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Can policy coordination facilitate unimpeded trade? An empirical study on factors influencing smooth trade along the Belt and Road

Published Online: 20 May 2022
Volume & Issue: AHEAD OF PRINT
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Received: 19 Feb 2022
Accepted: 10 Apr 2022
Journal Details
License
Format
Journal
eISSN
2444-8656
First Published
01 Jan 2016
Publication timeframe
2 times per year
Languages
English
Introduction

Currently, economic globalisation and regional economic cooperation are the mainstream trends of global economic development. Pursuant to President Xi Jinping's announcement of the Belt and Road Initiative (BRI) proposal in 2013, China and the countries and regions along the Belt and Road (CRBR) have adopted an in-depth five-pronged approach and achieved fruitful results. A total of US$ 50.7 billion was invested; US$ 6.6 billion was paid to the host country as taxes and fees; and 392,000 local jobs were created

Data were obtained from China's Belt and One Road Network, https://www.yidaiyilu.gov.cn/xwzx/gnxw/217288.htm.

. Under the guidance of the global values of a community envisaging a shared future for mankind, the high-quality development of bilateral relations between China and CRBR has further promoted ‘five links’, narrowed cultural and geographical distances, improved the economic situation and encouraged the application of the concept of ‘discuss, build and share together’. Therefore, bilateral trade (BT) has reached new heights. Furthermore, China should base itself on the new development pattern of domestic and international dual circulation and mutual promotion and take multiple measures and efforts to establish a new potential for unimpeded trade (UT).

Close to a decade has passed since the BRI was proposed. With the continued spread of COVID-19 worldwide and the Sino–US trade frictions, China's international trade (IT) has experienced complicated situations. Under such circumstances, it is necessary to re-evaluate the factors influencing IT along the B&R to grasp the inherent laws of the development of trade among CRBR, which is crucial for promoting BRI and building a new development pattern wherein China's domestic and international dual circulation promote each other, so as to further guide the construction of cooperative architecture of the world economy.

Literature review and hypothesis

Chinese and international academicians believe that numerous internal forces promote the smooth flow of IT, which can facilitate trade-related improvements through changes in the market, supply and demand, cost and consumer preferences. Currently, academic researchers consider the following six factors that determine the smooth flow of IT: policy, infrastructure, finance, cultural distance, spatial distance (SD) and economic level.

The IT level is controlled with policy coordination (PC) between the two governments concerned. Specifically, a friendly and harmonious environment [1], equal foreign trade agreements [2], positive political relations [3, 4, 5], the same military alliance [2, 4] and the same political alliance network [4, 5] can promote BT. In addition, a newly signed policy cooperation between countries facilitates the development of new industries, followed by a related trade increase. Therefore, cooperation and communication between national policymaking subjects and cooperative behaviour among enterprises have a certain decision-making and guiding role. Pollins [3] stated that as enterprises follow the political winds, lowering the uncertainty of political cooperation can ensure that the external environment of export trade is secure, which is conducive for the promotion of BT. The better the policy cooperation effect, the higher the efficiency of bilateral export trade [6]. Therefore, stable political cooperation basis and political trust relationship, especially positive political communication between the top leaders of two countries, can significantly and positively affect the BT level [7]. Based on the above analysis, Hypothesis 1 is proposed as follows:

H1: Good PC can bring UT

The improvement in trade level must be supported by the provision of good facilities. Specifically, infrastructure connectivity (IC) between two countries can considerably facilitate BT and transportation [8] and enhance the BT volume [9, 10, 11]. Trade facilitation through IC considerably reduces the trade cycle [12,13], trade costs [14, 15, 16, 17, 18] and uncertainty [13, 16, 19, 20, 21, 22]. Accordingly, BT can be promoted, thus facilitating the timely exchange of relevant market information between the two countries [23] and products of comparative advantage and by accelerating cross-border flow and the adjustment of factors and commodities [22]. Good infrastructure support provides an efficient, transparent and predictable environment for IT [11, 24] in addition to promoting the development of economic globalisation and international division of labour. Exchange of information between the two countries [24] and the construction of transportation facilities open up the connection channel for the regional market between the two countries. Accordingly, industrial linkage development between the two countries and their exchange of factors of production can be promoted [25] to strengthen their trade stickiness and promote trade dialogue. Based on the aforementioned analysis, Hypothesis 2 is proposed as follows:

