Trade between China and the European Union

What is it about?

This paper examines trade flows between China and the European Union from 2000 to 2022, emphasizing the role of trade policy uncertainty as a key determinant of bilateral trade. Using an extended gravity model, we introduce a novel measure of China’s Trade Policy Uncertainty (TPU) and show that it has a significant and persistent negative relationship with China-EU trade, even after accounting for traditional economic and institutional factors. While China’s economic growth constitutes a dominant driver of trade, the results underline the anticipatory nature of flows in response to rising uncertainty. Furthermore, our findings indicate, although evidence of trade gains associated with formal participation in the Belt and Road Initiative (BRI) remains limited at the aggregate level, positive effects are identified for EU exports to China. Robustness checks across alternative specifications highlight the usefulness of TPU indicators as early warning tools for shifts in trade dynamics. These insights can help policymakers better anticipate disruptions and design resilient strategies for stability and economic integration.

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Photo by Brett Wharton on Unsplash

Photo by Brett Wharton on Unsplash

Why is it important?

The trade gap between China and the EU continues to widen rapidly, while Brussels and Beijing are locked in high-stakes economic negotiations, shaped by the fact that China relies heavily on European markets while, at the same time, the EU demands strict export quotes in order to protect its domestic industrial base. And all this against a backdrop of rising trade policy uncertainty fostered by the conflict in the Strait of Hormuz, which indirectly harms trade between China and the EU by driving up global energy costs and weakening economic demand in Europe. Consequently, this study highlights the importance of reducing trade uncertainty and how doing so can lead to increased trade flows between China and the EU at a time of rising protectionism and the imposition of tariffs by the United States.

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