Trade openness, market integration and economic growth: Evidence from China

Despite the resilience of China's economic growth, the regional disparity between the North and South has become increasingly apparent. The “new economic geography” theory attributes this disparity to trade openness and domestic transportation costs. Based on the aforementioned background, this paper merges the indicators of China's export trade openness, domestic transportation costs, and GDP at the prefecture level. By employing panel data econometric analysis on the merged dataset, the study investigates the impact of export trade openness and domestic transportation costs on the economic disparity between northern and southern regions. The empirical results indicate that the interaction term coefficient is significantly negative, suggesting that higher domestic transportation costs in China diminish the positive effect of export trade openness on regional economic growth. Mechanism analysis indicates that the regional economic growth disparities between the northern and southern regions, driven by the interaction effects of export trade openness and domestic transportation costs, are primarily attributed to “economies of scale” and “industrial linkage effects.” In the extension examination section, this paper empirically analyzes the impact of the interaction between export trade openness and domestic transportation costs on the north-south economic gap from the perspectives of domestic market integration and industry heterogeneity. This paper provides a novel perspective, based on trade openness and domestic transportation costs, to explain the phenomenon of the “east-west” economic gap gradually narrowing and the “north-south” disparity increasingly emerging in China's economic development over the past forty years of reform and opening up.