The development of trade between EU and China: under the influence of economic integration

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The development of trade between EU and China ---under the influence of economic integration

Datong Feng 1990-10-08 Lars Andersson

Dominique Anxo

Bachelor Essay, 2NA00E Bachelor, Spring 2011

Abstract

European Union and China are very important economic entities in the world.

Trade between them has quite a long history and affects the world trade enormously.

The appearance of economic integration in the worldwide influences international trade largely and the influence is becoming bigger and bigger. The integration of Europe affects trade between these two big entities, too. As there’re a few researches about this topic, this paper is going to study what may happen to trade between China and EU under the influence of economic integration of Europe. Firstly, I show the history between these two entities to make the background clear. Secondly, I represent some important theories about international trade. Then by using Krugman’s new trade theory, I analyze current situation of trade between them. After that, I introduce economic integration in detail. At last, with the help of Panel Cointegration and Vector Error Correction Model built by Zhang Bin and Yang Yong, I get my conclusion about the future of trade between China and EU: Economic integration of Europe has a negative influence on trade between China and EU, but the influence is not strong enough to change the pattern of today’s trade. Trade pattern between China and EU will go on developing.

Contents

1. Introduction……….

2. Summarize history of the trade between Europe and China……..

2.1 development of trade before1949……….2

2.2 development of trade after1949………3

2.2.1 The development of trade from 1949 to 1993………..3

2.2.2 The development of trade after 1993………4

3. Theories about international trade and the trade between China and Europe analyzed by Krugman’s theory………

3.1 Theory about international trade………...5

3.1.1 Theories before Adam Smith...5

3.1.2 Absolute Advantage and Compare Advantage ---representative of Classical Trade Theory...5

3.1.3 Factor Endowment Theory (H-O theory) ---representative of Neoclassical...6

3.2 Introduction of Krugman’s theory………8

3.2.1 Background of Krugman’s theory………8

3.2.2 The establish process of Krugman’s theory………..9

3.3 Case of trade between China and Europe analyzed by Krugman’s theory……13

3.3.1 Analysis of Krugman’s theory………14

3.3.1.1 The aspect of trade between China and EU ………..14

3.3.1.2 The influence of change of intra-industry trade within EU………...18

3.3.2 Compare with H-O theory--- look at trade between China and EU in another visual angle………...19

4. Economic integration……….

4.1 Introduction of economics integration……….19

4.1.1Definition of Economic Integration………..19

4.1.2 The influence of economic integration on trade………21

4.2 Economic Integration Model………...………22

4.2.1 Other models and conclusions

22

4.2.2 Tools for my research: Trade Creation Effect and Trade Diversion Effect………22

4.2.3 Model………..23

5

Conclusion: The influence of economic integration on the

trade between EU and China

6.Appendix………...

7. Reference………..

List of Figures

Figure 1 Trade Based on Economic of Scale 15

Figure 2 Production and Pricing Under Monopolistic Competition 16

Figure 3 Monopolistic Competition and Intra-Industry Trade 17

Figure 4 TCI and TDI in different countries 30

List of Tables

Table 2 Commodity structure of EU export to China 20

Table 3 Intra-industry trade index between China and EU (1992～2003) 22

Table 4 Trade effect of European integration on Trade between China and EU in long run 30

List of Functions

Function 2 29

Function 3 29

List of Abbreviations

IITI Intra-industry Trade Index PAM Partly Adjust Model

PCVECM Panel Cointegration and Vector Error Correction Model TCE Trade Creation Effect

TDE Trade Division Effect TCI Trade Creation Index TDI Trade Division Index

1.Introduction

Nowadays, there are two major economic entities that have become more and more influential to the world economy. One is European Union (originally European Community), and the other is People`s Repulic of China. Both of them not only influence the trade between them largely, but also affect the international trade of the world on a large scale. European Union is the most advanced country's organization, and it is also the biggest and most advanced economic entity in the world. Its GDP is even larger than the United States of America, and its trade volume is nearly half of the world. As for China, it is the biggest developing country in the world and its economy has grown at a most high speed in the past 20 years. Besides, Chinese international trade develops very quickly, which has become the biggest exporting country since 2009, exceeding Germany, and it has become the largest foreign exchange reserve all over the world. China has established the formal foreign affairs relationship with the European Union since May 1975. With the development of 30 years, the relationship goes well and there are so many achievements between the two parts. In recent years, great success has been made in the economic and trade cooperation under the push of China and European Union.

These days, there is a tendency in the economic world that has becomes more and more powerful and influential，it is economic integration, which means more and more countries are combining together. We can see it in all kinds of media talking about international economy or trade. Although there’re objectors, this tendency can not be stopped. The world is becoming a factory and each country is just like one of its workshop. One production can be combined by different parts coming from all over the world. Anyway, the effect of such integrations on the world economy has already emerged.

This thesis is going to analysis the development of the trade between the two huge economic entities---EU and China, under the influence of economic integration，

especially the effect of European integration. What effects does the economic integration of Europe have on the trade between them, positive or negative? How will

the future of the trade between them develop?

Trade between China and Europe has a long history, but I will focus on the development in last decades. Besides, There’re lots of factors that can influence the trade between them, such as income of each country, exchange rate and so on. But I won’t study everything. What I will study is using Krugman’ s theory to analyze the influence of economic integration on trade, especially intra-industry trade. Because intra-industry trade occupied large part of international trade and its share is still increasing.

In order to make it more logical, the thesis is divided into four parts. The first part is summarizing trade history between China and Europe, showing the background of beginning and process. The second part includes some theories about international trade, especially introducing Krugman’s theory and the analysis about trade between China and Europe based on his theory. The third is important, introducing economic integration. In this part, I will introduce economic integration in detail and build a model to show its influence to trade between China and Europe. The fourth part is core part. I will combine analysis result based on Krugman’s theory and economic integration model to get my conclusion, to show the tendency of their trade in the future under the influence of economic integration.

2. The summary of the trade history between EU and China

History is just like a book, which helps us understand what has happened and makes us know what we should do.

2.1 The development of the trade before 1949

Although the exact time when the trade between China and Europe began is not confirmed, it can be traced back to at least 5^th century B.C. ¹ When it was 2^nd century B.C., Zhang Qian, a general of the Western Han Dynasty, opened up the Silk Road.² ________________________

1.Baidu encyclopedia, the Silk Road, 百度百科，丝绸之路 http://baike.baidu.com/view/1239.htm “At that time, some European countries called China ”Seres”, which means Silk.”

