Results

Part of the increase in trade flows between China and former colonies would not have been observed under the counterfactual of persistent colonial relationships. We thus expect lower predicted trade flows associated to the absence of independence events, and thus a below one ratio of new to original trade. Table 2 displays the ratios of predicted imports from China without independence over predicted imports from China with independence, for former colonies of either France, Great-Britain, or Russia. The ratio is computed in levels for each year shown in the table. The table indicates for example, that in 1970 trade flows between China and French colonies would have been 7% lower, had independence not happened. Said differently, the contribution of independence to bilateral trade flows of former colonies with China is an increase by 7% for the year 1970.

The same comparisons are made for British, and Russian former colonies, the latter number available after independence of its colonies in 1991. All three groups report below one numbers, indicating a positive effect of independence on outside-pairs trade. The ratio of counterfactual over predicted trade decreases: this pattern

Table 3.2: Predicted ratio of imports from China, without independence

Columns contain the ratio of average pre-dicted imports from China without indepen-dence, over average predicted imports with in-dependence (for each group of former French, British, or Russian colonies). Predicted ex-ports are computed according to the modu-lar trade impact method following Head and Mayer (2014).

comes from the estimated independence effect, which gets larger as time passes since independence. It also highlights that the contribution of separations to the redis-tribution of trade is larger in recent years. In 2010 trade flows between China and former colonies are 15% higher than what they would have been with the persistence of colonial relationships.

These differences in trade flows by year are presented graphically in figure (5).

The two panels display the evolution of the “fake” shares of imports from China, computed alternatively with factual trade costs and with counterfactual trade costs that cancel independence events. In echo to the previous results, we observe an increasing effect of independence on trade flows with China, for Algeria, Senegal and Ghana.

Figure 3.5: Differences in trade flows with and without independence

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Last, table 3 displays the difference in amount of change of trade since 1995. One reads for instance, that if they were still under colonial domination, between 1995 and 2010 the growth of French colonies imports from China would have been 15%

lower. On average, trade flows have increased by 15% more than what they would have done under persistent colonial relationships.

Table 3.3: Predicted growth in imports from China since 1995, without indepen-dence

Year France Great-britain Russia

2000 .88 1.04 .83

2005 .84 .91 .85

2010 .85 .93 .82

Columns contain the ratio of the average change in predicted exports from China since 1995 for the group of former French, British, Russian colonies. Predicted exports are com-puted according to the modular trade impact method following Head and Mayer (2014).

3.5 Conclusion

In this paper we investigate the often heard idea that China has taken over an excep-tional trade role in former colonies, replacing the former hegemon in the hierarchy of preferential market access. Indeed imports of those countries from China have risen markedly over time, to currently reach similar levels to what the countries import from the former colonizer.

We show that this pattern can be fully explained by the typical trade determi-nants of the theory-consistent gravity literature. In other words, contrary to what ex-colonial countries still import from their former metropole, we don’t find an ab-normaly high flow when the exporter is China.

Our paper can be viewed as a illustration of two important facts. First, the structural version of gravity is a very useful tool to disentangle the effects of bilateral versus multilateral frictions on trade. In our case, the impressive increase of China’s exports to the colonial world is entirely explained by the multilateral part. On the importer side, the multilateral resistance effect is the ‘normal’ reallocation effect

of trade towards countries other than the ex-hegemon (including China). On the outward side, the gravity equation takes into account that China has become a more performant exporter (towards all countries in the world) during this period. Nothing special is left to be explained by a change in the bilateral frictions between ex-colonies and China. Second, our results might also illustrate the importance of formal trade integration. Lacking linguistic, historical and cultural linkages with most of the colonial countries, China benefitted from the redirection following independence like any other country. Note that China did not sign over that period formal preferential agreements that might have triggered a higher share of trade by newly independent countries. The recent change in the Chinese attitude towards preferential trade agreements offers on this ground interesting perspective of future research.

Economic diplomacy: the

“one-China policy” effect on trade ¹

1This chapter corresponds to the paper “Economic diplomacy: the “one-China policy” effect on trade” under revision for theChina Economic Review.

