An Empirical Study of China-Australia Bilateral Trade Potential Based on Gravity Model

Based on the use of trade integration index and gravity model, this paper uses the bilateral goods trade data between China and Australia from 2000 to 2019 to analyze the trade status, trade complementarity and trade potential between China and Australia. The results of the study show that the trade scale, trade complementarity and trade potential between China and Australia are constantly expanding. However, from the perspective of trade balance, China has always been in the position of a deficit country, and the deficit is getting larger and larger, especially in terms of primary products. Judging from the trade integration index, China’s trade integration with Australia generally shows an upward trend, indicating that the trade dependence between China and Australia is gradually increasing. Judging from the results of the trade potential analysis, the trade potential between the two countries has not been fully realized, and there is still much room for improvement in bilateral trade relations.

Several areas are one of the free trade agreements that China has signed with the highest level of trade and investment liberalization. It is the first country to make a commitment to China's "negative list" approach in the field of service trade. The signing of a bilateral free trade agreement between large developed economies and the signing of the China-Australia Free Trade Agreement has important demonstration effects on other free trade zones under negotiation and free trade zones under study.
According to the country trade report of the Ministry of Commerce, China has become Australia's largest trading partner for five consecutive years from 2009 to 2014, and Australia's trade status in China has also increased year by year. Therefore, studying the current status of China-Australia bilateral trade development and conducting an empirical analysis on the trade potential of the two countries will help realize the complementary economic advantages of the two countries, promote the in-depth development of bilateral economic and trade relations, smoothly implement the China-Australia bilateral free trade agreement, and accelerate the implementation of the China Free Trade Zone. Strategy to reduce the impact of the US-led TPP and TT 7P strategies on China's economic and trade development.

Literature Review
In recent years, the research on the economic and trade relations between China and Australia has mainly focused on the measurement of the level of intra-industry trade between the two countries, the construction of free trade zones and the trade of agricultural products. The research by Chen (2017) found that the China-Australia intra-industry trade index is low and has a downward trend.
China-Australia intra-industry trade is mainly concentrated on the trade of some industrial manufactured goods. Chi's (2014) research shows that six of the nine China-Australia service trade projects are characterized by intra-industry trade, indicating that the service industry intra-industry trade has an important position in China-Australia service trade. The analysis of Yang et al. (2012) believes that there is obvious economic complementarity between China and Australia. The establishment of a free trade zone will improve the overall welfare of the two countries and the world.
Australia's agriculture and industry will benefit. The benefits of the agricultural sector are greater than those of industry. In terms of sectors, China's profits all come from labor-intensive industrial sectors, while the agricultural sector will be affected to a certain extent. Hong (2017)  Obviously, most of the above studies have analyzed the intra-industry trade between China and Australia, the development of economic and trade relations, and the construction of free trade zones from a macro perspective. Few quantitative analyses of bilateral trade flows between China and Australia, and the focus of this article is to study the Sino-Australian bilateral trade structure and measure its trade potential, which will have great practical significance for promoting the healthy and healthy development of bilateral economic and trade cooperation.  Yu (2018) found that the factor endowment between China and Australia determines the special trade model of the two countries. Australia has a comparative advantage in agricultural and resource-based products while China has a comparative advantage in labor-intensive products.
Comparative advantages are different. The research of Xie and Lai (2017) Wang (2015) used the results of the trade gravity model and fixed effect analysis to believe that the Sino-US agricultural trade is a "potential into a people type". In summary, the gravity model has now become a classic theoretical basis for studying bilateral or multilateral trade. Therefore, based on this model, this paper will also measure and study the potential of bilateral trade between China and Australia.

China-Australia Trade Status
For more than 40 years since the establishment of diplomatic relations between China and Australia, bilateral trade relations and scale have maintained a good momentum of development. This article will analyze China-Australia bilateral trade relations from four aspects: trade scale, trade balance, commodity trade structure and trade deficit.

