An Empirical Analysis of the Trade Effect of the Construction of the
Sino-Russian Free Trade Area Based on the Trade Gravity Model
Nan Yan
School of Economics, Harbin University of Commerce, Harbin, Heilongjiang, China
Keywords: China-Russia Free Trade Area, Trade Effect, Trade Gravity Model.
Abstract: Based on the trade scale, trade structure, and investment cooperation development between China and Russia
from 2010 to 2019, using the trade gravity model, empirical analysis of the trade effects of the establishment
of a free trade area between China and Russia. The regression results show that the GDP growth of China and
Russia has a significant boost to the bilateral trade volume; the changes in the exchange rate level between
the two countries will have a certain impact on the bilateral trade volume; the reduction and exemption of
tariffs between the two countries will have a positive effect on the growth of bilateral trade volume. Therefore,
with the in-depth development of economic and trade cooperation between the two countries, the
establishment of a free trade zone will have a more significant trade effect.
1 INTRODUCTION
The signing of the world’s largest free trade
agreement, RCEP, on November 15, 2020, indicates
that China’s strategy of “promoting the construction
of a global-oriented high-standard free trade zone
system” in 2019 is being implemented steadily.
Against the background of rising global trade
protectionism and the negative impact of the new
crown pneumonia epidemic on trade and investment,
China’s active participation in bilateral or multilateral
free trade areas not only helps reduce trade frictions
and stabilizes the foreign trade situation, but also
promotes the development of a dual cycle of domestic
and foreign trade.
There have been some related academic studies on
the construction of the Sino-Russian Free Trade Area.
Hao Yubiao (2013) used the trade gravity model to
measure the influencing factors between China and its
main trading partners, and analyzed the restrictive
factors of Sino-Russian trade development. (Hao,
2013) Liu Zhizhong (2017) used the revealed
competitive advantage index and trade
complementarity index to estimate the
competitiveness and complementarity of various
products in bilateral trade between China and Russia
under the “One Belt and One Road” strategy. (Liu,
2017) Ling Chen (2020) comprehensively analyzed
the constraints and complementary conditions for the
establishment of the Sino-Russian Free Trade Area
under the opportunities of the new era, and further
elaborated the specific promotion strategy. (Chen,
2020)
This article continues the above thoughts, on basis
of expounding the status quo of Sino-Russian trade
and investment, draws lessons from the Sino-
Australian Free Trade Area, which is similar to the
Sino-Russian trade structure, and uses the trade
gravity model to analyze the trade effects established
by the Sino-Russian Free Trade Area. Based on the
above research, suggestions are given for accelerating
the construction of a Sino-Russian free trade area
under the new situation.
2 DEVELOPMENT STATUS OF
SINO-RUSSIAN BILATERAL
TRADE
2.1 The Scale of Bilateral Trade
Continues to Expand, and the
Growth Rate Is Relatively Slow
As shown in Figure 1, from 2010 to 2019, the bilateral
trade volume rose from 55.53 billion U.S. dollars to
110.94 billion U.S. dollars, an overall increase of
99.78%. In 2019, the total bilateral trade between
China and Russia increased by 3.58% year-on-year, of.
264
Yan, N.
An Empirical Analysis of the Trade Effect of the Construction of the Sino-Russian Free Trade Area Based on the Trade Gravity Model.
DOI: 10.5220/0011734500003607
In Proceedings of the 1st International Conference on Public Management, Digital Economy and Internet Technology (ICPDI 2022), pages 264-270
ISBN: 978-989-758-620-0
Copyright
c
 2023 by SCITEPRESS – Science and Technology Publications, Lda. Under CC license (CC BY-NC-ND 4.0)