2.The source is the same as 1, “the silk road is first named by F．von Richthofen，in1877，in his book China”

Just as has been showed by the name, the earliest and most important goods trade between Europe and China was silk at that time. One of the most important person who came from western countries is Macro Polo(A.D.1254 ～ A.D.1324), a businessman born in Venice. He witnessed the flourishing trade between Europe and China.

As time went on, the trade between China and Europe underwent the time with heavy taxes imposed by Ottoman Empire, went through the Geographical Great Discovery time and witnessed the notorious Opium Trade.

Throughout most of the history, the trade between China and Europe has not been balanced. It seems that China always benefits more from it. But during the Opium Trade, which began from about 1790s, Chinese lost more money than it gained.

“According to statistics from Morse, the total value of opium put into China from 1790 to 1838 is 239045040 liang.”³

2.2 The development of the trade after 1949

“The relationship between China and EU is the most stable and most mature among the relations between China and developed countries”.⁴

2.2.1 The development of the trade from 1949 to 1993

I am going to divide this period into two parts according to the time when the diplomatic relations between China and European Community were established

In 1975, which was before the normal relations were built, trade between the two sides had a hard time for two main reasons. Firstly, new China repelled anything in connection with capitalism and closed up its door to many other foreign countries.

Secondly, at that time, the whole world was during the Cold War. There was nearly no official connection between socialist nations and capitalistic nations, and neither was China and European countries.

__________________________

3. Zhongping Yan, Statistic data of Chinese modern economic history ,P.11,1955 严中平编《中国近代经济史统 计资料》，第11 页，北京，1 955 年版。Liang is a Chinese weight unit, 1British Pound＝3 liang，1 liang＝1.388 Spanish silver dollar.

4.Jing Zou, Study about unbalance of trade between China and Europe, reasons and influence, P11, 2007 邹静，

中欧贸易不平衡的原因及影响研究，第十一页，2007

After they established diplomatic relations, especially after the implement of

Chinese new policies—opening-up and reform, the trade between them got along well.

The trade amount between China and Europen countries increased quickly. At the beginning, the trade volume between China and Europen countries was only 2.3 billion US dollars, but in 1993, the number reached up to 26.145 billion US dollars, which was more than 10 times in 1975.⁵

2.2.2 The development of the trade after 1993

The trade between China and EU has kept growing with the development of Europen integration, and it increases more quickly than any other time in history. Up to 2010, the trade volume between China and European Union has increased to 479.71 billion⁶ US dollars, which is more than 200 times of the trade volume in 1975, and nearly 20 times of 1993. “After expanded in 2004, EU became the biggest trade partner of China, and at the same time, China became the second biggest trade partner of E.U. ”⁷ “Trade between China and EU occupied 16.4% of Chinese total international trade, including that export amount to EU occupied 20.7% of Chinese total export amount and import amount from EU occupied 11.4% of Chinese total import amount.” ⁸ Besides, the trade between them occupied around 12% ⁹of EU’ s total international trade. All the numbers above show that the trade between China and EU has developed very well.

_________________________

5.Xingmei Xiong and Yao Shen, Review and Foresight of trade between China and European Union,P3, 1995 熊 性美 沈瑶，中国---欧盟贸易回顾与前瞻，第三页，1995

6. China Customs statistic

http://www.chinacustomsstat.com/aspx/1/NewData/Stat_Class.aspx?state=3&t=2&guid=569

7.Guoan Wang and Zichang Fan, Complementarity Study about trade between China and EU---analysis based on comparative advantages and intra-trade industry, P2,2005 王国安 范昌子,中欧贸易互补性研究——基于比 较优势理论和产业内贸易理论的实证分析,第二页，2005

8. Trade between China and EU gained great growth中欧经贸发展实现巨大飞跃 http://www.chinaports.org/info/200807/110010.htm)

9. calculate based on European Statistics department

http://epp.eurostat.ec.europa.eu/portal/page/portal/external_trade/publications/monthly_bulletin/monthly_bulleti ns_2010)

3. Theories about international trade and the trade between China and Europe analyzed by Krugman’s theory

3.1 Theories about international trade

Although economics is considered began with the publication of The Wealth of Nations by Adam Smith in 1776, there were some people thinking about trade from 15^th century.

In early time (15^th century to 16^th century), these people held the view that wealth is only gold and sliver, and the way to get them is international trade. In their opinion, international trade is zero-sum game. They believed that if nations want to be rich, we should pursue export as much as we can and forbid import or reduce import as much as we can. But later (17^th century to 18^th century), they released the requirement, as long as we can get trade surplus, our nations can become rich. This kind of economic philosophy is called mercantilism. The famous representative figure is Thomas Mun.¹⁰

In later of 17^th century, there were some people opposed to mercantilism in France.

They believed that trade should be free trade and government should think highly of agriculture. In their opinion, free economy is the most important thing to maintain market equilibrium and stable. This view is called physiocracy, and the representative figure is F. Quesnay.¹¹

3.1.2 Absolute Advantage and Compare Advantage ---representative of Classical Trade Theory

In the book of The Wealth of Nations written by Adam Smith, he put forward the definition of absolute advantage “When one nation is more efficient than (or has an

_______________________

10. Dominick Salvatore, International Economics, the seventh edition in 2001, P30

11. Baidu encyclopedia, International economic theories, 百 度 百 科 ， 国 际 贸 易 理 论 ， http://baike.baidu.com/view/1248260.htm

absolute advantage over) another in the production of one commodity but is less efficient than (or has an absolute disadvantage with respect to) the other nation in producing a second commodity, then both nations can gain by each specializing in the production of the commodity of its absolute advantage and exchanging part of its output with the other nation for the commodity of its absolute disadvantage.”¹² Adam Smith’s theory is based on the division of labor and specialization, and the source of division is differences of nature resources and different conditions of production in different countries. But the limitation of absolute advantage is obvious. In reality, there are trades happened between a country that has absolute advantage in every industries and a country that has absolute disadvantage in every product field.

