The Role Of Local Government During The Integration Of Domestic Market In China

Using a gravity model, this paper investigates the border effect among eight main regions and observes local government’s behaviour in domestic market integration of China. The result proposes that the local governments encourage inter-provincial trade particularly of intermediate goods.The empirical results suggested overall regional border effect of7.54times at the national level for total trade volume. It was found that regional supply and demand and intra-industrial trade have positive effects on regional trade volume. Conversely, transportation cost and local government’s protection negatively effects on the dependent variables. Border effects were differing by regions and by industries. The lowest border effect was found in the Central Coastal Region (Shanghai, Jiangsu, and Zhejiang) and Petroleum and Coking industry. The highest border effect was detected in the North Municipalities,(Beijing and Tianjin) and Metal Products industryGovernment protection was found to have positive effect on border effect. Thus one percent increase of protection would lead the border effects to increase by4.34%of total trade volume. It is exposed that the local government protection variable is statistically insignificant for final goods trade while recording statistically significant for intermediate goods.