The Effect of Trade Opennes on Government Size: An Econometric Investigation for China

In the process of globalization, many countries that have removed the barriers to international trade have increased the level of openness of their foreign trade. The increase in the level of trade openness has made countries more open to risks arising from the international system. This situation has revealed the possibility of affecting the size of the public sector. China has gradually increased foreign direct investments within the scope of the open-door policy that it has started to implement since the end of the 1970s. Since the 1990s, it has liberalized its trade and carried its share in world trade to the top. The main problematic of this study is how the size of the public sector was affected by this development in China, which significantly increased the level of trade openness while transitioning from a socialist model to a socialist market economy. For this purpose, annual data on trade openness and public sector size for the period 1990-2021 were used in the study. A long-term relationship was found between the variables in the examination made with the help of the Banerjee et al. (2017) fourier ADL cointegration test. According to Hacker & Hatemi-J (2012) causality test results, one-way causality was determined from trade openness to public sector size. As a result of the findings, it was concluded that trade openness increased the size of the public sector in China and the compensation hypothesis was valid.