H2: IC can facilitate UT

The promotion of trade level requires the use of capital as an intermediary and as a guarantee. Specifically, considering the differences in currency types and dynamic exchange rates, BT usually adopts foreign exchange or letter of credit settlement. Accordingly, cross-border trade settlement is crucial for avoiding the exchange rate risk of enterprises, enhancing trade terms and stabilising foreign trade growth [26]. At this point, the level of financing determines the convenience of BT. Furthermore, when trade occurs between the two countries, due to the asynchronous and separation of goods and capital flow, BT is usually an asynchronous exchange. Thus, as a guarantee, capital is essential to realise the integrated connectivity of funds across multiple currencies, time zones and countries [27]. Furthermore, in IT, a country's exports often require international finance; otherwise, it is difficult to form a certain scale [28]. High-level financial development can promote economic growth by encouraging a higher level of capital formation and enhancing the efficiency of capital allocation [29, 30]. Therefore, the higher the level of financial integration (FI), the higher the efficiency of BT [6]. Moreover, capital constraint strongly affects the trend and volume of BT. Based on the aforementioned analysis, Hypothesis 3 is proposed as follows:

H3: FI plays an important role in promoting UT

Furthermore, culture also affects IT. Specifically, the cultural gap resulting from excessive cultural differences significantly negatively affects international tourism intentions as well as economic and trade cooperation [31], thereby affecting IT in goods [32]. The cultural distance significantly negatively correlates with IT, implying that a lower cultural distance is conducive to IT [33, 34, 35, 36]. This is because people's subjective initiative directly determines the amount and type of trade; and tourism, science and education exchange is a type of trade practice. Scholars have proposed that the recognition of a certain cultural extent affects economic behaviour, thereby affecting trade [37, 38]. Therefore, as a spiritual link, people-to-people bond (PPB) is crucial in BT. The relevant countries can convert potential into actual trade performance by reducing institutional and cultural differences [39]. In addition, the friendliness of a country's people and the number of sister cities considerably affect the willingness of traders to choose that country as a trade destination. Based on the above analysis, Hypothesis 4 is proposed as follows:

H4: PPB can accelerate UT

The host country's level of economic development also affects BT. The level of economic development affects the relation between BT and economic growth [40, 41, 42, 43, 44]. Thus, the higher the host country's level of economic development, the higher the consumption level and purchasing power of residents. Accordingly, the host country's level of economic development has considerable influence in determining whether or not there is a significant increase in BT volume. In addition, the increase in per capita GDP can considerably facilitate UT [45]. Based on the aforementioned analysis, Hypothesis 5 is proposed as follows:

H5: Higher GDPPC can advance UT

Furthermore, the larger is the distance between the two countries, the more complex the transportation environment. A negative correlation exists between UT and SD. The longer is the SD, the more complex the transportation environment and the higher the transportation cost of trade and cultural exchange [46]. Meanwhile, strengthening the segmentation characteristics of the overall market is easy [45]. Therefore, the increase in SD naturally inhibits the smooth flow of trade [47, 48, 49]. The closer the distance between the two countries, the easier it is to eliminate the challenges of storage and transportation technology, reduce product costs and promote UT [50]. Similarly, geographical distance also affects BT by reducing the effects of economic integration agreements [51]. Accordingly, SD still affects trade today [52]. Based on the aforementioned analysis, Hypothesis 6 is proposed as follows:

H6: Spatial proximity can smooth UT

Empirical study
Methodology
Indicators

In this paper, a multiple linear regression model is used to empirically analyse factors affecting trade among CRBR. In accordance with research assumptions, indicators are mainly selected from six aspects: policy, infrastructure, finance, cultural distance, SD and economic level. Table 1 presents the specific indicators and definitions.

Indicator selection and interpretation

More interpretations for UT, PC, IC, FI, and PPB is from Xinhuanet, http://www.xinhuanet.com/world/2015-03/28/c_1114793986.htm

VariablesIndicator nameInterpretation

The dependent variableUTInvestment and trade are facilitated, related barriers are removed, a sound business environment within CRBR is fostered, free trade zones are established, more cooperation is expanded and the potential is unleashed.
The independent variablesPCMore inter-governmental cooperation is strengthened, a multi-tiered inter-governmental mechanism is actively established for macro policy communication and exchange, converging interests are deepened, political mutual trust is promoted and more consensus on cooperation is reached.
ICBased on the need to respect the sovereignty and security concerns of the relevant countries, the synergisation of infrastructure construction plans and technical standard systems are strengthened among CRBR, the construction of international trunk routes is jointly promoted and an infrastructure network connecting all sub-regions in Asia, and between Asia, Europe and Africa, is gradually formed.
FIFinancial cooperation is deepened, and the development of currency stability, investment and financing, and credit systems in Asia could be advanced.
PPBThe spirit of friendship and cooperation among CRBR is shared. Extensive cultural and academic exchanges, personnel exchanges and cooperation, media co-operation, youth and women exchanges, and volunteer services are carried out so that a solid public support for deepening bilateral and multilateral cooperation is gained from more people.
GDPPCThe ratio of the gross domestic product realised in a country or region to the resident population within its territory during an accounting period (usually 1 year).
SDThe distance between the host country and China.

