROVING ECONOMIC POLICY WWW.BRUEGEL.ORG @BRUEGEL ORG#2Outline . • Background Reflection on EU's Competition with China and Russia · Empirical Analysis Conclusions#33500000 3000000 Background: Why China-Russia Relations Matters • China and Russia are key strategic partners for Europe. • Russia's largest trading partner. China's major economic competitor in terms of export capacity. Gross Domestic Output: 1993-2015 (Million, USD) 2500000 2000000 1500000 1000000 500000 0 19930301 19940201 19950101 19951201 19961101 19971001 19980901 19990801 20000701 20010601 20020501 20030401 20040301 20050201 20060101 20061201 ⚫Russia China 20071101 20081001 20090901 20100801 www. 20110701 20120601 20130501 20140401 20150301#4Mio € . EU Relations EU-Russia v.s. China-Russia relations ● The EU-Russia relations are challenged by Russia- Ukraine gas dispute and Russia's annexation of Crimea in 2014. China-Russia has increased their economic collaborations over the past years. European Union, Trade with China Total goods: EU Trade flows and balance, annual data 2005 - 2015 Source Eurostat Comext-Statistical regime European Union, Trade with Russia Total goods: EU Trade flows and balance, annual data 2005 - 2015 Source Eurostat Comext Statistical regime 4 400,000 350,000 300,000 250,000 240,000 220,000 200,000 180,000 160,000 140,000 200,000 150,000 100,000 50,000 120,000 100,000 Imports 80,000 Exports 60,000 Balance 40,000 20,000 10 -50,000 100,000 150,000 ווי 10 -20,000 -40,000 -60,000 -80,000 200,000 100,000 יוווווייי 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 Imports Exports Balance#5A Brief History of China-Russia Relations • Pre-1991: Sino-Soviet Relations • 1992 - Russian President Boris Yeltsin made first official visit to China. • 1994 - 1996, from “Constructive partnership" to "strategic partnership of coordination". . . 1998, Following China Prime Minister Li Peng's visit to Moscow, Russia and China issued a joint communique pledging to build an 'equal and reliable partnership'. 2001, Formalization of the Treaty of Good-Neighborliness and Friendly Cooperation, a twenty-year strategic, economic, and - controversially and arguably - an implicit military treaty. • 2004, a proposed pipeline from Eastern Siberia to the Pacific and increase oil export. • . 2009, the 60th anniversary of established diplomatic relations, coincided with the signing of over 40 contracts worth roughly $3 billion. 2013, China proposed the belt and road initiative, with Russia being an important partner.#6100.00% Comparison of China and Russia Figure 1: China and Russia's exposure to globalization Domestic sales v.s. Imports in China 100.00% Domestic sales v.s. Imports in Russia 95.00% 95.00% 90.00% 90.00% 85.00% 85.00% 80.00% 80.00% 75.00% 75.00% 70.00% 70.00% 65.00% 65.00% 60.00% 60.00% 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 Domestic Sales Imports Domestic sales Imports#7HS 2 Digit Code Import Competition from EU and Russia in China Figure 2: Import share of EU and Russia in China 0.25 0.2 0.15 0.1 0.05 0 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 Figure 2A: Top 10 imports from EU in China 87 Vehicles other than railway or tramway... 84 Nuclear reactors, boilers, machinery and.... 85 Electrical machinery and equipment and... 90 Optical, photographic, cinematographic,... 88 Aircraft, spacecraft, and parts. 30 Pharmaceutical products. 39 Plastics and articles 71 Natural or cultured pearls, precious or... 29 Organic chemicals. 73 Articles of iron or steel. 0 10000000 20000000 30000000 40000000 50000000 Export Value (thousand, USD) -EU-Russia Figure 2B: Top 10 imports from Russia in China 27 Mineral fuels, mineral oils and products of ... 44 Wood and articles of wood; wood charcoal, 84 Nuclear reactors, boilers, machinery and.. 75 Nickel and articles. HS2 Digit Code 26 Ores, slag and ash. 31 Fertilisers. 03 Fish and crustaceans, molluscs and other... 47 Pulp of wood or of other fibrous cellulosic... 