The Effect of China’s Preferential Trade Agreements on Energy Trade Tarek Atalla, Carlo Andrea Bollino, Philipp Galkin 40th IAEE International Conference, "Meeting the Energy Demands of Emerging Economies: Implications for Energy and Environmental Markets." 18-21 June, 2017, Marina Bay Sands, Singapore

Why China / PTAs / Energy? China is dependent on energy imports China imports 70% of consumed crude oil, 39% of natural gas and 7% of coal (NBS China) Chinese energy sector affects global markets China consumes 48% of global coal, 13% of oil (BP) Chinese coal imports = 18% of global, crude oil - 15% (World Bank) China is actively engaging in preferential trade deals Preferential trade deals with 23 economies Deals with 20+ economies under negotiation (including major energy exporters such as GCC countries and South Africa)

Research Questions Is energy / resource security the main driver of Chinese preferential trade strategy? Do the PTAs have a significant impact on Chinese energy imports / energy exports to China? Does the impact vary by particular product group? Is a PTA with China likely to help increase or secure a share in Chinese energy imports? Does a PTA with China tend to increase the Chinese share in the partner’s energy exports? Which PTA component – tariff reduction or institutional arrangements – is more important in facilitating energy trade with China?

China’s PTA Partners

China’s PTA Strategy Partner selection Preference for bilateral rather than multilateral deals No deals with many top trading partners (EU, US, Japan, India, Brazil, Russia) Sourcing energy, raw materials and agricultural products – important but not exclusive criterion Other considerations include: access to significant or strategically important markets, complementary economic and trade structures, extending political influence The structure of a PTA agreement No ‘template’, designed on an individual basis Initial priority – trade in goods through tariff reduction Tariff concessions for developing economies Depending on the progress in relationships – additional agreements on trade in services and investments Recent shift (effect of the TPP?) PTAs with Australia, South Korea, negotiations with Japan More comprehensive deals

China’s Energy Imports in Foreign Trade Sources: National Bureau of Statistics of China, World Bank, ITC Trade Map

China’s Energy Imports Structure Sources: National Bureau of Statistics of China, World Bank, ITC Trade Map

General model formulation Y = Z*β + X*α + ε Scope and Method General model formulation Y = Z*β + X*α + ε Extension of the gravity model of trade A panel of 22 partner economies over 21 years from 1995 to 2015 4 categories of energy products Y (dependent variables) – values and volumes of import and export flows, import and export shares, trade intensity indices Z – a matrix of variables capturing the effect of PTAs: PTA: a dummy variable that captures whether an economy has a PTA with China; DI: the value of the Depth Index that characterizes a PTA between China and partner economy If in any given year t TarAvg: simple average import tariff for a particular product group applied by China to a partner economy X – a matrix of other control variables including GDP of China, GDP of partner economy, exchange rates of Chinese yuan and partner’s currency to USD, the distance between China and partner economy and domestic production of exporting economy. ε – error term.

Panel of 22 partner economies: Scope and Method Panel of 22 partner economies: A B C Categories of energy products Coal (HS code 2701) Crude (HS code 2709) Oil products (HS code 2710) Gas (HS code 2711)

Product Groups (HS Classification) Effect of PTAs on Chinese Energy Imports   Product Groups (HS Classification) Variables 2701 (Coal) 2709 (Crude Oil) 2710 (Oil Products) 2711 (Gas/NGLs) ImpFlUn ImpFlVal ImpShUn ImpShVal PTA (+) + DI TarAvg - (-) + positive effect, (+) insignificant positive effect, - negative effect, (-) insignificant negative effect Tariff levels have prevalent effect on import flows China can unilaterally reduce MFN tariffs to secure energy import flows (no policy framework needed) Exporters require preferential trade regime to capture Chinese import share

Product Groups (HS Classification) Effect of PTAs on Energy Exports to China   Product Groups (HS Classification) Variables 2701 (Coal) 2709 (Crude Oil) 2710 (Oil Products) 2711 (Gas/NGLs) ExpFlUn ExpFlVal ExpShUn ExpShVal PTA + (+) DI TarAvg (-) - + positive effect, (+) insignificant positive effect, - negative effect, (-) insignificant negative effect Tariff levels have prevalent effect on export flows PTAs can help divert partners’ coal and gas exports to China Depth Index has no impact

Product Groups (HS Classification) Effect of PTAs on Trade Intensity in Energy Trade with China Trade Intensity Index (TII) – shows whether the value of trade between two economies is greater or smaller than would be expected on the basis of their importance in world trade. In this study, it is defined as the share of an economy’s energy product exports to China divided by the share of world exports to China. Variables Product Groups (HS Classification) 2701 (Coal) 2709 (Crude Oil) 2710 (Oil Products) 2711 (Gas/NGLs ) PTA   DI TarAvg - + positive effect, (+) insignificant positive effect, - negative effect, (-) insignificant negative effect Confirms significance of import tariff levels Average TII values in all cases exceed 1 (from 1.86 for crude oil to 10.58 for gas/NGLs) Export flows to China from its PTA partners are larger than expected based on the countries’ share in world economy

Key Takeaways Securing energy/resource imports is not the major driver of China’s PTA strategy. Other considerations include: access to significant or strategically important markets, complementary economic and trade structures and extending political influence. The impact of PTAs on trade patterns varies across product groups. Agreement elements may include tariff reduction, scope and other specific policy arrangements. From China’s perspective, reduced import tariff rates likely: Increase the import flows of coal, crude oil and oil products – but not. Help an energy exporter increase its share in Chinese crude oil and oil product imports. Divert a partner’s exports of crude oil and oil products to China from competing importers. From an exporter’s perspective, the presence of an operational PTA with China likely: Increases the import flows of gas from a partner economy to China. Helps an energy exporter increase its share of Chinese imports of coal. Diverts a partner’s exports of coal and gas to China from other importers. Does not affect oil exports to China. The depth and scope of a PTA does not affect the patterns of Chinese energy imports.

Appendix: Depth Index The Depth Index is an additive index of seven variable that represents key provisions of a preferential trade agreement: Variable Description Value Full_fta More than a partial scope agreement? [0;1] Services Substantive provision on services? Investments Substantive provision on investments? Standards Substantive provision on standards? Procurement Substantive provision on public procurement? Competition Substantive provision on competition? Iprs Substantive provision on intellectual property rights? Total range [0;7] Source: Dur et al. 2014