Bilateral Trade Between China And GCC Countries Perusal Through Gravity Model

The purpose of this research is to design some clear determinants of bilateral trade between China and GCC countries. In 1990, North put forward gravity model which applies Maswana’s approach (2005) to explain the bilateral trade between China and GCC countries. The study used Panel data structure to estimate the independent variables of gravity model for trade between China and its six trading partners from GCC countries during the period of 23 years. It mainly determined the series of variables in our gravity regression model are stationary in time series. Therefore, this study uses three different panel unit root tests which including LLC (2002), IPS (2003), and MW (1999) to estimate suitable gravity model for trade in the integration of individual and time series. All unit root tests used maximum lag length of 4, which is based on Schwarz’Bayesian Information Criterion (SIC). There are two models estimated for each unit root test, the first model including individual intercept, and the second put individual intercept and trend variables into the unit root regression model. We used the Pedroni co-integration test to test the correlation variables in our gravity model.We employed the Hausman test to test the fixed and random effect in the model. The random effect model is appropriate for our gravity model based on null hypothesis and the alternative fixed effect model is suitable for this model. Throughing Hausman test, the estimated gravity model used random effect model to determine the suitable fixed effect model. The GDP is the representative of the scale of economic. The larger economic scale these countries have, they have better capability to promote bilateral trade. The coefficients of market size which represent the market scale of China and its trading partners is found to be statistically significant. The market scale is remarkable associated with population variable in our equation. The estimated coefficient of population implied that 1% rise in the level of market size in China and trading partners leads to 0.36% on average increase in bilateral trade volume between them. The random effect model suggests that the coefficient of real exchange is statistically significant and has negative effect in the bilateral trade between China and its trading partners. The last independent variable of our gravity model is distance, which is found to be statistically significant and negatively affect the bilateral trade. In addition, we conducted diagnostic test. The goodness of fit of the random effect model which is measured by R-Squared shows that the 96% variation in the bilateral trade between China and GCC Countries is explained by the variables in our gravity model which including GDP, Population, Exchange rate and Distance. We also use serial correlation test to find whether there exists autocorrelation problem in the panel and time series data or not. The LM test for autocorrelation fails to reject the null hypothesis of no autocorrelation and concludes that the panel and time series data has no autocorrelation. The first major contribution of this study is to explore the trade patterns between China and GCC countries and to find if there has any country in GCC can be connected with the economy of China. The second contribution is to study the trade determinants of China and GCC and try to put forward a better theoretical analysis on the purpose of explain trade determinants between GCC and China based on gravity model.