Trade Liberalization and Trade and Capital Flows: Evidence from China Pilot Free Trade Zones

Abstract

China established several Pilot Free Trade Zone (PFTZ) in recent years as a major step to deepen trade liberalization. In this paper, we investigate the impact of FTZs on the economy’s capital flow, imports and exports, as well as the underlying mechanisms. We consider the newly established FTZ as a natural experiment, manipulate with the respective establishment dates of the FTZs, and construct a difference-in-difference (DID) model. Our results show that FTZ does promote local foreign direct investment (FDI) and outward foreign direct investment (OFDI), but its influence on goods exports and imports remain limited.