China-United Kingdom free trade area. Likely impact on the economy and on specific industry sectors in both countries
| Date | 06 February 2017 |
| Pages | 111-126 |
| DOI | https://doi.org/10.1108/JCEFTS-11-2016-0032 |
| Published date | 06 February 2017 |
| Author | Shumei Chen,Dandan Li |
| Subject Matter | Economics,International economics |
China-United Kingdom free
trade area
Likely impact on the economy and on specic
industry sectors in both countries
Shumei Chen and Dandan Li
School of Economics and Management, Southeast University, Nanjing, China
Abstract
Purpose –The purpose of this paper is to predict the likely economic effects of a free trade area (FTA) on
both China and the United Kingdom (hereafter the UK).
Design/methodology/approach –Following literature review and trade relationship brieng, this
paper uses the Global Trade Analysis Project simulation to predict the economic effects of such a FTA on both
China and the UK.
Findings –The simulation results indicate that a China-UK free trade area (hereafter CUFTA) will bring
more benets than harm to both China and the UK, and achieving zero tariff or reducing technological barriers
to trade (TBT) is mutually benecial for both China and the UK, with the growth in GDP, economic welfare as
well as import and export. Combining zero tariff and the reduction of TBT in exceptional departments is the
most favorable way to improve the macroeconomic effects without bringing damaging effects on the
comparative disadvantage industries such as transport equipment, chemicals industries for China and textiles
and apparel industry for the UK.
Originality/value –After the UK voted to leave the European Union, CUFTA is put on the agenda by both
the governments, yet there are fewer studies on CUFTA, with this paper being one of the early trials. Besides,
based on the simulation results, some policy suggestions will be put forward for future negotiations and
industrial policies’ adjustment.
Keywords China-United Kingdom free trade area (CUFTA), Economic effects, GTAP model
Paper type Research paper
1. Introduction
Partly because of the stalemate of the multilateral negotiations under the World Trade
Organization (WTO)’s Doha round, coupled with the economic slowdown after the global
nancial crisis since 2008, more and more countries are turning to regional trade agreements
(RTAs) which are more exible and easier to maneuver (Kim et al., 2013). As of 1 July 2016,
some 635 notications of RTAs (counting goods, services and accessions separately) had
been received by the General Agreement on Tariffs and Trade (GATT)/WTO. Of these, 423
were in force. These WTO gures correspond to 460 physical RTAs (counting goods,
services and accessions together), of which 267 are currently in force. To involve in the
regional trade liberalization, China has made efforts to link RTAs with more and more
countries.
On 23 June 2016, the UK voted to leave the European Union (hereafter the EU). Although
the notice period required means that the actual British exit (or “Brexit”) date is unlikely to be
before 2018, there will be both long- and short-term implications for the UK and international
This study is part of the research results of The Chinese National Social Sciences Fund Project (Project
No. 16AJL010).
The current issue and full text archive of this journal is available on Emerald Insight at:
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China-United
Kingdom free
trade area
111
Journalof Chinese Economic and
ForeignTrade Studies
Vol.10 No. 1, 2017
pp.111-126
©Emerald Publishing Limited
1754-4408
DOI 10.1108/JCEFTS-11-2016-0032
businesses and, of course, the wider UK economy. Some of the immediate challenges for
businesses will arise from the impact of Brexit on the free movement of goods, services and
employees. To fully prepare for the challenges and crisis after the Brexit, the UK Government
seeks to build much stronger friendships with some potential economic entities. At its
attempts to return to its glory of the industrial revolution in the world, the UK cannot
overlook China, the world’s largest trading market and the world’s second largest economic
entity. Meanwhile, the UK is China’s second largest trading partner in Europe. Trade of
goods between China and the EU amounted to $564.85bn in 2015, whereas trade between
China and the UK reached $78.54bn, accounting for nearly 14 per cent among all the 28
members of the EU, according to the General Administration of Customs of the People’s
Republic of China. Therefore, the cooperation of these two countries is a matter of course.
However, the UK’s membership of the EU has constrained its ability to deal with nations
outside Europe because it has been “bound by the rules”. The EU’s common commercial
policy aims to apply uniform principles, particularly with regard to the conclusion of tariff
and trade agreements with countries outside the EU; as a consequence, China has not signed
a single deal with an EU member. Speaking at the end of a G20 summit in China in July 2016,
the British new chancellor of the Exchequer Philip Hammond said that the UK has already
started preparing for the launch of FTA talks with China. On 2 August, Shen Danyang,
spokesman of the China’s Ministry of Commerce, responded to the British Government and
expressed the willing to launch FTA talks.
A China-UK free trade area (hereafter CUFTA) is put on the agenda by both the
governments, yet there are fewer studies on CUFTA, with this paper being one of the early
trials. This paper may make some contributions to the prospective research on the likely
economic effects of CUFTA from both the macroeconomic and industrial levels based on the
Global Trade Analysis Project (hereafter GTAP). The conclusion and suggestions put
forward in the paper will be of great signicance in the theoretical and practical aspects, and
some of them can be used for reference in the specic negotiation.
2. Literature review
The static (one-off) effects of an FTA using the basic conceptual model was developed by
Viner (1950) in his epoch-making book “The Customs Union Issue”. Containing the
fundamental concepts of trade creation and trade diversion, this model was then extended
from a single market to multiple markets (i.e. general equilibrium models), from analyzing
static effects to the long-term, cumulative ones (i.e. dynamic effects). For example, Meade
(1955) as well as Lipsey and Lancaster (1956,1957) concluded that trade creation is greater
than trade diversion, whereas Dixit and Stiglitz (1977) introduced economies of scale,
product diversity (number of product categories) and consumer demand diversity into the
model to explain the phenomenon of intraregional economic integration. During a long term,
it can be concluded that the theoretical studies have achieved a great improvement, and
scholars not only focus on the trade effects but also on the dynamic effects such as
investment and economic growth, which laid a foundation for the empirical studies of the
FTAs.
The second-best nature of FTAs suggests that empirical analysis is necessary to
anticipate the possible economic consequences of any given FTA (ex-ante analysis) and to
analyze the effects of an FTA once it is already in place (ex-post analysis), with computable
general equilibrium (CGE) models being used for ex-ante analysis and gravity models being
used for ex-post analysis. The GTAP model, originally formulated by Hertel (1997),isthe
most widely used CGE model for analyzing trade policy. For example, using the CGE model
to simulate and analyze the macro and micro economic effects of Russia-EU FTA, Miriam
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