A Study of Trade Efficiency and Potentials between Jiangsu Province and the Countries along the Belt and Road Initiative

This paper applies Stochastic Frontier Analysis (SFA) to a broad data set for selected 48 countries along the Belt and Road from 2002 to 2017, and analyzes foreign trade potential and trade efficiency between Jiangsu Province and countries along the Belt and Road. The empirical analysis shows that trade efficiency of Jiangsu Province has been improved gradually year by year in general. From the view of natural factors, the research identifies market size, establishment of diplomatic relation and the bilateral geographical distance between Jiangsu Province and countries can stimulate Jiangsu Province’s foreign trade respectively. From the perspective of human factors, one-step model discovers that government efficiency, political stability and investment freedom are crucial to improving trade efficiency. However, financial freedom and the current situation of transportation infrastructures will aggregate inefficiencies to some extent. Based on these findings, the paper proposes how to expand foreign trade and improve trade efficiency between Jiangsu Province relative to countries the Belt and Road Initiative.


Introduction
Jiangsu Province boasted an outstanding performance in 2017 and has successfully become the second province after Guangdong province to surpass 4 trillion yuan in total imports and exports. As a crucial intersection in terms of the Belt and Road Initiative, Jiangsu Province has actively invested in the Belt and Road construction and comprehensively deepened economic and trade cooperation with these countries with exports increasing from $5.574 billion in 2002 to $87.191 billion in 2017, at an average annual growth rate of 91.52%, accounting for the total exports of Jiangsu Province in the same period from 11.03% to 24.01%. It can be seen that, thanks to the strategy of the Belt and Road, the total value and share of Jiangsu Province's exports to those countries have both increased dramatically. However, the vast majority of trading partners along the Belt and Road are developing countries or emerging economies with different national conditions and backgrounds. Additionally, China's economy is under new downward pressure. Against all these factors, it is worth to explore whether Jiangsu Province can maintain and improve its exports to the Belt and Road countries. As an important indicator to measure performance of a country's foreign trade, trade efficiency and potentials are crucial to exploring the dynamics and development trends of Jiangsu Province.
Since the launch of the Belt and Road Initiative in 2013, academic researchers conduct a series of qualitative and quantitative analysis mainly on the background and significance of this proposal, strategic ideas and trading strategies, trade structure and competitiveness of partner economies along the route (e.g. Lin, 2017;Hu, Ma, & Yan, 2014;Sheng & Li, 2016;Pei et al., 2015). With continuous deepening of research in these fields, issues of trade potentials and trade efficiency attract more and more attention. Early gravity model is widely used to probe trade efficiency and potentials due to its simplicities (e.g. Sheng & Miao, 2004;Tang, Shao, Li, & Wang, 2018;Chen & Chen, 2018;Kong & Dong, 2015).
However, such a conventional framework usually classifies unpredictable resistance factors into disturbance residual terms, which leads to biased estimation (Battese & Coelli, 1992). Nowadays, stochastic frontier model comes to the spotlight and becomes the mainstream model since it owns two error terms, one to account for trade efficiency and the other to explain other factors in trade variables.
Literature using stochastic frontier models can be broadly divided into two categories. On one hand, scholars conduct quantitative analysis using time-invariant and time-varying stochastic frontier models from perspective of national perspective, and find that exports efficiency between China and countries along the line increases with time, and trade potential is growing (e.g. Zhang & Yin, 2018;Sun & Liu, 2016). There also exist some scholars who focus on bilateral trade or trade among some certain countries or regions (e.g. Liu et al., 2018;Huang & Gong, 2014;Tan & Zhou, 2015;Chen & Li, 2019;Hou & Deng, 2017). On the other hand, scholars estimate exports potentials of specific industries based on industry perspectives (e.g. Li & Lyu, 2019;Deng et al., 2019;Chang, Wang, & Han, 2018;Zhang & Zeng, 2017).
All in all, scholars conduct both theoretical and empirical researches and study trade development between China and countries along the Belt and Road from different perspectives. The data are basically based on the national level, and less research is done on the provincial level. As a major trade and manufacturing

Current Situation of Trade Cooperation between Jiangsu
Province and the Belt and Road Countries   PGDPD are the per capita GDP of exporting and importing countries, which represent the level of economic development and consumption. The higher the economic level, the stronger the production capacity or purchasing power, the ability to use its comparative advantages to provide more products or create a huge consumer market, the impact is expected to be positive; 2) What are the factors determining trade efficiency? To further analyze factors of influencing trade inefficiency, scholars generally adopt a two-step method or a one-step method. Considering inconsistencies in the assumptions of the two-step model, we adopt the one-step method and incorporate exogenous factors such as government effectiveness and investment freedom into inefficiency terms as follows: Expected coefficients are negative.

Data Availability
Considering the availability of data and the current status of trade between Jiangsu Province and countries along the Belt and Road, 48 representative countries are selected. In 2017, Jiangsu Province exports to these sample countries accounted for more than 65 percent of its total exports, which proves selected samples are persuasive and representative.

