The Border Effects of Domestic Trade in Transitional China: Local Governments’ Preference and Protectionism

Abstract

Following a two-region border effect model with consumption preference of local governments, this article examines the segmentation of the Chinese domestic market as well as its determinants. Through empirical tests, we find that the average border effect of domestic trade among provinces in China showed an upward trend from 1997–2002 and 2002–2010. The significant difference of border effects between western and eastern areas of China indicate more regional trade barriers in the western areas than in the eastern areas. In addition, compared to agricultural products, there are less trade barriers on industrial products. This partially verifies that there is more trade protection and self-consumption from local government on raw materials. Under the local governments’ preference for regional protection, the higher degree of financial autonomy and larger output share of SOEs will both significantly contribute to the trade barriers among provinces. Local governments’ behavior is the key to understanding the pattern of border effects among provinces.