Assessing the impact of China's FTS’s on trade creation and trade diversion

Abstract

This paper estimates trade creation and trade diversion effects of China’s effective free trade agreements (FTAs) as of 2019. The annual trade data used in this study cover 32 economies with 25-year span (1995-2019). Using gravity type of model, trade creation and trade creation effects are estimated by applying ordinary least square (OLS) and Poisson Pseudo-Maximum Likelihood (PPML) techniques with various fixed effects. PPML is applied to deal with heteroscedasticity problem.

The results show a pure trade creation effect of ACFTA and a pure trade contraction effect of CPFTA in the time fixed model. In the time & pair fixed model, trade contraction effect of MHCEPA and expansion effect of extra-bloc exports and imports of MMCEPA. Export diversion and contraction effects of SCFTA. Export diversion effect of CIFTA and import diversion effect of CCRFTA. Pure trade creation in exports of CCFTA and CSFTA, pure trade creation in imports of PCFTA. Intra-bloc trade creation effect of CAFTA and intra-bloc trade creation and export diversion of CGFTA. The results suggest that China experiences net gains from those trade creation and trade diversion effects arisen from FTAs. Therefore, China should maintain FTA relation with its trading partners while paying attention closely to negative effects from trade diversion.