FI, financial integration; GDPPC, GDP per capita; IC, infrastructure connectivity; PPB, people-to-people bond; PC, policy coordination; SD, spatial distance; UT, unimpeded trade; CRBR, countries and regions along the Belt and Road.

Data source

In this paper, 94 countries that have signed cooperation agreements with China under the BRI before 2019 were considered as research samples. The data are presented as follows:

The five indicators, UT, PC, IC, FI and PPB, are represented by a set constituting an index, as in The Belt and Road Initiative: Report on Five-Connective Index, which has been jointly issued by Peking University and a think-tank called Taihe Institute.

The raw data for GDP per capita (GDPPC) were obtained from the World Bank, and the raw data for SD were obtained from the Internet, http://www.china6636.com/country/CN. The raw data for both the indicators were obtained for 2018. Since the data for GDPPC and SD constitute absolute numbers, they should be indexed.

The indexation of GDPPC is as follows: GDPPCIi=GDPPCiMaxGDPPCi;i=1294, {\rm{GDPPCI}}_{\rm{i}} = {{{\rm{GDPPC}}_{\rm{i}}} \over {{\rm{MaxGDPPC}}_{\rm{i}}}};\quad i = 12 \ldots 94, where PGDPCi denotes the host country's or region's GDPPC; MaxGDPPCi represents the highest GDPPC of these host countries or regions; and GDPPCIi is the PGDPCi index.

The indexation of SD is as follows: SDIi=SDiMaxSDi;i=1,2,,94, {\rm{SDI}}_{\rm{i}} = {{{\rm{SD}}_{\rm{i}}} \over {{\rm{MaxSD}}_{\rm{i}}}};\quad i = 1,2, \ldots, 94, where SDi denotes the distance between the host CRBR and China; SDIi represents the SDi index; and MaxSDi indicates the maximum distance between the host country or region and China.

Finally, in a total of 94 datasets, the samples for Serbia, Kyrgyzstan, Palestine and the Cook Islands were deleted due to data loss, leaving a remainder of 90 datasets.

Analysis

Multiple linear regression was conducted, with the UT index as the dependent variable and the PC, IC, FI, PPB, SD and GDPPC indexes as independent variables.

In Table 2, VIF values are less than 10. No multi-collinearity exists among the dependent variables, and the multiple linear regression can be conducted. Table 3 presents the descriptive statistics.

Collinear analysis of independent variables

Collinear statistics

toleranceVIF

PC0.6401.562
IC0.6401.562
FI0.4382.285
PPB0.4892.045
GDPPC0.6621.512
SD0.7601.316

Note: a. Dependent variable: UT.

PC, policy coordination; IC, infrastructure connectivity; FI, financial integration; PPB, people-to-people bond; GDPPC, GDP per capita; SD, spatial distance; UT, unimpeded trade.

Descriptive statistics of indicators

MeanStandard deviation

UT12.506112.429006
PC10.979782.967041
IC9.7948892.25475
FI10.008224.086667
PPB12.4722.962444
GDPPC0.1149670.130957
SD0.5198330.204799

UT, unimpeded trade; PC, policy coordination; IC, infrastructure connectivity; FI, financial integration; PPB, people-to-people bond; GDPPC, GDP per capita; SD, spatial distance.

After adjustment, R2 = 0.514, implying that the model has a good fit. The six indicators constituted 51.4% of UT, as indicated in Table 4.

Model's goodness of fit analysis

ModelRR2Adjusted R2Errors in standard estimatesDurbin–Watson test

0.739a0.5470.5141.693591.889

In Table 5, the F-value is 16.679, and p < 0.05, indicating a linear correlation between the dependent and independent variables.

Model significance test

Quadratic sumVarianceMean squareFSig.

Regression287.041647.84016.6790.000b
Residual238.066832.868
Total525.10689

Notes:

Dependent variable: UT;

Predictor variables: (constant), PC, IC, FI, PPB, GDPPC and SD.

