# **1. Introduction**

The Belt and Road Initiative (BRI) or One Belt One Road (OBOR) initiative was announced in the Fall of 2013 by President Xi Jinping of the People’s Republic of China (PRC). The President invoked the ancient Silk Road announcing the plans to bring Asia, Europe, Africa, and the Middle East closer together by constructing investment and trade networks and creating new institutional linkages. The BRI could promote trade, more efficient resource reallocation and strengthen economic growth across the region. It could also encourage countries to coordinate economic policy and improve regional collaboration. The goals of our analysis are to i) study the impacts of infrastructure improvements on BRI and non-BRI countries’ trade flows, growth and poverty; and ii) suggest policies that would help maximize gains from the BRI-induced trade cost declines.

To our best knowledge, there are only a few CGE-based studies on the impacts of the BRI. Fan Zhai (2017) uses estimates of elasticity of trade costs with respect to quality of infrastructure and per capita income to estimate the future reductions of trade costs due to BRI. He applies those estimates in a dynamic global CGE model and finds that BRI might bring important benefits to its members and beyond. With moderate assumptions on BRI investment, the simulation results indicate a global welfare gain of 1.3% of global GDP by 2030 with a boost to global trade by 5%. The vast majority of gains applies to BRI countries. Villafuerte, Corong, and Zhuang (2016) assume that BRI leads to a 25% reduction in road transport margins and 5% in sea transport margins, as well as a significant reduction in time to import by BRI countries due to the accompanying trade facilitation measures. The authors estimate that BRI GDP growth rates could increase by 0.1-0.7 percentage points, while total exports of BRI countries could increase by between $5 billion and $135 billion depending on the assumptions on trade costs reductions.

Our analysis adds value to the existing research by incorporating the impacts of BRI-related infrastructure improvements based on bilateral trade time reductions from de Soyres et. al. (2018). In addition, while the CGE analysis provides impacts on several economic variables (e.g. trade, employment, economic growth), we also study the impacts on poverty and greenhouse gas emissions. We also assess the role of trade policy reforms in maximizing the gains from BRIinduced infrastructure improvements.

We use the data on “value of time” from de Soyres et. al. (2018), which is based on Hummels and Schaur (2013) original estimates updated with trade flows from 2014. In our BRI simulations, the value of time in trade is adjusted based on the GIS estimates of the impacts of BRI projects on shipment time based on Baniya et. al. (2018). More details on these estimates are provided below.

The findings of this paper rely on the Envisage Model—a global, recursive dynamic computable general equilibrium model. The Envisage Model was initially developed at the World Bank, which continues to use it, though the core development team is now situated in the Center for Global Trade Analysis (GTAP) at Purdue University. More details on the model, the underlying database and the regional and sector dimensions, and the baseline assumptions for this study are provided in Annex A.

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