The Geographical Orientation of Chinese Merchandise Imports. Where do European Exporters stand? A Gravity Model Approach Based on Panel Data

European trade relations with the PR of China are said to be relatively under-developed. Market shares and trade intensity statistics seem to confirm this view, but they lack an economic explanation. Such an explanation is attempted by developing a so-called gravity model that captures the major determinants of Chinese foreign trade on a bilateral level. Fitted values are taken as a standard to evaluate the relative position of each country in Chinese foreign trade. Taking into account distance and other economic factors, it turns out that Sino-European trade relations are note at all special in the context of Chinese overall trade. Consequently, government trade promotion might rather create market distortions instead of repairing them. Apart from these empirical results, the validity of the gravity model of international trade is discussed. According to recent research, the model does not suffer from a lack of theoretical foundations any more. It seems rather the other way around: several micro-foundations make it difficult to attribute the empirical success of our model to a specific economic theory. Estimation problems are solved with a new econometric approach, i.e. the estimation of a gravity model on panel data. A fixed effects model is developed and estimated according to the instrumental variable techniques proposed by Hausman/Taylor (1981) and Amemiya/MaCurdy (1986). Since these estimators are not available in standard econometrics software, we had to write our own programs under LIMPED. The new estimation procedure offers several advantages, such as higher efficiency, integration of the temporal dimension, less risks of multicollinearity, etc.