Addressing Excess Capacity--The Effect of China's FDI in the Iron and Steel Industry in Five Central Asian States: a GTAP-FDI Model Perspective

This paper uses an extended GTAP model which incorporates foreign affiliate sales and foreign direct investment stock (FDI) data to quantify the economy-wide effect of China’s overseas investment in the iron and steel industry under the “One Belt, One Road” initiative. In particular, the paper uses a GTAP-FDI model which makes capital sector specific and allows sector-specific capital to flow across countries. The model is calibrated with a 2011 baseline of 7 regions (China, USA, Kazakhstan, Kyrgyzstan, rest of the three Central Asian states (Tajikistan, Turkmenistan and Uzbekistan). The model simulates the economy-wide/sectoral effects of five Central Asian states unilaterally reduce their investment barriers towards Chinese overseas FDI to their iron and steel industry, by reducing the cost of using capital for Chinese iron and steel firms in their countries by 50 percent. The results indicate that compared to the baseline, Kazakhstan’s welfare increases by $42.8 million. Kyrgyzstan’s welfare would increase by $4.78 million, and the welfare for the other three Central Asian states would increase by $5.28 million. The production of Chinese iron and steel companies in Kazakhstan would increase by 17.2 percent, while overall production in Kazakhstan’s iron and steel industry would increase by 1.73 percent, which is $147 million in value terms. Overall production in Krgyzstan’s iron and steel industry would increase by 0.34 percent; overall production in the other three Central Asian states would increase by 0.38 percent.