Evaluating the Impact of the One Belt One Road Initiative on the Gravity Estimates of Partner Countries

This paper looks at the impact of the One Belt One Road Initiative (OBOR) on the gravity estimates of China’s trade partner countries. More specifically, this paper examines the impact of the initiative on the total value of trade by looking at the nexus of trade and GDP and of trade and distance between China and the host country. This paper does so by using the OLS estimator. We compare the gravity estimates of a country before and after the OBOR initiative was introduced. Initially, we look at the textbook gravity model, which only takes into account GDP and distance between two countries. The value of trade is directly proportional to GDP because the countries with higher GDP are likely to import more due to their higher incomes and export more because of their increased capacity to produce a wide variety of products. On the other hand, the value of total trade between two countries is negatively correlated to the distance between the two countries- a higher distance means a higher cost of transportation of goods and services and vice versa. The add-ons are later incorporated. This paper looks at the gravity estimates of all the countries and not just the OBOR partnering countries because of the lack of access to some OBOR data. Our results show that after the introduction of the OBOR initiative in 2013, the overall average GDP of partner countries increased, the average total trade between China and the trading countries increased, and the average outward-FDI from China to the trading countries increased as well. We found evidence that the OBOR initiative increases the magnitude of the GDP coefficient of the gravity estimation, which shows the importance of integration of economies. We also found evidence that the OBOR initiative increases the magnitude of the distance coefficient of the gravity estimation. This implies friction of distance and suggests that China should use resources to invest in countries further away from it as well.