David Ricardo found this restriction, and he developed Smith’s theory in his book Principles of Political Economy and Taxation which is published in 1817. He raised his theory known as Comparative Advantage. This theory believe that “The first nation should specialize in the production of and export the commodity in which its absolute disadvantage is smaller (this is the commodity of its comparative advantage) and import the commodity in which its absolute disadvantage is greater (this is the commodity of its comparative disadvantage).” ¹³ Ricardo’s theory believes that even if the first nation has disadvantage in producing every commodities, trade can still happen between them. This is the inheritance and development of Smith’s theory.¹⁴

3.1.3 Factor Endowment Theory (H-O theory) ---representative of Neoclassical

Factor Endowment Theory is put forward and developed by Eil F Heckscher and his student Beltil G Ohlin. The definition is “A nation will export the commodity whose production requires the intensive use of the nation’s ________________________

12. Dominick Salvatore, International Economics, the seventh edition in 2001, P33 13. Dominick Salvatore, International Economics, the seventh edition in 2001, P35

14. Baidu encyclopedia, International economic theories, 百 度 百 科 ， 国 际 贸 易 理 论 ， http://baike.baidu.com/view/1248260.htm

relatively abundant and cheap factor and import the commodity whose production requires the intensive use of the nation’ s relatively scare and expensive factor”¹⁵ This theory is considered as the development of comparative advantage theory. It is truly based on comparative advantage theory, but this theory is not only considers single factor---labor, it also introduces capital and other factors into analysis system. In this theory, the difference in cost is due to two reasons. Firstly, it is because different factor intensity. Under the assumptions of this theory, we call “commodity Y is capital intensive if the K/L used in the production of Y is greater than K/L used in the production of X”.¹⁶ Secondly, it is because different factor abundance in different countries.

We usually compare the amount of all capital and labor in each country or compare the price of capital and labor in each country to get the definition of factor abundance.

In 1940s, Palua A Samuelson deduced H-O theory with mathematical method.

He got the result known as H-O-S theorem:” International trade will bring about equalization in the relative and absolute returns to homogeneous factors across nations.” 17 Is means that international will bring both wages of homogeneous and the return to homogeneous capital to be the same within trading countries.

But still, H-O theory is not perfect, Leontief paradox is one of the most important problem unsolved.

_______________________

15. Dominick Salvatore, International Economics, the seventh edition in 2001, P129 16. Dominick Salvatore, International Economics, the seventh edition in 2001, P122 17. Dominick Salvatore, International Economics, the seventh edition in 2001, P135

3.2 Introduction of Krugman’s theory

There’re lots of other trade theories, but I am not going to introduce them one by one, now I will introduce the theory I am going to use mainly--- Krugman’s theory.

“Traditional international trade theories are based on comparative advantage”¹⁸, the representative is H-O theory. Krugman’s theory is different, it is called new trade theory. Its theory is based on incomplete competition and economies of scale, and the reason of it has relation with the background of the world.

3.2.1 Background of Krugman’s theory

After the Second World War, our world went well in international trade growth due to the progress of technology, development of productivity and some other reasons.

But trade during this time had big differences with former. Firstly, trade proportion between countries whose economic level are similar increased quickly, occupied as much as 70% of total international trade volume.¹⁹ Then, another obvious phenomenon is “a great deal of international trade can and does involve the exchange of differentiated products of the same industry or broad product group.”²⁰ It means that a country exports and imports the same kind commodity at the same time. This kind of trade is called intra-industry trade. For example, Japan export cars to EU, in meanwhile, it import cars from EU. But these commodities are differentiated commodities rather than homogeneous products.

However, H-O theory can’t explain these two new phenomenons. Because it is based on factor endowment different among countries, the bigger differences are, the larger amount of trade could be. H-O theory can only explain inter-industry trade, but not the new trade pattern after the World War II. We need new theory to explain it.

In 1979, Paul Krugman put Dixit and Stiglitz’s (1977) theory, differentiated _________________________

18. Baidu encyclopedia, Krugman’s international theory, 百 度 百 科 ， 克 鲁 格 曼 的 国 际 贸 易 理 论 http://baike.baidu.com/view/1626372.htm

19. Dazhong Cheng, Paul Krugman and the new trade theories,2009 程大中，保罗· 克鲁格曼与新贸易理论，

2009

20. Dominick Salvatore, International Economics, the seventh edition in 2001, P177

products, into consideration, and built neo-Chamberlin model, which is also called the love for variety model. 21 Kruman also put forward that “we should consider economies of scale as a reason of international trade”²² His model considered differentiated products, incomplete competition, and economies of scale which are never been thought before, explained the relationship between them and international trade, and interpreted the new pattern successfully. Let’s see how he built his theory.

3.2.2 The establish process of Krugman’s theory

Firstly, He released the assumptions of H-O theory. He found “relaxing most of the assumptions of the Heckscher-Ohlin theory only modifies but does not invalidate the theory”²³ But among the 11assumptions of H-O theory, when he released the assumptions of constant economies of scale and perfect competition, H-O theory meets difficulties to explain the reality. These difficulties H-O theory meets could be the start point to research.

After found the defects of H-O theory, he put forward his own assumptions and studied them. The first one is increasing returns to scale. Increasing returns to scale means the increased input is always smaller than the increased output, and it could result in production frontiers to be inward-bending. Let’s see figure 1 below.

_________________________________

21. Dazhong Cheng, Paul Krugman and the new trade theories,2009 程大中，保罗· 克鲁格曼与新贸易理论，

2009

22. Baidu encyclopedia, Krugman’s international theory, 百 度 百 科 ， 克 鲁 格 曼 的 国 际 贸 易 理 论 http://baike.baidu.com/view/1626372.htm

23. Dominick Salvatore, International Economics, the seventh edition in 2001, P173

Figure 1 Trade Based on Economic of Scale

Source: Dominick Salvatore, International Economics, the seventh edition in 2001, P175

Krugman assumed that two nations are identical in all respects so that with single production frontier and single difference map, we can show both of them. Then, with increasing returns to scale, those two curves will be convex to origin. When there’s no trade happen between two nations, because of identical in every respect, nations will get equilibrium at point A and the price is Px/Py=PA. But with trade, “Nation 1 could specialize completely in the production of commodity X and produce at point B.”²⁴ The same situation to Nation 2, it could specialize completely to produce commodity Y and produce at point B’. Then we get a new production frontier after connecting B and B’. Nation 1 can use 60X trade with Nation 2 to get 60Y, in other words, each country can have 60X and 60Y with trade. The new equilibrium is point E, and due to economies of scale and specialize production, each country can gain 20X and 20Y more than before. In conclusion, even though two nations are identical in every respect, as long as economies of scale or increasing return to scale exists, they can benefit from trade.