Figure 1: 2010-2019 China’s trade value with Russia.
which China’s exports to Russia were US$49.75
billion, a year-on-year increase of 3.71%, and imports
from Russia were US$61.19 billion, a year-on-year
increase of 3.47%. In terms of trade balance, the trade
surplus and deficit have fluctuated. From 2013 to
2017, China was in a trade surplus position, but after
2014, the trade surplus position declined. In 2018 and
2019, China’s trade deficit was 1.17 billion U.S.
dollars and 11.44 billion U.S. dollars. The steady
growth of trade volume in the past ten years has laid a
solid economic foundation and stable cooperative
relations for the construction of the China-Russia Free
Trade Area. However, the scale of bilateral trade is
still relatively small and the growth rate is relatively
slow. It can be seen there is great room for bilateral
trade to development.
2.2 The Level of Bilateral Trade Is Low
and The Trade Structure Is Highly
Complementary
Free trade zones are easier to establish between
economies that dominate intra-industry trade. For
example, the China-Korea Free Trade Zone focuses on
intra-industry trade of mechanical and electrical
products. According to the country-by-country trade
report of the Ministry of Commerce of China, in 2019,
mechanical and electrical products accounted for more
than 50% of the total import and export volume of
China and South Korea. The trade structure between
China and Russia is similar to that of China and
Australia, with inter-industry trade dominated. China
mainly exports labor-intensive manufactured products
such as machinery and electronics and textiles, and
imports primary energy products such as mineral
products. In 2019, mechanical and electrical products,
base metals and products, textiles and raw materials
were the top three commodities in Russia’s imports
from China. These three categories of commodities
together accounted for more than 60% of Russia’s
total imports from China. Mineral products, wood
products, and mechanical and electrical products are
the top three commodities in Russia’s exports to
China. These three types of commodities together
accounted for 85.8% of Russia’s total exports to
China, of which mineral exports accounted for the
highest proportion, reaching 75.2 %. It can be seen the
low level of Sino-Russian trade and the single trade
structure are not conducive to the increase of the added
value of bilateral trade and the further expansion of
trade scale.
Although the Sino-Russian trade structure
dominated by inter-industry trade will restrict the
construction of the free trade zone to a certain extent,
the strong complementarity of the industrial structure
and its import and export commodity structure is also
the advantage of the construction of the Sino-Russian
free trade zone. Russia’s industrial structure is
dominated by heavy industries, and it relies heavily on
the export of crude oil and other energy sources to
generate income. In the process of rapid economic
development, China’s external demand for energy
resources has continued to grow. In addition, the
development of Russia’s agriculture and light industry
is relatively lagging, and China, as a world
manufacturing country, has advantages in scale, cost,
and price, and can effectively meet Russia’s domestic
market demand. In 2019, Russia’s first import from
-150
-100
-50
0
50
100
150
0
200
400
600
800
1000
1200
2010 2011 2012 2013 2014 2015 2016 2017 2018 2019
unit:100 million U.S. dollars
import and export value export value import value trade gap
An Empirical Analysis of the Trade Effect of the Construction of the Sino-Russian Free Trade Area Based on the Trade Gravity Model
265

China was mechanical and electrical products, which
accounted for nearly half of Russia’s total imports
from China. It shows that China’s mechanical and
electrical products have market competitive
advantages in Russia’s import trade of such products.
In addition, China’s light industrial products such as
base metals and products, textiles and raw materials,
furniture, toys, miscellaneous products, plastics,
rubber, shoes and umbrellas still occupy a major share
of Russia’s import trade. Among them, light industrial
products such as furniture, toys, miscellaneous
products, shoes and umbrellas account for more than
half of the total imports of similar commodities in
Russia’s foreign trade.
2.3 The Scale of Investment Is Small,
and the Areas of Cooperation Tend
to Be Diversified
As shown in Figure 2, although China’s direct
investment in Russia fluctuated greatly from 2010 to
2019, it averaged US$987.2 million per year.
Russia’s direct investment in China is relatively
small, but the overall trend is increasing, with an
annual average of US$380.1 million. In 2019,
China’s investment flow to Russia was negative 379
million U.S. dollars, mainly due to the negative flow
of 1.13 billion U.S. dollars in the mining industry.
From the perspective of investment fields, China’s
investment in Russia is mainly concentrated in
mining, agriculture, forestry, animal husbandry and
fishery, manufacturing, wholesale and retail
industries, while Russian investment in China mainly
includes technology, construction, transportation and
other fields. From the perspective of investment
regions, due to the geographical proximity, Chinese
investment in Russia is mainly distributed in Siberia
and the Far East, while Russian investment in China
is also mainly concentrated in China’s northeastern
region. From the perspective of investment entities,
most of the investment enterprises are small and
medium-sized enterprises. Factors affecting mutual
investment between China and Russia include: the per
capita GDP of the two countries, relevant policies and
regulations, the state of infrastructure such as
transportation and communications between the two
countries, and historical factors. These factors will
also restrict the level and level of the construction of
the Sino-Russian free trade zone. It can be seen Sino-
Russian bilateral investment cooperation has yet to be
deepened, and there is great potential for
development.
Figure 2: 2010-2019 China’s direct investment in Russia and China attracts Russian direct investment flows.
0,34
0,31 0,3
0,22
0,41
0,13
0,73
0,24
0,57
0,54
5,68
7,16
7,85
10,22
6,34
29,61
12,93
15,48
7,3
-3,79
-10
-5
0
5
10
15
20
25
30
35
2010 2011 2012 2013 2014 2015 2016 2017 2018 2019
unit: 100 million U.S. dollars
Russian direct investment flows to China China's direct investment flows to Russia
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3 EMPIRICAL ANALYSIS OF
TRADE EFFECT BASED ON
TRADE GRAVITY MODEL
3.1 Construction of Trade Gravity
Model and Variable Selections
This article selects the data from 2003 to 2019, and
uses the trade gravity model to empirically
demonstrate the influencing factors of Sino-Russian
bilateral trade, which focuses on the analysis of the
impact of tariffs on trade effects.
In the China-Australia FTA, Australia’s tax cut
transition period is 5 years, and there are three ways to
cancel tariffs: one is the 0 category, that is, when the
agreement comes into force, the tariffs on products
originating in China are reduced to 0; the second is the
3 category, which means that the tariffs on products
originating in China will be divided three times and
reduced to zero every year when the agreement comes
into force; The third is the 5 category, that is, when the
agreement comes into force, the tariffs on products
originating in China will be divided into five times and
will be reduced to zero in equal proportions every
year. According to relevant simulation analysis and
prediction, the China-Australia FTA will increase
China’s GDP by 0.33%, exports by 0.53%, and
imports by 0.51% within 5 years from the entry into
force of the agreement. (Zhao, 2019) Therefore, it is
expected that during the construction and subsequent
development of the China-Russia Free Trade Area, the
gradual reduction of tariffs will promote the
continuous growth of Sino-Russian bilateral trade.
In this paper, based on the trade gravity model, the
expression of the trade effect between China and
Russia is as follows:
ln (Y