Model Setting Test and Analysis
Before the regression, we apply maximum likelihood estimation in order to distinguish the set forms of stochastic frontier gravity model and one-step model based on Stata14.0 software.
The test results of likelihood ratio test (see Table 1) show that trade non-efficiency term does exist and varies with time, time-varying model is appropriate in our study. Accept the null hypothesis that boundary variables should not be introduced, maybe common boundaries do not promote export trade due to the development of transportation. The null hypothesis that the duration of diplomatic relations should not be included is refused. In fact, this variable reflects that close exchanges between trading partners, and diplomatic relationship is conducive to promoting foreign trade. According to test results, it can be known that trade inefficiency exists and all models are set correctly. According to above tests, the final setting form of the model is as follows: (3)

Analysis of Results of Stochastic Frontier Gravity Model
Based on results of applicability test, this paper uses a time-varying stochastic frontier gravity model to conduct an empirical analysis of current state of foreign trade between Jiangsu Province and 48 sample countries from 2002 to 2017. In order to compare the robustness of results, we also lists the results of mixed regression models, real fixed effect models, real random effect models, and time-invariant models in subsequent.
In time-varying model and time-invariant model, the values of γ are 0.843 and 0.923 respectively (see Table 2), which are close to 1, indicating that the gap between the actual bilateral trade flows and potentials is mainly caused by trade inefficiencies. The results of η in the time-varying model is significantly positive, indicating that trade efficiency between Jiangsu Province and the countries along the route has continued to increase over time.

Analysis of Results of One-Step Model
In order to further verify the applicability of non-efficiency models, in this section, Table 2. Empirical results of stochastic frontier gravity model.  The above regression results (see Table 3

Analysis of Trade Efficiency and Potentials from National Perspective
Trade efficiency index reflects the extent to which trade potential is realized. Based on regression results above, two sets of trade efficiency values can be Open Journal of Social Sciences   Jiangsu has the highest export efficiency to Malaysia (0.94), followed by the Czech Republic (0.92), Cyprus (0.91) and Slovenia (0.90). The export efficiency to Bosnia and Herzegovina is the lowest (0.10), and the gap between the highest value and the lowest value is significant (see Table 4). According to the ranking above, the export efficiency of Jiangsu Province to the top 27 countries is above the average. Among those countries, there are 6 southeast Asian countries, 2 south Asian countries, 9 central and eastern European countries and 10 west Asian countries. The data show Jiangsu Province boasts huge exports and high

Analysis of Trade Efficiency and Potentials from Regional Perspective
Considering that trade situations of countries in different regions along the Belt and Road are quite different, we calculate average values of trade efficiency and trade potential index of each region in each year, so as to make further dynamic and regional analysis. countries in Central and Eastern Europe, 13 countries in Western Asia, 7 countries in the CIS, and 5 countries in South Asia are all "enormous" (see Table 5), This shows that whether it is a Southeast Asian country with close trade ties with Jiangsu Province, or a CIS country whose trade efficiency needs to be improved, Jiangsu's trade potentials with these countries has not been fully realized.
According to the above analysis, it can be found that inefficient factors of trade have largely restricted foreign efficiency between Jiangsu Province and countries along the Belt and Road, and negative effects of trade barriers cannot be ignored. At the same time, there is still much room to expand trade between Jiangsu Province and countries along the Belt and Road. We can continue to carry out cooperation in various fields and take positive measures to strengthen bilateral trade with countries along the Belt and Road.

Main Conclusions
First of all, we collect trade data between Jiangsu Province and 48 countries Jiangsu Province has the highest export efficiency with Malaysia (0.94), followed by the Czech republic, Cyprus and Slovenia (0.10), and the lowest export efficiency to Bosnia and Herzegovina (0.10), with a significant gap between the highest and lowest values. From regional perspective, Jiangsu Province has closer trade relations with West Asia, East Asia, and Southeast Asia, and it is necessary to further strengthen trade cooperation with the CIS. In general, trade efficiency between Jiangsu Province and 9 countries in East and Southeast Asia, 13 countries in Central and Eastern Europe, 13 countries in Western Asia, 7 countries in the CIS, and 5 countries in South Asia all have great great potential, and there is room for trade potentials.

Political Advice
Jiangsu Province's foreign trade depends on economic development and market size, so relevant government organizations can introduce relevant measures to enhance its export capacity and highlight its advantage. At the same time, the government ought to provide convenient services and support for enterprises and work with them to create a business environment conducive to foreign trade, and help enterprises better and faster "go global".
Factors such as good investment environment and governmental effectiveness can help inhibit trade inefficiency and reduce fluctuations. Jiangsu Province ought to implement tax preferential policies and simplify fiscal and taxation procedures at multiple levels, reduce costs and increase efficiency, increase attractiveness of project construction and investment, and strengthen financial co-operations with countries along the route. At the same time, export companies must also have a sense of crisis and guard against financial risks. The variables measuring infrastructure are not crucial to trade efficiency based on these regressions, which reflects countries along the route need to further improve their national infrastructure. In order to increase exports to countries along the route, Jiangsu Province can use its role as a major economic province to participate in infrastructure construction projects of the countries along the route to facilitate unimpeded trade, with a view to reducing trade costs, enhancing trade efficiency of Jiangsu Province to the countries along the route, and increasing trade potentials.