An empirical study on status and potential of Sino-Russian bilateral trade

Source: calculation based on data downloaded from wits database .

Index (RCA)⁴. If the trade complementarity is obvious, which means intensive export products of a country are suitable for intensive import products of its partner, the development of their trade relationship and their existing production model could be maintained.

The formula for the trade complementarity index of a single product is:

Where Xkl and Xkw are separately the exportations of Product k in Country i and the world, X_i and X_w are respectively the total exportations of Country i and the globe, Mk I is the import quantity of Product k in Country i and M_i is the total importations of this country.

According to Product k, if Ckij > 1, the trade complementarity of this kind of products is very strong and if not, the trade complementarity is weak or un- obvious. The higher the value of Ckij is, the stronger the trade complementarity is.

We conclude from Table3 and Table 4:

Table 4 The Value C Calculated by Russia as the Exporting Country

Source: calculation based on data downloaded from wits database

(1) From the perspective of the trade complementarity of Chinese exports and Russian imports (Table 3), the complementary effects of labor-intensive products (SITC 6 and SITC 8) and partial capitalintensive/technology-intensive products (SITC 7) are relatively obvious, especially the index of SITC 8 is the most evident and its average is around 2. Especially to deserve to be mentioned, numerical values in Table 3 are relative stable with little fluctuations.

(2) Index of Table 4 reflects the coincidence degree of Russian exports and Chinese imports. The high numerical values gather in the same kind of products, resource-intensive products. Specifically, the indexes of SITC 2 and SITC 3 are very obvious, which could reach up to 3-4. What's more, the trade complementarity indexes of SITC 3 in 2015 and 2016 are respectively 7.03 and 8.57, which are fairly high coincidence degrees in the bilateral trade field.

In order to further clarify the trade complementarity between the two countries, we calculate the comprehensive trade complementarity (Table5) by the following formula:

(5)

where C„ is the index of comprehensive trade complementarity which is a weighted average of all products or all industries, and the weighted factor is the proportion of all kinds of products in the global trade, W_k / W.

In the case of multiple industries, if we don't want to distinguish the exporter, we should first determine the comparative advantages between these two countries. The assumption is that as long as a country has the comparative advantage in one industry, it would be able to export to its partner whose products in that industry are relative inferior.The formula based on this method is:

(6)

where Ј_a and Ј_b are respectively superior product sets for Country i and Country j, C_ijt represents the comprehensive trade complementarity index without distinguishing the export country, X_wa and X_wb are global exportations of industry a and b. And we investigate the comparative advantages before.

The complementary relationship between China and Russia is consistent with the stability of the factor endowment and these two countries' comparative advantages (Fig. 4).To be more specific, resourceintensive products have the highest values which would reach up to more than 3 and they always take up the majority of Russian exportations to China.

Table 5 Index of Comprehensive Trade Complementarity

Source: calculation based on data downloaded from wits database.

According to the outcomes of Table 5, all indexes of Chinese exports to Russia are over 1. Albeit to some values less than 1, the indexes of Russian exports to China increase in general. The integral index (Table 6) without export country distinction shows that the volume increased before 2012 which is a year with the highest number of 2.16 and then decreased slightly. On the whole, the comprehensive index is relatively high, which means, in spite of imports and exports, the complementarity of Sino-Russian bilateral trade is very strong.

Table 6 The Comprehensive Complementarity Trade Index without Distinguishing export country

Source: calculation based on data downloaded from wits database

Fig. 4. Complementarity Index of Chinese and Russian products

Source: Calculation based on data downloaded from wits database.

trade gravity sino-russian

2. The potential of Sino-Russian bilateral trade

The former statistical study indicates that China and Russia have strong trade relationship during these ten years and trade intensity shows an upward tendency. In addition, Import and export products of these two countries have different commodity compositions due to comparative advantages. The complementarity of resource-intensive products strengthens, whereas that of the other two catego ries is almost invariable. Taken together, we should further investigate the potential of Sino-Russian bilateral trade.