Imperfect competition is another important field Krugman studied. As we said before, a large part of world trade happens in the same industry or broad product group. Krugman quote Dixit and Stiglitz’s (1977) theory, differentiated products, as _____________________

24. Dominick Salvatore, International Economics, the seventh edition in 2001, P174.

the reason. Because “a large portion of output of modern economies today involves differentiated rather than homogeneous products”²⁵, intra-industry trade can happen and occupy a great deal of international trade. As to the reason why this kind of trade increases so quickly, Krugman believe that due to the pressure of international competition and in order to decrease cost, each producer produces “only one, or at most a few, varieties and styles of the same product rather than many different varieties and styles”²⁶. Especially, when trade barriers are removed for some reasons, for example the establishment of economic union, intra-industry trade will be more obvious. There’s one point I have to refer to. With the goal to minimize the costs of a product, “intra-industry trade is related to the sharp increase in international trade in parts and components of a product”.²⁷ There’re still some other studies concluded in Krugman’s theory, but I am not going to research them any more as they are useless for my analysis.

After these two part theoretical studied, Krugman built his model. Look at figure 2 below.

Figure2: Production and Pricing Under Monopolistic Competition

Source: Dominick Salvatore, International Economics, the seventh edition in 2001, P182

_____________________

25. Dominick Salvatore, International Economics, the seventh edition in 2001, P177 26. Dominick Salvatore, International Economics, the seventh edition in 2001, P177 27. Dominick Salvatore, International Economics, the seventh edition in 2001, P179

In this figure, D represents the demand curve of product sold by a firm that produce differentiated products. MR is marginal revenue curve of the firm. AC represents average cost and MC is marginal cost.

Because there are lots of firms that sell differentiated but similar products, the demand curve is downward and fairly elastic. Since the firm want to make price of commodity lower in order to increase sales, MR-curve will be below the demand curve, so we can know MR<P. AC is downward because the firm produces only one of a few varieties of product and gets increasing returns to scale. And because of AC’s decline, MC must be smaller than AC, so that MC-curve is below AC. The equilibrium point is E because MC=MR at that point. If MR>MC, the firm will increase output, and at the same time, there will be new firms producing this production to get profit, as a result, MR will decrease until it is equal to MC; if MR<MC, the firm will decrease output and some firms will withdraw production, so that MR=MC again. As to P=AC, it means, in the long run, the firm “earns only a normal return on investment”²⁸

In order to make it more persuasive, Krugman form another version of Intra-industry Trade Model. Look at Figure 3 below

Figure 3: Monopolistic Competition and Intra-Industry Trade

Source: Dominick Salvatore, International Economics, the seventh edition in 2001, P184 ______________________

28. Dominick Salvatore, International Economics, the seventh edition in 2001, P182

Figure 3 is different from Figure 2, the vertical axis of Figure 3 is product price (P) and the average cost of product (AC), at the same time, the horizontal axis of Figure 3 is the number of firms (N) in a monopolistically competitive industry.

The product price (P) curve is downward because the larger the number of firms, the more competition will be and the lower the price will be. C represents the average cost of firms. Because all these firms in the same industry face “identical demand and cost functions or conditions”²⁹, C-curve shows that the larger the number of firms is, the greater their average cost will be. When there’s no international trade, point E is the equilibrium point, and the reason is the same as the equilibrium point in the first model. If the country open up to the world, then the firms in the whole world can get in this industry, in other word, N will increase. But “firms in each nation can specialize in the production of smaller range of products and face lower average costs of production” 30. So with the expanding international trade, C-curve will remove to C’-curve, and result in lower product price. The new equilibrium point is E’, and at that point, customers all over the world will benefit from lower price and more commodities choice.

Paul Krugman’s new trade theory is a mature theory, it researches from economies of scale and intra-industry trade, explains the new trade pattern after the World War II successfully by using monopolistic competition model (Neo- Chamberlin model). The biggest difference between Krugman’s theory and H-O theory is that, the former one mainly explain intra-industry trade based on economies of scale and imperfect competition, while the later one mainly explain inter-industry trade based on factor endowment difference and comparative advantage.

3.3 Case of trade between China and Europe analyzed by Krugman’s theory

As I am going to study the influence of economic integration, I will mainly use ____________________

29. Dominick Salvatore, International Economics, the seventh edition in 2001, P183 30. Dominick Salvatore, International Economics, the seventh edition in 2001, P184

Krugman’s theory to research from intra-industry trade which is influenced by economic integration largely. But, considering that the subject is trade between China and EU, I will also use H-O theory to do some analysis. Discussing from two dimensions can make this thesis more persuasive.

3.3.1 Analysis of Krugman’s theory

3.3.1.1 The aspect of trade between China and EU

As I referred in part 2, trade between China and EU develops very well, especially after 2000. Also, there’re some new tendencies showing up. Look at the tables below, they show the trade data between China and EU recently. ³¹

Table 1 Commodity structure of EU import from China (Unit: billion euro)

Commodity category

Commodity category

2002 Percentage (%)

2004 Percentage (%)

2006 Percentage (%)

Total Amount 89.610 100 127.463 100 191.769 100 Primary

products

3.848 4.3 5.496 4.3 7.428 3.9

Agricultural products

2.431 2.7 2.858 2.2 4.276 2.2

Manufactured products

85.496 95.4 121.666 95.5 183.728 95.8

Mechanical and electrical

products

35.820 40.0 59.652 46.8 88.012 45.9

Chemical products

3.297 3.7 4.013 3.1 6.088 3.2

Soft goods 13.342 14.9 16.081 12.6 25.281 13.2

Source: Jing Zou, Study about unbalance of trade between China and Europe, reasons and influence, P13, 2007 邹静，中欧贸易不平衡的原因及影响研究，第十三页，2007

______________________________

31. The commodity trade classification in this thesis is SITC Rev.3

Look at Table 1, we can find that, in the import of EU from China, the primary products occupies a little part of total trade volume and the percentage is decreasing over time, while manufactured products shares a large part of trade volume and the percentage is still increasing. It shows that Chinese export structure is changing from low-value added, primary products to high-value added, manufactured products.