)=α

+ α

ln (GDP

)+α

ln (T

)+α

ln (R

)+
α

ln (FDI

)+ξ

(1)
Among them, the dependent variable is the total
bilateral trade Y

between China and Russia, and t
represents the year. The independent variables are the
sum of GDP

of China and Russia, the average import
tariff T

of the two countries, the average exchange
rate of RMB to ruble R

, and the sum of the two-way
direct investment FDI

between China and Russia. ξ

is the random error term.
In order to ensure the validity of the estimated
value and regression, after the unit root test of the
variables, they are all stable time series, so the
phenomenon of “false regression” in the model can be
avoided. The following uses Stata 14 measurement
tool to perform least squares regression calculation. In
the first regression, the explanatory variable ln (FDI

)
is expected to have the same sign, but the significance
is not high, so it is deleted. (Huang, 2020) The results
of the second regression are shown in Table 4.
The regression equation obtained from Table 4 is:
ln(Y

)=−2.13 + 1.01ln (GDP

) − 0.79ln(T

) −
0.98ln(R

) (2)
This shows that in the regression results, the
coefficient signs of the explanatory variables are
consistent with the expected results. In addition, R
_
2
=
0.9830, indicating that the goodness of fit of the
equation is high, F = 310.20, and the P value of the F
statistic is 0.0000 <0.01, indicating that the overall
effect of the equation is significant. In summary, this
regression is generally established and effective.
Table 1: Explanatory variables expected symbols, theoretical analysis and data sources.
Independent
variable
Expected
s
y
mbol
Theoretical analysis Data Sources
GDP +
GDP reflects the supply and demand capacity of both sides.
The higher the GDP, the greater the bilateral trade volume.
World Bank
T -
The high level of tariffs will restrict the development of trade,
and the reduction or exemption of tariffs will promote the
growth of bilateral trade.
World bank WITS
atabase
R -
Changes in the exchange rate level between the two countries
have a certain impact on the volume of bilateral trade.
China Statistical
Yearbook
FDI +
Foreign direct investment promotes the development of
bilateral trade. The greater the investment, the greater the
bilateral trade.
Statistical Bulletin
of China’s Outward
Direct Investment
An Empirical Analysis of the Trade Effect of the Construction of the Sino-Russian Free Trade Area Based on the Trade Gravity Model
267