China-Australia Trade Scale：
According to statistics from the Australian Bureau of Statistics, the bilateral trade volume between Due to the impact of Novel Coronavirus Pneumonia epidemic and the prolongation of the Spring Festival holiday, Chinese import and export market in January and February 2020 decreased significantly. According to Chinese customs data: From January to February 2020, the total value of Chinese imports and exports of goods trade was 4.12 trillion yuan with a decrease of 9.6%. Among them, Chinese goods trade imports were 2.08 trillion yuan, down 2.4%; Chinese goods trade exports were 2.04 trillion yuan, down 15.9%.

China-Australia Trade Structure
Mineral products mainly including metal ores have been the main product of Australian exports to China. In 2019, its export value was 71.39 billion US dollars, accounting for 68.7% of Australian total exports to China. Moreover, the major Australian exports to China are followed by animal products and textiles, which account respectively for 4.0% and 2.4% of Australian total exports to China. As the share of mineral products is close to 70%, the performance of mineral products to China basically determines the overall performance of Australian exports to China. The rapid growth in exports of animal products, textiles and raw materials has further boosted the growth of Australian exports to China.
The import and export trade structure between China and Australia has the following characteristics: (1) Most of China's exports to Australia are capital or technology-intensive products and labor-intensive products. Among them, capital or technology-intensive products increased from US$ 347 million in 1994 to US$ 17.662 billion in 2013. The rate of population growth is fast, and the scale is large; labor-intensive products have increased from 10.87 in 1994 US$ 100 million increased to US$ 18.589 billion in 2013. This trade structure was created because China has abundant labor resources and a vast market space. It can export light industrial products, textiles, mechanical and electrical products and other labor-intensive products to Australia and can also provide high-tech services such as satellite launches.
(2) China's imports from Australia are basically primary products or resource-intensive products. The trade volume increased from US$ 1.884 billion in 1994 to US$ 87.451 billion in 2013 and is mainly concentrated in meat and meat products and dairy and egg products, which is inextricably linked to Australia's developed animal husbandry industry. (

3) The trade complementarity between
China and Australia is relatively strong. The above data shows that China has a comparative advantage in the production of capital or technology-intensive products and labor-intensive products, while Australia has a comparative advantage in the production of resource-intensive products. There is a strong complementarity between the trade products of the two countries Sex. Therefore, the two countries should use their comparative advantages to further expand the scale of trade between China and Australia.
The main commodities Australian imports from China are electromechanical products, textiles, furniture and toys, and miscellaneous products. In 2019, the import value of these products is 33.71 billion US dollars, accounting for 61.2% of Australian total imports from China. In addition to the above products, base metals and products, plastics, rubber, minerals, etc. are the main major commodities imported by Australia from China as well. However, their share in imports only exceeds or approaches 5%. Overall, Australian imports from China have declined slightly, which is in stark contrast to its continued high growth in exports to China.

China-Australia Trade Integration and Complementarity
The trade integration index is usually used to measure the interdependence of the two countries in trade.
The trade integration index refers to the ratio of a country's exports to a trading partner to its total exports, and the ratio of the trading partner's total imports to the world's total imports.
In the above formula, TCIij represents the trade integration index of country i to country j; Xij represents the total export of country i to country j; Xi represents the total export of country i; Mj represents the total import of country j; Mw represents the total import of the world. If the value of In addition, Chi (2014) analyzed the relative HM index and believed that China's dependence on the Australian market is not high, while Australia's dependence on the Chinese market is increasing. If the current trend continues, Australia will become more dependent on China for trade by the end of 2020 than it is for USA. However, China has a certain dependence on Australian iron ore, which is the Australia's number one commodity exported to China.

China-Australia Trade Deficit
On the whole, China has always been on the side of a deficit in Sino-Australian trade, and in recent years China's deficit has shown an increasing trend. Figure 5  Australian mineral products has continued to increase. At the same time, the price of mineral products has risen rapidly, and there has been a so-called "both volume and price" situation, which has led to a faster increase in China's imports to Australia. Taking 2008 as an example, the price of Australian iron ore has increased by more than 95% on average. However, because Australian iron ore has a higher cost performance compared to other countries, and China has a rigid demand for iron ore, our country