Table 2 Commodity structure of EU export to China (Unit: billion euro)

Commodity category

Commodity category

2002 Percentage (%)

2004 Percentage (%)

2006 Percentage (%)

Total Amount 34.869 100 48.189 100 63.361 100

Primary products

2.438 7.0 3.799 47.9 7.248 11.4

Agricultural products

0.936 2.7 1.236 2.6 1.645 2.6

Manufactured products

31.745 91.1 43.551 90.3 54.570 86.1

Mechanical and

electrical products

16.648 47.4 23.360 48.5 26.025 41.1

Chemical products

3.305 9.5 4.432 9.2 6.042 9.5

Soft goods 0.448 1.3 0.559 1.2 0.801 1.3

Source: Jing Zou, Study about unbalance of trade between China and Europe, reasons and influence, P13, 2007

邹静，中欧贸易不平衡的原因及影响研究，第十三页，2007

We can see from Table 2, in the export of EU to China, manufactured products occupies most of the trade, although the share of it is decreasing with the increasing of primary products.

If we combine Table1 and Table2 to analyze, we can find that most part of trade between China and EU is manufactured products, and in every category above, there’re import and export existing at the same time. But a large part of trade may not be intra-industry trade, as we can see from UN comtrade database³² that what manufactured products EU imports from China is boxes, soft goods, organic chemistry goods and some other labor-intensive and low technological products, while commodities EU exports to China is mainly automobile, airplane and some capital-intensive and high technological products. Anyway, we can know that intra-industry is existed in trade between China and EU. As to the level of it, we need a tool to measure.

There’s intra-industry trade index (IITI) that can measure the level of intra-industry trade:

T=1—|X--M|/(X+M) (1)³³

In the function above, X is the value of exports of a particular industry and M is the value of imports of the same industry or commodity group. “The value of T ranges from 0 to 1”.³⁴ If T is equal to 0, it means that a country only exports or only imports commodity in the same industry, in other word, there’s no intra-industry trade. If T is equal to 1, it means that a country’s export and import of the same commodity is equal and the intra-industry trade will be the max.

When we put trade data between China and EU into this function, we can get IITI and know the level of intra-industry trade. Look at Table 3 below, which shows IITI between China and EU from 1992 to 2003.

_____________________

32. The website address of UN comtrade database http://comtrade.un.org/db/mr/daCommodities.aspx 33. Function(1) Dominick Salvatore, International Economics, the seventh edition in 2001,P180 34. Dominick Salvatore, International Economics, the seventh edition in 2001, P180

Table3 Intra-industry trade index between China and EU (1992～2003)

Commodity

category 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 Primary products 0.535 0.4170.676 0.761 0.52 0.618 0.656 0.866 0.7690.7060.8020.745

Labor-intensive

products 0.584 0.423 0.47 0.454 0.491 0.487 0.465 0.462 0.47 0.522 0.54 0.573 Capital-intensive

products 0.529 0.4970.711 0.739 0.802 0.889 0.972 0.965 0.8820.908 0.90 0.844

Source: Guoan Wang and Zichang Fan, Complementarity Study about trade between China and EU---analysis based on comparative advantages and intra-trade industry, P5,2005 王国安 范昌子,中欧贸易互补性研究——

基于比较优势理论和产业内贸易理论的实证分析,第五页，2005

From Table 3, we can know that capital-intensive products’ IITI is higher than the other two category commodities and labor-intensive products’ IITI is the lowest. But, it is true that every kind of products’ IITI between China and EU is more than 0.4.

The reason for this high level IITI of primary products and labor-intensive products is mainly because of two aspects. Firstly, these two economic entities both importing and exporting primary products, especially agricultural products, is to adjust product price because of season changing. Secondly, there’re some differences in part of labor-intensive products. There’re two aspects in products’ differences: the first one is horizontal difference, including different colors, styles and so on; the second one is vertical difference, it mainly indicates quality difference. Labor- intensive products’

trade between China and EU is based on horizontal difference of products, while capital-intensive products’ trade is mainly based on quality difference.³⁵

Besides, trade structure has changed a lot. “Since 1995, commodity classification between China and EU is changing from material, soft goods, agricultural products to mechanical and electrical products and innovative and high technological products.

____________________________

35. Guoan Wang and Zichang Fan, Complementarity Study about trade between China and EU---analysis based on comparative advantages and intra-trade industry, P5,2005 王国安 范昌子,中欧贸易互补性研究——基于比较 优势理论和产业内贸易理论的实证分析,第五页，2005

Export structure has bigger change than import structure.”³⁶ Chinese export to EU in 1995 is more diversified than 2004, but the amount of high value-added products in 2004 is higher than their share in 1995. There’s no obvious changing in import from EU, it always is mechanical and electrical products and innovative and high technological products.37

In conclusion, trade between China and EU is mainly intra-industry trade now. The intra-industry trade index of manufactured products, especially capital-intensive products, is very high. Trade structure between them changes a lot, but it is mainly consist of manufactured products now and the tendency is continuing.

3.3.1.2 The change’s influence of intra-industry trade within EU

“The importance of intra-industry trade became apparent when tariff and other obstructions to the flow of trade among members of EU, or Common Market, were removed in 1958”38 As most countries in Europe is advanced countries, and the economic structure is similar, according to Krugman’s theory, trade among them is mainly intra-industry. Trade among members of EU will expand with European integration because the more similar the countries are in EU, the more specialize can a nation be in production.

As the internal trade condition became better, companies may move back from China to Europe to produce commodity and exchange with other members of EU. It may lead to the reduction of trade between China and EU. This question will be study in next part after I introduce economic integration clearly.

________________________

36. Shuai Zhou, Contrast Studies and revelation of commodity trade structure between China and EU, Academic Journal of Zhongzhou, May 2006,NO.3, P70 周帅，中欧商品贸易模式的对比研究及启示，中州学刊，2006 年 5 月第三期，第 70 页

37. Shuai Zhou, Contrast Studies and revelation of commodity trade structure between China and EU, Academic Journal of Zhongzhou, May 2006,NO.3, P70 周帅，中欧商品贸易模式的对比研究及启示，中州学刊，2006 年 5 月第三期，第 70 页

38. Dominick Salvatore, International Economics, the seventh edition in 2001,p179

3.3.2 Compare with H-O theory--- look at trade between China and EU in another visual angle

As I found in 3.3.1.1, trade between China and EU is still partly based on each other’s comparative advantage. China is a developing country abundant in resources and cheap labor, so most of Chinese export is labor-intensive products. EU has abundant capital and advanced technology, so capital-intensive products occupies a large part of EU’s export. Although we know from data that trade between them is mainly intra-industry trade, these trades are not only based on imperfect competition and economies of scale, but also affected by factor endowment different.