2.1 Model, variables and sample

The thought of Gravity Model initially comes from Newton's law of gravitational attraction and it has been a main method of studying the international trade, economic behavior and influencing factors. The classical gravity model assumes that the scale of economic cooperation among countries is directly proportional to the total economic volume and is inversely proportional to its geographical distance. The majority of current researches introduce variables, such as whether they are both members of the APEC organization (Jin Zhuiqiao and Yang Fengmin, 2015) or Shanghai Cooperation Organization (Zhang Ying, 2012), on the basis of classical model, while this improvement is limited to the way of explaining foreign trade flows from an economic perspective. Following the phenomenon that institutional factors play an increasingly prominent role in international economic activities, especially after Nos (1990) proposing proposition system launches trade, scholars has begun trying to expend the Gravity Model from a system-factor perspective (Kolstad and Wiig, 2009; Jiang Guanhong, 2012). In addition, more and more researches support that the differences of informal systems, like languages, cultures and religions, are also vital determinants (Kan Daxue and Luo Li- angwen, 2012; Tian Hui and Jiang Chenchun, 2012; Huang Xinfei, etc., 2013; Song Yimiao, etc. 2015; Liu Hongduo, 2016).Bases on existing studies, we introduce formal and informal systematic factors into our research, such as the differences of systems, languages, cultures and religions.

The modified trade gravity model is as followed:

where dependent variables lnT_CFt represent the logarithm of bilateral trade volume between China and another foreign country in the year tand the data source is UN COMTRADE database.

The expected symbol and data source of the explanatory variables are shown in Table 7.

Table 7 The names, meanings, expected symbols and data sources of variables

We select samples within the scope of the emerging economies because China and Russia both belong to this kind of economic structure and these emerging economics are located on different continents, which show big differences among them. Selecting these countries or regions as samples of Sino-Russian bilateral trade potential, is representative (Jin Zhuiqiao and Yang Fengmin, 2015). And Sample countries and indicators are screened based on data available principles The data of culture differences comes from Hofstede(2001), At first, we should remove the excluded countries and then we select four dimensions of PDI, IDV, MAS and UAI in Hofstede (2001) due to some countries missing IND and LTO indictors. On this basis, we construct culture difference index variables combining the method of Kogut and Singh (1988).. Based on the two above considering points, we select Vietnam, Turkey, South Korea, Brazil, Indonesia, Indonesia, Indonesia, and Iran as sample countries and the sample spans between 2002 and 2016. So the quantity of effective samples is 135.

2.2 The analysis of Sino-Russian bilateral trade flows

At first, considering the existence of the panel autocorrelation problem and the phenomenon that panel data is sensitive to the variance of sample data, we do panel hetero-variance and autocorrelation test. The outcome of Hausman test indicates that the evaluated outcome of fixed effects model is more ideal than that of random effects model and the former one is suitable to our research. Then regarding the differences of system, language, culture and religion, and geographical distance would be unchanged over time, we use the least squares dummy variable model (LSDV) and then consider time effects, termed bidirectional fixed effects. Last but not least, we do the multi-collinearity test because there may be some multi-collinearity problems among differences of systems, languages, cultures and religions Generally speaking, if VIF>10, there exists severe multiple collinear; if 5 < VIF < 10, there exists a degree of multiple collinear conditions; if VIF<5, there is no multiple collinear. The VIF values in results of the model test are all under 5, which indicates there exists no multi-collinearity problem. In other words, if you do not include the above explanatory variables, there could be a variable-missing problem.. The regression results of the model are consistent with rational expectations, the regression coefficients of all variables are highly obvious and we get the empirical equation:

2.3 Evaluating the potential

The significant application of trade gravity model is estimating the potential of bilateral trade flows among countries, which means estimating development potential of bilateral trade flows through comparing the actual trade flows and theoretical ones calculated by gravity model.

There are two ways to estimate trade potential. The first one was used by Liu and Jiang (2002) firstly. They used trade gravity model to empirically analyze the main factors determining bilateral trade flows between China and other countries, and proposed methods to measure trade potential by the ratio of real bilateral trade volume (T) and analog value (T*). Then they divided bilateral trade potential among countries into three categories: (1) Potential Remodeling (T/T* > 1.2), the trade potential of trade partners in this kind is limited and there could be a relatively large spacious room for trade development under circumstance of new positive influencing factors. (2) Potential Development (0.8 < T/T* < 1.2), there is still trade potential between trade partners in this kind and it has certain space to expand bilateral economy and trade as well. (3) Potential Huge (T/T* < 0.8), there is a massive trade potential between trade partners in this kind and it is a good choice for the trade partners to remove bilateral trade barriers in order to promote the normal trade development.

Nowadays, the current researches on the potential of China and other countries often use this method such as Bi and Shi (2011) estimated the trade potential between China and East Asian countries, and Li (2013) estimated the goods trade potential between China and Korea.

However, the method of Liu and Jiang (2002) is only used to estimate the relative size of trade bilateral potential under existing trade conditions and it has not estimated concrete values. The study method of Wilson Mann and Otsuki (2003) is different. They got empirical equation through doing gravity model regression of trade flows of APEC members. In addition, they enhanced trade facilitation level below average to the average level and substitute it into the empirical equation for purpose of estimating trade potential result from trade facilitation improvement.