PC, policy coordination; IC, infrastructure connectivity; FI, financial integration; PPB, people-to-people bond; GDPPC, GDP per capita; SD, spatial distance; UT, unimpeded trade.

When p < 0.1, variables with statistical significance in the model should be retained. Therefore, as indicated in Table 6, IC, FI, PPB, GDPPC and SD should be retained and the indicator of PC should be deleted.

Significance test of independent variable regression coefficient

Standard errorBetatSig.
BStandard error

C7.0441.203 5.854***0.000
PC−0.0690.076−0.084−0.9120.364
IC0.1720.1000.1601.729*0.087
FI0.1810.0660.3052.731***0.008
PPB0.2590.0870.3162.993***0.004
GDPPC3.8631.6850.2082.292**0.024
SD−1.8461.006−0.156−1.836*0.070

Note:

The dependent variable is UT;

means p < 0.1;

means p < 0.05;

means p < 0.01.

PC, policy coordination; IC, infrastructure connectivity; FI, financial integration; PPB, people-to-people bond; GDPPC, GDP per capita; SD, spatial distance; UT, unimpeded trade.

Results

PC is not significant. The p-value of PC is 0.364, more than 0.1, and so the factor of PC could not be as valuable as it should be and is expected to be. Thus, Hypothesis 1 is rejected.

The rest of the indicators are significant. IC, FI, PPB, GDPPC and SD impede trade. Among these factors, IC, FI, PPB and GDPPC positively affect UT, but SD has a negative effect. Thus, the remaining five hypotheses should be accepted.

Table 7 presents the final results.

Results of the multiple linear regression

HypothesisCoefficientt-valuep-valueResults

H1: PC → UT−0.084−0.9120.364Not supported
H2: IC →UT0.1601.729*Supported
H3: FI → UT0.3052.731******Supported
H4: PPB → UT0.3162.993******Supported
H5: GDPPC → UT0.2082.292****Supported
H6: SD → UT−0.156−1.836**Supported

Note:

The dependent variable is UT;

means p < 0.1;

means p < 0.05;

means p < 0.01.

PC, policy coordination; IC, infrastructure connectivity; FI, financial integration; PPB, people-to-people bond; GDPPC, GDP per capita; SD, spatial distance; UT, unimpeded trade.

According to the table, the following regression equation can be obtained: UT=7.044+0.172*IC+0.181*FI+0.259*PPB+3.863*GDPPC1.846*SD UT = 7.044 + 0.172*IC + 0.181*FI + 0.259*PPB + 3.863*GDPPC - 1.846*SD

Discussion

BRI significantly promotes bilateral relations between China and CRBR, in addition to strengthening multilateral trade along the BRI. PC promotes BT; however, the analysis indicated that PC is not significant. The results are contrary to the original intention and idea of PC as well as PC expectations. This could be because:

PC is mainly political communication, and not communication primarily aimed at promoting BT. The data for the index of PC were obtained from The Belt and Road Initiative: Report on Five-Connective Index. In this report, PC includes the following indicators: frequency of high-level coordination, international cooperation mechanism under the BRI, the number of embassies and consulates in China, political stability of the host country, partnership between the host country and China, control of territorial disputes, strategic synergy, documents signed under the BRI and PC validity. Accordingly, the contents of the PC index are mainly political communication, which lead to the ‘decoupling’ of policy and trade in some cases. Moreover, BT may generate trade deficit in the host country and affect its domestic economy and industry. Trade protectionism may occur in actual trade practices. Thus, PC may be reduced to a form of communication that is not capable of bringing about effective trade promotion, resulting in the phenomenon of ‘hot politics and cold economy’.

Policy implementation time is still short, and the promotion of trade has not yet fully manifested. It has been less than a decade since China proposed the BRI and only about 5 years since China launched an in-depth BT cooperation with CRBR. Moreover, it takes a long time for political communication to enhance mutual trust, increase understanding and reach a consensus to achieve in-depth trade cooperation and promote UT. Furthermore, it takes a long time for PC to convert to other factors such as closer people-to-people connectivity and direct promotion of IC.

Conclusions

Among the six factors that influence UT, five are significant. Specifically, it can be found that

The coordination between policymaking subjects does not significantly promote BT. PC should boost BT; however, the research results suggest otherwise. Hypothesis 1 is rejected, implying that PC needs to be adjusted to boost BT.

Infrastructure construction can provide facilitation conditions and create an effective prerequisite for the circulation of elements among CRBR. The construction of infrastructure promotes trade development by indirectly reducing the uncertainty and time associated with trade, as well as the economic cost. (This is made possible by the fact that infrastructure construction can provide convenient conditions to facilitate the flow of factors among CRBR and reduce the uncertainty and time associated with trade, as well as the economic cost, thereby indirectly promoting trade development).