“Trade between China and EU has a strong complementarity” and still “can be analyzed by H-O theory”.³⁹ This is partly because “economic globalization affects international division of labor, the form of international division of labor is adjusting from division based on product to division based on factor”.⁴⁰ Therefore, this transformation will affect investment orientation and decide the position of a country in value chain.

4. Economic integration

4.1 Introduction of Economic Integration

“Economic integration is a kind of economic union that, based on current productivity level and the way of international division, more than two (including two) countries sign treaties abandoning some national sovereignty after consultations or negotiations, in order to improve its economic level by cooperation. In this economic union, productions, capital and labor are free flowing without nearly any trade ______________________

39. Shuai Zhou, Contrast Studies and revelation of commodity trade structure between China and EU, Academic Journal of Zhongzhou, May 2006,NO.3, P70 周帅，中欧商品贸易模式的对比研究及启示，中州学刊，2006 年 5 月第三期，第 70 页

40. Shuai Zhou, Contrast Studies and revelation of commodity trade structure between China and EU, Academic Journal of Zhongzhou, May 2006,NO.3, P70 周帅，中欧商品贸易模式的对比研究及启示，中州学刊，20065 月第三期，第70 页

restriction.”⁴¹ Besides, economic integration organizations usually have unified institutions monitoring and carrying out common policies and measures, even representing the interests of all the members.

In general, according to the geographic range, there are two definitions about economic integration. The first one is generalized economic integration. It means that economic integration is happening worldwide. It is also called economic globalization, which means “countries all over the world are opening to each other, canceling trade barriers and taxes to each other, depending on each other and developing together with others”. “The second one is narrow sense of economic integration, which is known as regional economic integration. It means two or more than two countries within one region take part in one official organization and form supranational institutions. They have unified external economic policies, financial policies and monetary policies, in order to eliminate barriers that may block economic growth, reach the level mutual benefit and, finally, become a unified politics and economics entity.”⁴²

Although many people object to economic integration, the trend of economic integration as well as economic globalization, they can not be changed up to now. In this thesis, the definition of economic integration will be in narrow sense if there is no special explanation.

Generally speaking, according to the degree of tightness among members, the level of economic policies’ harmony and barriers outward, we can divide economic integration into six different levels: “Preferential Trade Agreement, Free Trade Area, Custom Union, Common Market, Economic Union and Complete Economic Integration”.⁴³ European Union is Economic Union level now.

_________________________

41. MBA encyclopedia, economic integration, MBA 智 库 经 济 一 体 化 http://wiki.mbalib.com/wiki/%E7%BB%8F%E6%B5%8E%E4%B8%80%E4%BD%93%E5%8C%96

42. MBA encyclopedia, economic integration, MBA 智 库 经 济 一 体 化 http://wiki.mbalib.com/wiki/%E7%BB%8F%E6%B5%8E%E4%B8%80%E4%BD%93%E5%8C%96

43. Baidu encyclopedia, regional economic integration 百 度 百 科 区 域 经 济 一 体 http://baike.baidu.com/view/92189.htm. The difference in detail is in appendix.

4.1.2 The influence of economic integration on trade

Every coin has two sides, so does economic integration. If we discuss from trade aspect, there are several main advantages and disadvantages.

We talk about advantages first.

Firstly, different member states combined into one economic entity means that they have their right to speak improved and the influence on trade increased. It allows economic organization like European Union to have more power when they negotiate with other countries, which means the possibility of gaining more profits. With the development of economic integration, EU gradually becomes the entity with the biggest trade volume in the world, and its GDP exceeds America.

Secondly, “with trade restrictions decreasing, it is good to the economic

development of intra-region, and it will promote the extension of international trade, and then encourage economic globalization.”⁴⁴

Last but not least, trade scale will be extended as a result of the built of custom union, which will lead to the increase of welfare among members. It is known as Trade Creation Effect. ⁴⁵

As to disadvantages of economic integration, there are also influential.

First of all, as an organic whole, the relationship among the member states is much closer, but if problems appear on one member, all the other members will be influenced largely, which means they have to share the risk of being a whole and be responsible for each other’s mistakes. For example, Greek debt crisis has affected vastly the value of Europe, whose influence lasts until now.

Besides, although member states appear as a whole, they are still independent countries. But because of the closer relationship, there will be more intra-conflicts.

________________________

44. MBA encyclopedia, MBA 智 库 ,

http://wiki.mbalib.com/wiki/%E7%BB%8F%E6%B5%8E%E4%B8%80%E4%BD%93%E5%8C%96

45. Course of International trade of Shanghai University of Finance and Economics http://course.shufe.edu.cn/course/gjmyx/dzjc/chapter13/2_1.htm

It is difficult to deal with such conflicts when member states have had unbalance state in benefits

Thirdly, When members have combined into custom union, it will lead the trade between members and non-members to transfer to the trade within members. It may cause loss of total welfare. This is known as Trade Diversion Effect. ⁴⁶

4.2. Economic integration Model

During the research, I find that only a few people have studied the influence of economic integration on the trade between China and Europe. What’s more, most of the study achievements are only included in the analysis to the effect on the trade between Europe and developing countries. For example, Lars Nilsson (1999). “The most typical economists ever researched influence on China and Europe is H. Hallett (1994) and E. Kreinin, G. Plummer (2002). The former was based on the data of the trade between them in 1988, and came to the conclusion that European Common Market would lead to 1.1 billion European Monetary Unit decrease of Chinese products exported to EU every year, while the latter believed that China was the biggest victim due to European economic integration, according to the data of 1994.

They drew the conclusion that Chinese export decreased more than 5 billion US dollar every year because of economic integration.”⁴⁷

4.2.2 Tools for my research: Trade Creation Effect and Trade Diversion Effect As far as I have learned, the best way to research the influence of economic integration on trade is to use Trade Creation Effect (TCE) and Trade Diversion Effect (TDE) as analysis tool.

As has been referred to in the former part, Trade Creation Effect is the effect that ________________________

46. Course of International trade of Shanghai University of Finance and Economics http://course.shufe.edu.cn/course/gjmyx/dzjc/chapter13/2_1.htm

47. Yong Yang, Bin Zhang, Study of European integration’s trade effect on trade between China and EU, 2008张

彬 杨勇, 欧洲经济一体化的贸易效应对中欧贸易的影响探析,2008

happened when a custom union is formed. The welfare of the members will increase due to the elimination of the trade taxes and barriers, and because of the intra-trade increase. We can see from the definition that Trade Creation Effect has a positive influence on the trade.

