Does Political Risk Matter for China's Trade with ASEAN and MENA Countries? A Belt Road Initiative Perspective

Abstract

This study examines the role of political risk in deterring China's trade flow with her 132 trading partners with particular attention to the Association of Southeast Asian Nations (ASEAN) and the Middle East and North African (MENA) countries for 1984-2015 in the Belt Road Initiative (BRI) framework. Using twelve political risk indicators from International Country Risk Guide (ICRG), we use factor analysis to retrieve three underlying factors: 'Cultural Rigidity,' 'Governance Failure,' and 'Partners' Adverse Feeling.' After combining these factors into a dynamic system GMM Gravity equation, we examine their impact on China's trade flow. As we control for Gravity variables and these risk factors, BRI has been found effective for China with MENA countries, ASEAN10, and ASEAN10 + 3 (China, Japan, and South Korea) but detrimental to trade flow within the ASEAN10 + 6 (China, India, Japan, S Korea, Australia, and New Zealand) setup. Among the three factors, 'Partners' Adverse Feeling' is the most substantial deterrent, followed by 'Cultural Rigidities.' Most of the traditional Gravity coefficients like domestic and partner country's GDP, domestic and partner country's per capita GDP, distance, GATT membership of China and Partners, take their right sign and significance. 'Governance failure' has been found as a significant deterrent neither in ASEAN nor in MENA setup. Therefore, China should strive to improve cultural bottlenecks with her partner countries and improve upon the existing adverse perception in enhancing her trade flow with these countries.