Effect of Preferential Trade Agreements on Energy Imports from Chinese and Exporters’ Perspective

Tarek Atalla, Kapsarc, Riyadh, Saudi Arabia, email: tarek.atallah@otulook.com Carlo Andrea Bollino, Department of Economics, University of Perugia, via A. Pascoli, 20,

60123, Perugia, Italy, Phone: + 39 0755855421, Fax: +39 0755855299, e-mail: carloandrea.bollino@unipg.it

Philipp Galkin, Kapsarc, Riyadh, Saudi Arabia, email: Philipp.galkin@kapsarc.org

Keywords: China trade negotiations; energy imports; impact on international energy trade and global energy markets; preferential trade agreements (PTA’s); extended version of the trade gravity model; PTA’s impact on Chinese energy imports.

OverviewDespite slowing growth dynamics, China remains a major importer of fuels and energy products and has a significant impact on respective global markets. Since its accession to the WTO in 2001, Chinese foreign trade – including trade in energy – has been increasingly affected by preferential trade agreements (PTA’s) negotiated on a multilateral (e.g. ASEAN) and, for the most part, on a bilateral basis. Currently, China is engaged in PTA’s with 22 economies, which accounted for 18% of energy and 34.5% of total Chinese imports in 2015, and is in the negotiation process with 21 more potential PTA partners. Understanding Chinese approach to preferential trade deals and their effect on the energy flows is essential for all stakeholders involved.China has been pushing forward its trade agreement agenda targeting to strengthen economic ties in the Asia-Pacific region and engaging in trade negotiations worldwide. In this study we explore the role of energy agenda in Chinese engagement in preferential trade agreements (PTA’s) and apply the extended version of the trade gravity model to estimate the impact of these agreements on Chinese energy imports.Methods Our analysis covers annualized China’s energy import flows from the economies that have preferential trade agreements with China for the period of 1995 – 2015. These flows are represented in volumes (Kg) and values (thousand USD) and grouped according to the articles 2701, 2709, 2710 and 2711 of the HS Code. We also look at the shares of these flows in total Chinese imports of respective products. In the second phase, we approach the problem from the exporting economies’ perspective, looking at the annual energy export flows to China and China’s share in the economies’ total energy exports. Finally, we assess the dynamics of the trade intensity indices (TII) for selected energy product flows.Review of existing methods that assess the effects of PTA’s suggests that the trade gravity model is the optimal framework when the scope of the study is limited to analysis of trade flows and does not cover the macroeconomic impact. This approach allows quantifying the effect of PTA’s and isolating it from other potentially affecting factors such as the economies’ GDP, geographical location and currency fluctuations. Given a large degree of heterogeneity across the PTA’s policy arrangements and tariff levels applied to particular product groups, traditional representation of the PTA factor as a dummy variable can be deemed insufficient. Therefore, we disaggregate energy trade flows by major product groups (coal, crude oil, oil products, and gas

and gas products) and add two extra variables that represent the PTA effect: the average tariff level applied to a particular product group and the depth index that captures whether a trade agreement contains substantive provisions in seven key domains. ResultsAccording to the model output, the dominant factor affecting the trade flows of coal, crude oil and oil products is the average tariff level applied by China to these product groups. Its effect is less pronounced for the gas and gas products; this group is more affected by policy arrangements represented by a PTA variable. An energy exporting economy that targets increasing its share in Chinese imports should prioritize tariff reduction in the case of oil products and gas / gas products and a PTA deal in the case of coal. From Chinese perspective, reduced tariffs for oil and oil products are likely to divert partner’s exports from other importers, whereas policy arrangements facilitate such diversion for coal and gas product groups.Analysis of trade intensity indices for energy product flows to China confirms the dominant effect of tariff levels. It should also be noted that the comprehensiveness or depth of a trade agreement – measured by its depth index – doesn’t affect Chinese energy imports patterns.ConclusionsThe trade gravity model framework allows quantifying the effects of PTA on energy trade. Besides affecting trade flows, a PTA can facilitate increasing or securing a share in Chinese energy imports or – from the Chinese perspective – in diverting energy exports from other importers. Policy arrangements, represented by a PTA dummy variable, facilitate mutual increase in export / import shares in coal trade and help China secure larger share in partners’ gas exports. The market shares of export / import of oil and oil products, on the other hand, are affected by the tariff level. Importance of the market share factor is showcased by the recent drop in Chinese energy imports, which primarily affected non-PTA exporters. ReferencesAhn, J. B., Khandelwal, A. K. and Wei, S.-J. (2011), “The role of intermediaries in facilitating trade”, Journal of International Economics 84(1): 73-85.Andriamananjara, S., Dean, J. M., Feinberg, R. M., Ferrantino, M. J., Ludema, R. D. and Tsigas, M. (2004), “The Effects of Non-Tariff Measures on Prices, Trade, and Welfare: CGE Implementation of Policy-Based Price Comparisons”, U.S. International Trade Commission, Washington, D.C., Office of Economics Working Paper EC2004-04-A.Bhagwati, J. (1968), “More on the Equivalence of Tariffs and Quotas”, American Economic Review 58(1): 142-146. Bhagwati, J. (1988), Protectionism, Cambridge, MA, MIT Press. Bhagwati, J. and Ramaswami, V. K. (1963), “Domestic distortions, tariffs and the theory of optimum subsidy”, Journal of Political Economy 71(1): 44-50.Chen, N. and Novy, D. (2011), “Gravity, trade integration, and heterogeneity across industries”, Journal of International Economics 85(2): 206-221.Galal and Tohamy 1998 http://www.eces.org.eg/MediaFiles/Uploaded_Files/%7BAD2541E0-77FB-4926-97A6-83D8C3FAADAD%7D_ECESWP21e.pdfMaggi, G. and Rodríguez-Clare, A. (2007), “A Political-Economy Theory of Trade Agreements”, American Economic Review 97(4): 1374-1406.Plummer et al. 2010, https://aric.adb.org/pdf/FTA_Impact_Assessment.pdf United Nations Conference on Trade and Development (UNCTAD) (2012), Non-Tariff Measures to Trade: Economic and Policy Issues for Developing Countries, Geneva, UNCTADWorld Trade Organization (WTO) (2011), World Trade Report 2011: The WTO and preferential trade agreements: From co-existence to coherence, Geneva, WTO.