107

4.1 Introduction

The Chinese government frequently lobbies its trading partners when the partners undermine Beijing’s foreign policy. In 2007, a United Nations (hereafter UN) reso-lution was rejected when Taiwan wanted to become a member of this international organization². South-Africa was criticized for refusing to grant the Dalai Lama a visa. More recently, the Gambia has severed diplomatic ties with Taiwan for reasons of “national strategic interest” by now counting 22 countries³ in the world that rec-ognize Taiwan. Since 1949, the Popular Republic of China (PRC) has applied the

“One-China policy” (hereafter OCP) under the principle of “one China, two systems”

in international relations with Taiwan. More precisely, PRC is the sole government representing the Chinese territory and population around the world whereas Taiwan must be a part of China with relative autonomy. Taiwan is another core interest of the Chinese authorities in foreign affairs, particularly in trade relationships with outside countries to isolate and compel Taiwan to apply this doctrine. According to Bergeijk et al. (2011), “economic diplomacy can be defined as the use of interna-tional political tools - diplomacy - to achieve economic objectives”. Following this definition, we study the use of specific diplomatic tools by China to improve the country’s position in international trade relations at the expense of Taiwan. This chapter’s contribution is the assessment of the effects of the OCP on Chinese and Taiwanese bilateral trade flows, of which no empirical studies have been conducted to date.

The links between trade and foreign policy have been increasingly studied,

al-2http://www.nytimes.com/2007/07/24/world/asia/24iht-taiwan.1.6799766.html?_r=0

3Burkina Faso, Sao Tome and Principe, Swaziland, Kiribati, Marshall Islands, Nauru, Palau, Solomon Islands, Tuvalu, Paraguay, Belize, Dominican Republic, El Salvador, Guatemala, Haiti, Honduras, Nicaragua, Panama, Saint Kitts and Nevis, Saint Lucia, Saint Vincent and the Grenadines and the Holy See.

though without directly addressing this issue. Indeed, Nitsch (2007) investigated the impact of official state visits on bilateral trade and showed that this tool of foreign policy significantly improves trade for hosting countries. Rose (2007) shows that diplomatic representations have a positive effect on trade due to trade facilitation mechanisms that allow for a reduction in trade transactions. Yakop and Bergeijk (2011) extend this analysis for developing countries confirming the trade-promoting effect of embassies and consulates on trade. As suggested by Fuchs and Klann (2013), is political compliance a precondition for healthy trade relations with China? The authors find that visits by the Dalai Lama lead to a trade-deteriorating effect on exports to China for host countries only over a recent period. In other words, they empirically demonstrate the effectiveness of Chinese lobbying on their trading part-ners when these latter countries do not respect the doctrine of Chinese foreign policy.

We use two variables to approximate the OCP based on the works of Xin (2001) and Chiang (2004): first, the vote by countries of the UN resolution regarding China’s recognition in 1971 when the PRC replaced Taiwan in the UN bodies by formally representing China in the international community ; second, the existence of bilat-eral diplomatic ties with China by which foreign countries recognize “the government of PRC as the sole legal government of China and the sole legal government repre-senting the entire Chinese people”. There are various examples of the tools used by the Chinese government to isolate Taiwan in international diplomatic and economic relations. Through the OCP, China tries to undermine Taiwanese bilateral trade by putting political pressure on trading partners, for example, by the temporary closure of embassies, or by putting economic pressure by granting trade preferences⁴. Fur-thermore, since the creation of the PRC in 1949, official diplomatic ties with Taiwan

4 http://esango.un.org/ldcportal/trade/news/-/blogs/china-announces-97-per-cent-dfqf-treatment-for-ldc-imports

have drastically decreased, to the benefit of China. This chapter analyses whether the vote on China’s recognition by the UN in 1971 and the existence of diplomatic ties with China enhance the two-way trade flows of China with its trading partners.

We suppose that a reverse effect occurs for Taiwanese bilateral trade flows due to China’s willingness to isolate Taiwan by applying its doctrine.

We perform a theory-consistent structural gravity model (Anderson and van Win-coop, 2003 ; Head and Mayer, 2014) with a worldwide database over the period 1948-2012. Indeed, we improve our regressions with country-year and country-pair fixed effects to account for multilateral resistance and endogeneity of political factors. We also implement a Poisson pseudo-maximum likelihood (PPML) model to avoid an omission bias due to zero trade flows in the sample (Santos Silva and Tenreyro, 2006, 2011 ; Gomez Herrera, 2013 ; Fally, 2015). To determine whether the possible effects of these components of the OCP on bilateral trade flows vary over time, we decide to break down our variables of interest over a specific time period, i.e. all 5 years during the first 15 years after China’s recognition in 1971 and after the implementation of these diplomatic agreements.

The chapter is organized as follows. Section 2 presents a review of the literature on economic diplomacy. Section 3 describes the OCP. Section 4 details hypotheses, data and the empirical approach used. Section 5 discusses results and section 6 concludes.

4.2 Related literature: Economic diplomacy