Trade Diversion Effect is the effect that has happened when the custom union is founded, too. It is the fact that the trade will remove from low-cost production of non-members to high-cost production of intra-trade due to the abolishment of barriers among members and the loss because of this. Of course, we can see from the definition. Trade Creation Effect has a negative influence on trade between China and Europe.

Now, we have one positive effect and one negative effect. The question is which effect affects external trade? Or to ask the question in this way, what is the effect of economic integration to trade between China and EU, positive or negative?

To answer this question, we need a model.

4.2.3 Model

In my research, one of the best models to analyze and explain the question above is Panel Cointegration and Vector Error Correction Model (PCVECM) built by Bin Zhang and Yong Yang in 2008. They brought Michaely Index (1996) into the Gravity Model, corrected A. Mordonu’s Partly Adjust Model (2006) and established it.

“The Gravity Model is used to estimate the relation between trade volume and economic scale, geographical distance primally, it became the main tool to estimate RTAs (Regional Trade agreements) over time. The way it works is bringing into dummy variable in order to fit ECT and EDT.”⁴⁸ As to the introduction Michaely Index and A. Mordonu’s Partly Adjust Model, I put them in the appendix.

The Panel Cointegration and Vector Error Correction Model is combined by two functions:

________________________

48. Yong Yang, Bin Zhang, Study of European integration’s trade effect on trade between China and EU, 2008张

彬 杨勇, 欧洲经济一体化的贸易效应对中欧贸易的影响探析,2008

“lnExpjt=αjt+β1lnGdpjt+β2lnGdpkt+β3lnTdjt+β4lnTcjt+β5lnECjt+β6lnSdjt+β7lnExhjt +μjt “ (2)

“ lnExpjt=αjt+γ1 lnGdpjt+γ2 lnGdpkt+γ3 lnTdjt+γ4 lnTcjt+γ5 lnECjt+γ6 lnSd jt+γ7 lnExhjt+μjt “ (3)

“Expjt is the export volume from China to EU’s member j, Gdpjt is EU’s member j’s output, Gdpkt is Chinese Gross Domestic Product. Tdjt、Tcjt、Ecjt and Sdjt are member j’s Michaely Index. Exhjt is real exchange rate of China with country j, ajt is parameter representing the nature of section, βi and γi are adjust coefficient, ujt is random perturbation variable.” ⁴⁹

So function (1) represents the trade effect of European integration on trade between China and EU in long run, it also shows the relationship among sectors of trade effects in long term. Function (2) shows the trade effect of European integration on trade between China and EU in short run, it also shows that the deflection of trade between them in long run affects trade between China and EU itself. In this thesis, I am mainly going to study the influence in long run.

Now, as long as we put relative data into these two functions and analyze them, we can get our conclusion. As EU is decided to be established in 1991, my data will begin from 1992. My export and import data is mainly from UN comtrade database, and others will continue using Bin Zhang and Yong Zhang’s original data. ⁵⁰ as I have limitation to use them directly.

__________________________________

49. Yong Yang, Bin Zhang, Study of European integration’s trade effect on trade between China and EU, 2008 50. they use the several EU’s countries data to study. They divided them into economic advanced countries , such as Germany, France, Italy, Britain, and economic small countries such as Austria, Ireland, Portugal, Greece, Netherland(including Belgium and Luxembourg because of their tight relationship

After we quote data into Michaely Index Functions, we can get the figures below:

Figure 4: TCI and TDI in different countries

Trade creation index of small countries Trade creation index of big countries

Trade diversion index of small countries Trade diversion index of big countries Source: Yong Yang, Bin Zhang, Study of European integration’s trade effect on trade between China and EU, 2008张彬 杨勇, 欧洲经济一体化的贸易效应对中欧贸易的影响探析,2008

As we can see from the figures above, small countries’ TCI and TDI are increasing, except Ireland, and the alteration of big countries’ TCI and TDI is not very obvious.

So we can know that in the process of European integration, small countries adjust its economic structure and big countries will maintain its production and trade structure.

Therefore, trade effect of European integration on trade between China and EU is mainly from small countries.

Then, we can put data into PCVECM, and get final conclusion. Look at Table 4.

Table 4 Trade effect of European integration on Trade between China and EU in long run

EU’s Export to China (EXPjt) Chinese export to EU (EXPkt) Variable

coefficient t-statistic Probability coefficient t-statistic Probability GDPjt -0.417243 -2.963 0.0035 -0.271101 -2.220 0.0279 GDPkt 1.304519 28.175 0.0000 1.815889 45.237 0.0000 TCjt 0.846107 2.196 0.0296 0.722484 2.163 0.0322 TDjt -3.031716 -4.461 0.0000 -2.237666 -3.798 0.0002 ECjt -0.352413 -0.679 0.4977 -0.235676 -0.524 0.6008 SDjt -0.814833 -1.359 0.1762 -0.490736 -0.944 0.3466 EXHjt 0.348846 4.110 0.0001 0.587353 7.981 0.0000

Source: Yong Yang, Bin Zhang, Study of European integration’s trade effect on trade between China and EU, 2008张彬 杨勇, 欧洲经济一体化的贸易效应对中欧贸易的影响探析,2008

Comparing with economic scale and exchange rate’s multiplier influence, TCE and TDE of European integration are the main sectors that have influence on trade between China and EU. In long run, the coefficient of TDI is nearly three times of TCI, so TDE has a bigger influence than TCE and it is negative sector to trade between them. Therefore, the trade effect of European integration on trade between China and EU is negative on the whole. Considering that small countries’ trade effect is more unstable, we can conclude that the influence of European integration on trade between China and EU is negative and affect mainly by small countries’ trade diversion effect.

5. Conclusion : The influence of economic integration on the trade between EU and China

As I present in the thesis, trade between China and EU has a long history and develops rapidly nowadays, especially after 2000. EU has become the biggest trade partner of China, it is the prime technology source of China. At the same time, China is the second biggest partner of EU, it affords consumption market for EU’s products.

Trade between them affects each other’s international trade enormously.

Although trade between them has made great achievements, European integration, which started in last decades, has a negative influence on it. My analysis shows that Trade effect is the main influences on trade between China and EU. The negative influence of TDE is nearly three times of the positive influence of TCE. What’s more, the adjustment of small EU’s countries’ economic structure has a bigger influence because big countries’ economic structures are more stable. Nowadays, trade between China and EU is mainly manufactured intra-industry trade, and according to Krugman’s theory, trade within EU is mainly intra-industry trade, too. European integration will aggravate TDE, which is negative to trade between China and EU.