As a trading intermediary and guarantee among countries, FI can effectively avoid exchange rate risk, improve trade conditions and stabilise IT growth. FI can ensure asynchronous exchange for the expansion and development of some large multinational companies’ export as well as provide international financial support. The financing level of ascension has a certain promoting effect on trade flow.

PPB has the greatest positive effect on IT. As a spiritual bond of trade, people's hearts affect the tendency of consumption choices to a certain extent and directly stimulate the development of IT through tourism, scientific and educational exchanges and other behaviours. A higher level of PPB increases the willingness of both sides to IT; thus, improving the level of PPB facilitates the smooth flow of trade.

GDPPC positively affects IT, thereby directly determining the consumption level and purchasing power of residents. As a profit-seeking behaviour, IT is affected by consumption behaviour. Accordingly, the higher the consumption level and purchasing power, the more conducive the development of IT.

With the increase of SD, the cost and risk of IT increase. The exporting country easily loses its comparative advantage in the importing country's market. Therefore, the increase of SD restricts IT.

Indicator selection and interpretationMore interpretations for UT, PC, IC, FI, and PPB is from Xinhuanet, http://www.xinhuanet.com/world/2015-03/28/c.1114793986.htm

Variables Indicator name Interpretation

The dependent variable UT Investment and trade are facilitated, related barriers are removed, a sound business environment within CRBR is fostered, free trade zones are established, more cooperation is expanded and the potential is unleashed.
The independent variables PC More inter-governmental cooperation is strengthened, a multi-tiered inter-governmental mechanism is actively established for macro policy communication and exchange, converging interests are deepened, political mutual trust is promoted and more consensus on cooperation is reached.
IC Based on the need to respect the sovereignty and security concerns of the relevant countries, the synergisation of infrastructure construction plans and technical standard systems are strengthened among CRBR, the construction of international trunk routes is jointly promoted and an infrastructure network connecting all sub-regions in Asia, and between Asia, Europe and Africa, is gradually formed.
FI Financial cooperation is deepened, and the development of currency stability, investment and financing, and credit systems in Asia could be advanced.
PPB The spirit of friendship and cooperation among CRBR is shared. Extensive cultural and academic exchanges, personnel exchanges and cooperation, media co-operation, youth and women exchanges, and volunteer services are carried out so that a solid public support for deepening bilateral and multilateral cooperation is gained from more people.
GDPPC The ratio of the gross domestic product realised in a country or region to the resident population within its territory during an accounting period (usually 1 year).
SD The distance between the host country and China.

Model significance test

Quadratic sum Variance Mean square F Sig.

Regression 287.041 6 47.840 16.679 0.000b
Residual 238.066 83 2.868
Total 525.106 89

Results of the multiple linear regression

Hypothesis Coefficient t-value p-value Results

H1: PC → UT −0.084 −0.912 0.364 Not supported
H2: IC →UT 0.160 1.729 * Supported
H3: FI → UT 0.305 2.731*** *** Supported
H4: PPB → UT 0.316 2.993*** *** Supported
H5: GDPPC → UT 0.208 2.292** ** Supported
H6: SD → UT −0.156 −1.836* * Supported

Collinear analysis of independent variables

Collinear statistics

tolerance VIF

PC 0.640 1.562
IC 0.640 1.562
FI 0.438 2.285
PPB 0.489 2.045
GDPPC 0.662 1.512
SD 0.760 1.316

Descriptive statistics of indicators

Mean Standard deviation

UT 12.50611 2.429006
PC 10.97978 2.967041
IC 9.794889 2.25475
FI 10.00822 4.086667
PPB 12.472 2.962444
GDPPC 0.114967 0.130957
SD 0.519833 0.204799

Significance test of independent variable regression coefficient

Standard error Beta t Sig.
B Standard error

C 7.044 1.203 5.854*** 0.000
PC −0.069 0.076 −0.084 −0.912 0.364
IC 0.172 0.100 0.160 1.729* 0.087
FI 0.181 0.066 0.305 2.731*** 0.008
PPB 0.259 0.087 0.316 2.993*** 0.004
GDPPC 3.863 1.685 0.208 2.292** 0.024
SD −1.846 1.006 −0.156 −1.836* 0.070

Model's goodness of fit analysis

Model R R2 Adjusted R2 Errors in standard estimates Durbin–Watson test

0.739a 0.547 0.514 1.69359 1.889

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