Table 2: The Regression Results of the Total Volume of Sino-Russian Bilateral Trade and Its Influencing Factors.
3.2 Empirical Regression Analysis
First, the GDP growth of China and Russia has a
significant boost to the bilateral trade volume. When
the total gross domestic product of the two countries
increases by 1%, the bilateral trade volume will
increase by 1.01%. Second, changes in the exchange
rate level between the two countries will have a certain
impact on the volume of bilateral trade. When the
average exchange rate of RMB to ruble increases by
1%, the bilateral trade volume will decrease by 0.98%.
Third, the reduction or exemption of tariffs between
the two countries will have a positive effect on the
growth of bilateral trade. When the average import
tariff level of the two countries is reduced by 1%, the
bilateral trade volume will increase by 0.79%. On the
whole, with the in-depth development of economic
and trade cooperation between the two countries, the
positive effects of the establishment of a free trade
zone will be further expanded.
4 CONCLUSION AND
SUGGESTION
Factors affecting Sino-Russian economic and trade
cooperation include: the level of economic
development of both sides, exchange rates, tariff
levels, relevant policies and regulations,
infrastructure, and historical factors. However, the
continued growth of trade and investment between the
two countries, and the complementary advantages of
natural resources, human resources, industrial
structure, and commodity trade structure have shown
a good foundation for cooperation, making the
construction of a free trade zone highly feasible. At the
same time, the establishment of the China-Russia Free
Trade Area will further promote the in-depth
development of bilateral economic and trade
cooperation. The construction of the China-Russia
Free Trade Area can refer to the China-Korea Free
Trade Area and the China-Australia Free Trade Area,
formulate a reasonable transition period for tax
reduction, optimize the trade structure, and then
increase the level of trade and develop the trade
potential between the two countries. The relevant
countermeasures are as follows:
4.1 Optimize The Sino-Russian
Bilateral Trade Structure
Products with low value-added dominate the trade
structure between China and Russia, such as labor-
intensive manufactured products and energy primary
products. These products have low technological
content and lack of core competitiveness, thus forming
a single trade structure and a lower level of trade,
restricting the in-depth development of bilateral trade
cooperation. Therefore, the two countries should
strengthen cooperation in science and technology, use
technology transfer, technology licensing and other
forms to promote the flow of factors such as
technology, management, and talents, and increase the
added value of commodities in bilateral trade, so as to
achieve greater benefits. Russia has a good scientific
and technological foundation in the fields of
aerospace, metallurgy, and chemical industry. After
the reform and opening up, China has made significant
progress in technological innovation and research and
development capabilities, and has great potential for
cooperation with Russia in the fields of
communications, aerospace, electromechanical
manufacturing, and building materials. The two
countries can expand new cooperation space in the
fields of infrastructure construction and aerospace.
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China can strengthen cooperation in production
capacity through contracted projects and labor export,
and at the same time strengthen cooperation in science
and technology through technology trade and R&D
cooperation. This can accelerate the transformation
and upgrading of Sino-Russian trade, improve quality
and efficiency, and optimize the bilateral trade
structure, thereby improving the level and level of the
construction of the Sino-Russian free trade area.
4.2 Promote the Growth of Sino-
Russian Two-Way Investment
The small scale of mutual direct investment between
China and Russia limits the breadth and depth of
bilateral economic and trade cooperation. Under the
strategic opportunity of docking cooperation between
the “Silk Road Economic Belt” and the “Eurasian
Economic Union”, the two countries should increase
two-way investment, promote the development of
large projects, expand investment areas, and carry out
deeper cooperation. In particular, it is necessary to
strengthen investment in the field of service trade. At
present, the level of service trade between China and
Russia lags far behind the goods trade between the two
countries, and service trade not only has the
advantages of environmental protection and high
added value, but also serves the goods trade and can
improve trade efficiency and facilitation.
In terms of transportation, facing the pressure of
poor infrastructure and interconnection between the
two countries and the increasing volume of Sino-
Russian cargo transactions, the two sides should
vigorously develop bilateral cooperation in the
logistics industry, shorten the time of cargo
transportation, and improve transportation efficiency.
In terms of transportation, facing the pressure of poor
infrastructure and interconnection between the two
countries and the increasing volume of Sino-Russian
cargo transactions, the two sides should vigorously
develop bilateral cooperation in the logistics industry,
shorten the time of cargo transportation, and improve
transportation efficiency. In terms of payment
settlement, the two parties should deepen cooperation
in finance, insurance, consulting and other industries,
further standardize bank settlement, and reduce the
import and export risks of bilateral enterprises. In
terms of investment consulting, there are situations in
which Chinese and Russian companies have
incomplete and inadequate understanding of each
other’s market information. Intermediary agencies
with high authority are needed to provide investors
with information on the other party’s investment
environment and government policies.
4.3 Extend the Transition Period for
Tax Cuts
In the China-Russia FTA tariff reduction plan
officially implemented in July 2017, the two countries
implemented tariff reduction plans for approximately
7,000 tax items, laying a good foundation for further
tax reduction arrangements between the two countries.
Judging from the current trade structure between the
two countries, among China’s exports to Russia, food,
ceramics, mechanical and electrical products, and
transportation equipment have obvious market
competitive advantages. However, among Russia’s
exports to China, the competitiveness of Russia’s
exports is relatively weak, and Russia’s status in
China’s import trading partners continues to decline.
The overall and rapid reduction of tariff rates will
reduce the income effect brought by Russia to Russia
more than the reduction brought to China, which
shows that China-Russia negotiations on tariff
concessions are still facing inevitable resistance.
Therefore, both parties need to appropriately extend
the transition period of tax reduction, which can refer
to the tax reduction arrangements of China-Australia
and China-Korea FTA.
Based on the comparison of the strengths and
weaknesses of their own products between China and
Russia, trade commodities are divided into general
commodities, sensitive commodities and highly
sensitive commodities to determine different tariff
rates. For general goods, tariffs can be reduced
significantly in a relatively short period of time; for
sensitive goods, tariffs can be reduced in equal
proportions every year within 5 years; for highly
sensitive goods, the existing tariff rates can be
maintained, and then tariffs can be reduced in a timely
manner by dynamic classification. In this process,
China can appropriately relax tariff restrictions on
superior products and reach a list of tariff concessions
within the scope of commodities acceptable to Russia.
After that, gradually expand the range of goods
subject to tariff reduction. For sensitive areas in the
longer transition period, the two sides will gradually
release the agreement according to the effective time
of the agreement. Finally, the overall tariff level will
be reduced to 5% within 10 years.
4.4 Innovative Trade Policy System
In Due to the differences in economic scale and
industrial structure between China and Russia, the
negotiation process of the free trade agreement will be
relatively slow. However, the mutual political trust
between the two countries, the continuous growth of
An Empirical Analysis of the Trade Effect of the Construction of the Sino-Russian Free Trade Area Based on the Trade Gravity Model
269