But this conclusion is just considering multiplier effect (or to say coefficient), 1%

change in TDE can lead to -3.03% adjustment of EU’s export to China. It is much bigger than the effect of economic scale of EU ( 1% change lead to -0.42%

adjustment) or other factors. As we can see from Function (2), each section (for example “β₂lnGdpkt”) is combined by absolute number of each factor and coefficient.

If we put absolute number of each factor, for example, Chinese GDP, into consideration, the result could be different. It is because the number of Chinese GDP is thousands of billions (U.S. dollars), which is much bigger than the number of coefficient. That is the reason why trade effect is the main influence on trade between China and EU, but the trade is still developing rapidly. So the economic integration of Europe can not change the trade pattern of China and EU in the future alone.

Economic globalization is another kind of economic integration, I am not going to study its influence in detail, but as I referred in 3.3.2 and 4.1.1, it changes the pattern

of international division of labor, and it also makes the relation of whole world become tighter. In empirical perspective, with the development of it, trade barriers will be less and less, and it may have a positive influence to trade between China and EU.

There’re still some defects in this thesis. First, although I have the help of professor and advisor, the level of study is limited by my professional knowledge. Besides, I didn’t consider many other aspects, such as the economic scale and economic growth of China and EU, exchange rates, policies, political situation, technology level and so on. All of these factors also have big influence on trade between China and EU, some of them maybe are the crucial aspects and if we consider them, the conclusion may be different. Anyway, trade between China and EU is definitely influenced by economic integration (this thesis is studying European integration), just as the conclusion I get.

Appendix

Appendix 1 Levels and Characters of Economic Integration

1. Preferential Trade Agreement.

It is the lowest level of economic integration . In this level, members sign treaties or reach common views that give some privileges to each other on trading a part of or the whole productions.

2. Free Trade Area

It is a trade area consisting of countries that sign the free trade treaties and taxes, so other trade barriers among members in this area are abolished. Productions are free to flow in this area, but every member state still has their own right to keep barriers to non-members.

3. Custom Union

In my opinion, it is an important form of economic integration. Effects created by this level are very useful when we analyze influence of economic integration. In this level, on one hand, taxes and other barriers are completely eliminated among members, and trade policies of each member are coordinated to be more harmonious with others. On the other hand, the Union sets unified tax policies to external (CETs).

This kind of integration has some nature of supranational and progress further than Free Trade Area. European Community is a good example.

4. Common Market

It is based on Custom Union, and this kind of economic integration requires further eliminate to trade restrictions, especially restrictions on production factors, which can not only achieve free trade of productions, but also make capital, labor, technology and other production factors free flowing among members.

5. Economic Union

Its appearance is based on Common Market. Members in Economic Union not only achieve the free flow of trade goods and production materials, but also make unified economic policies and social policies, which means policy differences among

members will disappear little by little. Dispersive members are becoming a huge unitive economic entity. At present in the world, European Union is in this level, and it is the only economic organization reaching this level.

6. Complete Economic Integration

It is the highest level of economic integration. Members’ policies on economy, finance, money are absolutely the same. They have unified institutions to represent their interests, and these institutions are authorized by governments. Countries in this organization take the same standpoint in economic decisions. People in this region use the same money, and ,of course, trades are completely free flowing.

Table: Differences of different levels of economic integration Privilege

among members

Free flow of trade among members

Common tax to external

Free flow of production factors

Concert of economic policies

Unified economic policies Preferential

Trade Agreement

yes

Trade Free Area

yes yes

Custom Union

yes yes yes

Common Market

yes yes yes yes

Economic Union

yes yes yes yes yes

Complete Economic Integration

yes yes yes yes yes yes

Source: MBA library,

http://wiki.mbalib.com/wiki/%E7%BB%8F%E6%B5%8E%E4%B8%80%E4%BD%93%E5%8C%96

Appendix 2 Chamberlin’ s Internal Economies of scale model 张伯伦内部规模经 济

Chamberlin’s internal economies of scale is also called monopolistic competition, it is a kind of economies of scale. It was an important economic definition put forward by economist Chamberlin first. In general, it means single producer that producing differentiated productions saves costs or improves efficiency substantially by expanding itself production scale. These monopolistic competition’s producers’

economies of scale are from the saving of constant cost result from the expanding production scale. Let’s look at the function below, it shows how t comes:

In the function, ACx and MCx represent enterprise’s average cost and marginal cost separately. t is the index that measure enterprise’s economies of scale. If t is bigger than 1, commodity X gets increasing return to scale; if t is equal to 1,

commodity X is in economies of scale stage; if t is smaller than 1, commodity X gets decreasing return to scale.

Source: http://course.shufe.edu.cn/course/gjmyx/dzjc/chapter4/4_2.htm

Appendix 3 Michaely Index

Michaely Index (1996) is always used to exam ECT and EDT. There are four separate but interrelated indexes:

Tdjk=1-(Σ|mij-xik|)/2 , Tcjk=1-⁽Σ|qij-xik|)/2 Ecjk=1-(Σ|xij-xik|)/2 , Sdjk=1-(Σ|xij-mik|)/2

In these four index functions, j means importing country; k means exporting country; i is statistical standards classified on the basic of SITC or ISIC; m stands for import, and x stands for export. Now we can know that mij is the percentage of total import that commodity i occupies; xik means commodity i‘s percentage of country k’s total export; qij represents the percentage of commodity i’s product amount occupied in total export of country j and xij stands for commodity i’s percentage of country j’s total export.

So we can know that Tdjk means the trade matching degree between importing countries j and exporting countries k, which measures the potential of trade diversion.

The more similar country j’s import construct with country k’s export construct is, the more potential trade diversion will happen. Tcjk means the matching degree index between the production model of importing countries j and the export model of exporting countries k, which measures the potential trade creation. The more similar country j’s mode of production with country k’s mode of export is, the more potential trade creation will happen. （Michaely, 1996） As to Ecjk, it is an exam standard to Tcjk, it is a index to measure the matching degree of country j and country k’s mode of export. Sdjk is used to measure the matching degree of country k’s demand and country j’s support.

Source: Yong Yang, Bin Zhang, Study of European integration’s trade effect on trade between China and EU, 2008 张彬 杨勇, 欧洲经济一体化的贸易效应对中欧贸易的影响探析,2008