LAUSR

ABSTRACT In this research, we investigate trade costs in relation to China-EU trade in agri-food products during 2001–2015. Major components of trade cost include transportation costs, border-related policy barriers such as tariffs, and local distribution costs. Our results indicate that trade costs between China and EU involving agri-food products, although falling, remain abnormally high. Consequently, we find that trade cost reductions contribute to over half of the overall China-EU trade growth. Our decomposition technique demonstrates that economic growth and trade cost reductions are the key drivers of China-EU trade expansion. Implementation of the Belt and Road Initiative (BRI) would reduce high trade costs to increase EU-China bilateral agricultural trade significantly. This is not fully captured in the gravity models where a static distance is usually used as a proxy to trade cost. The BRI will not reduce the distance, but it will cut transportation and other components of trade cost for China-EU trade.