bilateral trade and investment, and other
complementary advantages have laid a realistic
foundation for the construction of the free trade zone.
In the negotiation process, it is necessary to learn from
the experience of establishing a free trade area
between China and RCEP member states, but also to
conform to the specific conditions of the construction
of a Sino-Russian free trade area. The main topics of
the free trade agreement are related arrangements such
as trade in goods, trade in services, and investment
liberalization. In the free trade agreement negotiations
between China, Vietnam, Singapore and other
countries, trade in goods is the main topic. The
determination of the main topic is related to the trade
structure of the two countries. Therefore, in the
negotiation of the China-Russia Free Trade
Agreement, the subject of the agreement can be
determined as trade in goods, and the tariff concession
list will be included as an annex to the agreement. In
terms of service trade and investment, China and
Singapore negotiated separately after the conclusion
of the main agreement and made it a part of the free
trade agreement. Taking into account that the
development of service trade and investment between
China and Russia is not yet mature, the relevant
provisions of service trade and investment can be
stipulated in the free trade agreement first, and then
implemented when the time is ripe.
In addition, a settlement mechanism for Sino-
Russian trade disputes should be established in
advance. In recent years, there have been more and
more trade disputes between China and the United
States, ASEAN countries and other countries. For this
reason, it is necessary for the establishment of a Sino-
Russian free trade zone to formulate an effective plan
to prevent and resolve trade disputes in advance. In
addition, China should also establish a supervisory
mechanism and a preventive mechanism. On the one
hand, we should be familiar with Russian law and
have relevant information, fully understand the
situation of the other party, respond quickly and have
effective evidence when there is a trade dispute, and
strive for the initiative. On the other hand, we should
also establish risk awareness, strengthen self-
prevention, and combine the power of the government
with the power of enterprises to prevent problems
before they occur.
ACKNOWLEDGMENT
This work was supported by the 2020 Harbin
University of Commerce “Young Innovative Talents”
Support Program: Research on the construction of
Sino-Russian FTA based on the perspective of the
“Silk Road Economic Belt” and the “Eurasian
Economic Union” (2020CX34).
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