This paper comprehensively uses two research methods. At first, use the ratio of real gross trade volume and simulated fitting value to measure the Sino-Russian bilateral trade potential, and the outcome is showed in the Table 8.

Table 8 sino-Russian Bilateral Trade Potential

As data in Table 8 show, Sino-Russian bilateral trade potential fluctuated around 1 with slightly increasing in recent years. This phenomenon illustrates the whole trade form between China and Russia belongs to potential-development type and there is a relatively large space for their bilateral trade development.

Based on this, we reduce the difference in the Sino-Russian informal system, like linguistic difference and cultural difference, to a certain percentage and then analyze the trade potential brought by the improvement of familiar degree in language, culture and other aspects. Taking year 2016 as an example, if the distance of language or culture between China and Russia could reduce 10 percent, the bilateral trade potential could be promoted 3.2% and 2.9% respectively. Thus, it is effective to promote bilateral trade development through improving familiar degree of language, culture and other aspects.

Conclusions

To sum up, the volatilities of Sino-Russian bilateral trade volume and growth rate are both strong and the future trend is not very clear. The commodity structures of these two countries are different because of comparative advantages. From a trade-balance perspective, China's trade surplus has been shrinking and the balance of trade between China and Russia has improved. Additionally, the complementarity and intensity of their products are relatively evident and keep steady with slightly increasing trend, and the complementarity of resource-intensive products is the most distinct one, whereas that of the other two categories is almost invariable and at relative low level. What's more, from the potential point of view, the whole trade form between China and Russia belongs to potential-development type and there is a large space for their bilateral trade development. It could be effective to develop bilateral trade through improving informal-system familiar degree. Based on the above empirical analysis, we give following suggestions:

(1) Further deepen the cooperation mechanism.

There are many existing mechanisms of cooperation between China and Russia. Specifically, they are both members of Asian-Pacific Economic Cooperation (APEC), Shanghai Cooperation Organization (SCO), as well as belong to BRICS. One Belt One Road (OBOD) initiative proposed by Chinese president Xi and Eurasian Economic Union proposed by Russia have lots of common interests and cooperation opportunities. The two countries, China and Russia, should not only strengthen the docking and cooperation of existing mechanisms, but also establish some new cooperation mechanisms. They should maintain the comprehensive strategic partnership, start bilateral trade and investment facilitation negotiations, perfect dialogue mechanism, cooperation on more potential fields and develop a long-term and operational outline for economic and trade cooperation.

(2) Gradually improve the trade structure

We found within the former results that export products of both countries have obvious differences and trade complementarity is very evident especially in resource-intensive products. Although comparative advantages determine the type of export products and merchandising the goods with high complementarity is reasonable, strengthening other types of commercial trade could promote the overall development of Sino-Russian trade. The process of optimizing the structure of commodities should be gradual because too fast change could lead to instability of total trade and domestic markets, even the global market. And improving commodity composition does not mean transferring the trade amount of previous high-proportional products to other categories, it is a method to improve the volume of low-proportional products on the basis of original trade situation. In order to seize the cooperation opportunity to seek common development, both countries should strengthen infrastructure construction, such as the construction of pipelines and transportation, which could guarantee the development of transaction and trade.

(3) Strengthen the construction of Sino-Russian free trade area

Establishing Sino-Russian free trade area is a beneficial method to accelerate the development of their bilateral trade and it is a field that worth concerning, negotiating and promoting. We argue that expending the scale of free trade area after succeeding in some particular areas would be an effective measure. Trade partners should negotiate following the principle of reciprocity and mutual benefit. Meanwhile, they should reinforce private transaction. On one hand, it could stimulate each part to participate in Sino- Russian trade to promote the overall trade. On the other hand, it could be conducive to the diversity of products which has the possibility to promote the trade balance.

(4) Enhance the cultural communication

The communications between China and Russia could be traced back to ancient times. The Silk Road gives these two countries chances to indirect with each other and since then the exchanges between China and Russia have not been interrupted. Although they have different languages, civilizations and religions, China and Russia should accept the attitude of mutual understanding to keep the good relations of peaceful coexistence, for sake of common development. Admittedly, enhancing familiarity could be beneficial to the economical development and it is one of the foundations of building trade trust. There are some measures to enhance the mechanism of cultural communication, such as establishing more Confucius institutes, holding Sino-Russian cultural year, exchange of overseas students, holding regular forums and culture events, and promoting development of their tourisms. Moreover, the One Belt One Road initiative is an essential opportunity to constantly improve the scale and level of cultural exchanges between China and Russia.

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