71 Natural or cultured pearls, precious or... 29 Organic chemicals. I 0 10000000 20000000 Import Value (thousand, USD) 30000000#8Import Competition from the EU and China in Russia Figure 3: Import share of EU and China in Russia 0.8 0.7 0.6 0.5 0.4 0.3 0.2 0.1 0 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 -China EU Figure 4A: Top 10 imports from EU in Russia 84 Nuclear reactors, boilers, machinery... 87 Vehicles other than railway or... 85 Electrical machinery and equipment... 30 Pharmaceutical products. 39 Plastics and articles thereof 90 Optical, photographic,... 33 Essential oils and resinoids;... 48 Paper and paperboard; articles of... 73 Articles of iron or steel. 88 Aircraft, spacecraft, and parts thereof. HS2 Digit Code 0 10000000 20000000 30000000 Import Value (thousand, USD) HS2 Digit Code Figure 4B: Top Imports from China in Russia 85 Electrical machinery and... 84 Nuclear reactors, boilers,... 64 Footwear, gaiters and the like.... 87 Vehicles other than railway or... 62 Articles of apparel and clothing... 61 Articles of apparel and clothing... 39 Plastics and articles thereof 94 Furniture; bedding, mattresses,... 73 Articles of iron or steel. 95 Toys, games and sports requisites;.... 0 5000000 10000000 Import Value (thousand, USD) 15000000#9• Estimates of Elasticity: Method • • Following Diewert (1976) and Feenstra (2003), we choose a translog expenditure function to estimate the elasticity of substitution in Allen-Hicks sense. In(Ę;) = ln(U; ) +αo; + Σ a; In(p;;) + ΣΣ^, ln(p)](P) j α j ji j k ji. With some reasonable assumptions it is possible to show that Smj =αm + 2km ln(Pkj) -Σ//km k The elasticity of substitution can be retrieved from the parameters along with the market share value. See technical details in the appendix of the paper.#10Two Key Results I. The EU and Russia are complementary in the Chinese market as shown by the negative and significant elasticity. II. China and EU countries are competitive in the Russian market as shown by a positive and significant elasticity. Country Pair EU-Russia Substitution EU-China Substitution China Market -0.15** (complement) EU-ROW Substitution 0.73 (substitute) Russia Market 1.30** (substitute) 1.24 (substitute)#11. Product-level Analysis The competition between countries are more pronounced within each sector, as shown that the within-sector substitution for the three areas are positive for most sectors. • The complementarity between Russia and EU in the Chinese market is driven by cross-sector complementarity.#12-0.8 1.2 1 0.8 0.6 0.4 0.2 -0.2 0 Evolution of the Elasticity of Substitution • • The elasticity of substitution between the EU and Russia in China has experienced a dramatic decline over the past years. The EU and China have maintained a competitive relations in the Russian market, but the elasticity has increased during the last three years when EU-Russia relations sharply deteriorated. The Substutability of EU and Russia Competition in China The Substutability of EU-China Competition in Russia 1998-2004 1999-2005 2000-2006 2001-2007 2002-2008 Period 2003-2009 2004-2010 2005-2011 2006-2012 2007-2013 2008-2014 2.5 2 1.5 1 0.5 Elasticity of Substitution 0 1998-2004 1999-2005 2000-2006 2001-2007 2002-2008 2003-2009 Period 2004-2010 2005-2011 2006-2012 2007-2013 2008-2014#13Stimulating the Impact for Europe Scenario simulation: ● Assuming that a closer economic relations implies a reduction in China-Russia bilateral exporting prices of 20%. Interacting the effect of the substitution in Russia and the effect of complementarity in China, we show that there will be a reduction of 4% of EU exports to Russia and China. Three issues concerning the simulation: ceteris paribus assumption ● the possible deterioration of EU-Russia relations • slowdown of China and Russia economy#14Conclusions • By estimating the elasticity of substitution, we show that: ● . Russia and EU countries are complementary on China's market and this is increasingly the case over time. China and EU economies compete in Russia's market and increasingly so in more recent years. · Simulation results indicate that a 20% reduction in bilateral exporting price between China and Russia would reduce EU exports to these two countries by 4%, with most of the negative impact born by exports to Russia.