Gravity Model Construction and Variable Description
Based on the previous studies of trade gravity models by scholars, the author attempts to establish a gravity model that reflects the bilateral trade flow between China and Australia. Based on the Limmemann (1966) trade gravity model, this article expands the Limmemann model by introducing the virtual variables of UDP per capita in both countries, whether both countries are APEC member countries, and the distance between the two capitals. The trade flow estimation model is: Among them, β ０ , β １ , β ２ , β ３ and β ４ are regression coefficients, and μ ｉｊ is the random error term.
See Table 2 for details about the explained variable, the meaning of the explained variable, the expected symbol, the source of the quantity and the basic statistical information. is more representative, so that the simulation results of the trade potential are relatively accurate (Yu , 2019). Since the number of regression samples is 300 and the time interval is 20 years, the sample data structure of this paper is short panel data.

Analysis of the Bilateral Trade Flow between China and Australia
First, use the econometrics software STATA to perform the general mixed least squares (Pooled OLS) estimation of the above model. As can be seen from the data in the second column of Table 3, the adjusted R2 of the model is 0.7266. All the variables used in the gravity model can explain the changes in the bilateral trade volume between China and 20 sample countries to a degree of 72.66%, that is, the overall model is better. At the same time, since the F statistic is 0.000, the model is significant. In other words, the bilateral trade volume between China and trading partners can be well explained by the trade gravity model. After controlling for other variables, it can be seen that if China's per capita GDP increases by 1%, the bilateral trade volume between China and its trading partners will increase by 1.49%; The bilateral trade volume of trading partner countries will increase by 0.13%. If both China and trading countries are APEC member countries, the bilateral trade volume is 139% higher than that of non-member countries. When the distance between the two countries increases by 1%, the bilateral trade volume will decrease by 0.52%. Obviously, the estimated results of these variables according to the gravity model are consistent with our expectations. Normally, we must decide whether to choose ordinary mixed least squares or random effects model.
According to the above regression results, enter the test command in the STATA software, and the resulting P value is equal to 0.000 (less than 0.05). Therefore, the author chooses a random effect model for regression analysis. The Hausman test usually judges whether to choose a fixed effect model or a random effect model. Also based on the regression equation, the test command is also entered in the STATA software, and the test result obtained shows that the P value is equal to 0.9999 (greater than 0.05), so a random effect model should be selected for regression analysis of the gravity model. In summary, the author finally chose a random effects model to analyze the above estimation equation in an economic sense. The specific results are shown in Table 3. According to the regression results of the random effects model, the following trade gravity equation can be obtained: Obviously, after controlling for other variables, for every 1% increase in China's GDF per capita, the bilateral trade volume between China and trading countries will increase by 1.49%; and for every 1% increase in GDP per capita of trading countries, China's Trade volume will increase by 0.14%.

Estimation of Bilateral Trade Potential between China and Australia
Estimating The results of the calculation of the bilateral trade potential between China and Australia using the random effect model selected above are shown in  Year 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 Trade potential China-Australia trade freedom. The negative impact of the globalization. In addition, from the development of China-Australia bilateral economic and trade relations in recent years, it can be seen that the two sides are facing many disputes on products such as agricultural products, textiles and clothing. Therefore, in order to ensure the realization of the efficient, balanced and fair objectives of the free trade zone, it is necessary for the two countries to refer to the relevant WTO rules and formulate a dispute settlement mechanism for the China-Australia free trade zone in accordance with the principles of conciseness, convenience and pragmatism in order to resolve related issues amicably.

Create a New Situation in China-Australia economic and Trade Cooperation
As the complexity and intensity of China-Australia relations continue to change, it is necessary to strengthen political mutual trust. Not only should the high-level Chinese and Australian governments strengthen exchanges, but also the importance of business and private exchanges is becoming increasingly prominent. Strengthening the two-way exchanges between the official, business and ordinary people between China and Australia is conducive to promoting understanding between China and Australia and helping to eliminate misunderstandings, prejudices and estrangements between each other. 2014 coincided with China as the host country of the APEL meeting and Australia as the G20 chair. Both China and Australia should seize historical opportunities, make full use of these two internationally influential exchange platforms, carry out closer Sino-Australian economic and trade cooperation, and create a new situation in China-Australia cooperation through various forms such as tourism and cultural exchanges.