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Competition Policy and Trade Barriers: Empirical Evidence from China

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Abstract

This paper examines the impact of competition policy on inter-regional trade barriers among provinces in China. Using data from 28 Chinese provinces for the period 1994–2013, we show that the implementation of competition policy—as measured by a number of indices that we construct—can effectively reduce inter-regional trade barriers. We provide results that are based on both fixed effects and instrumental variables estimators to support the causal nature of the established link. The effect is found to be more salient for provinces with a less corrupt political environment. The results are also shown to be robust across alternative specifications, alternative measures of competition policy, and inter-regional trade barriers.

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Fig. 1

Source: Authors’ calculations

Fig. 2

Source: Authors’ calculations

Fig. 3

Source: Authors’ calculations

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Notes

  1. Bizjak and Coles (1995) argue that the effectiveness of antitrust law enforcement comes from the potential imposition of behavioral constraints, rather than from the threat of a monetary penalty.

  2. As described in Sect. 4.2 of this paper, regional trade barriers are measured by the behavior of prices of similar products across different regions, which can be a consequence of multiple factors and not just administrative trade barriers. This latter factor is one of the most important sources of trade barriers in China.

  3. In particular, China implemented its Anti-Monopoly Law in 2008, which puts great emphasis on promoting competition policy. Thus, evaluating the effectiveness of this effort becomes significantly relevant for policy.

  4. In addition, a growing body of literature provides evidence on trade barriers and discusses their causes and their consequences for the economy. For instance, Li et al. (2003) state that inter-regional protection partly caused the fragmentation of China’s domestic market and that the possible causes of inter-regional protection may be decentralization and international trade protection. Li and Li (2013) show the significant spillover effect of infrastructure investment between firms in neighboring provinces to reduce interprovincial trade barriers.

  5. See Sect. 4.1 for the measurement of competition policy.

  6. The standard practice in the spatial econometrics literature is to assume that geographically closer jurisdictions interact more strongly with each other. To allow for different spatial relations, we use both inverse distance and inverse squared distance as the weights.

  7. As Shleifer and Vishny (1994) show, it is easier for local government officials to have state-owned enterprises create job opportunities and to hire more local people than it is to bribe private firms to do these same actions. With more job opportunities for local people, it is easier for local government officials to be reappointed or even promoted, as the central government is increasingly reliant on the opinion of local people for these decisions.

  8. The People’s Republic of China was founded on October 1, 1949.

  9. Our discussion on measuring trade barriers draws heavily on Ke (2015).  For more-detailed elaborations on the trade barrier indicator, see Chen et al. (2007) and Ke (2015).

  10. These products include: grain; fresh vegetables; beverages, tobacco, and liquor; garments, shoes, and hats; traditional Chinese and Western medicines; newspapers and magazines; stationery and sporting goods; daily use articles; and fuel.

  11. For instance, production processes and prices of agricultural products and manufactured goods are affected by different factors, and the prices of agricultural products tend to be more volatile than the prices of manufactured goods (Ke 2015).

  12. Therefore, the implementation of the Anti–Monopoly Law in China has appeared to be effective in reducing regional trade barriers across the country.

  13. From an administrative standpoint, Mainland China consists of 31 provinces, minority autonomous regions, and provincial-level municipalities. Due to data unavailability for constructing trade barrier indicators, Chongqing, Hainan, and Tibet are not included in the analysis.

  14. In particular, the interaction term between historical privatization of a province and the contemporary share of NSOE in the province is positively associated with the province’s competition policy, which is consistent with our hypothesis that both early privatization and non-state ownership would have positive implications for the emergence of a regulatory environment in a province. Depending on the hypothesized spatial relations, the weighted averages of competition policies in other provinces are associated with the competition policy in the home province in different ways, which may suggest that competition policy can perform either as a strategic substitute or as a strategic complement among provinces.

  15. Recall that the nine products are: grain; fresh vegetables; beverages, tobacco and liquor; garments, shoes and hats; traditional Chinese and Western medicines; newspapers and magazines; stationery and sports goods; daily use articles; and fuel.

  16. These three types of products are under regulation in China, which thus facilitates protection by local governments.

  17. Most corruption indices are cross-national and perception-based (Zhang 2013).

  18. Note that, as an alternative way to address the potential endogeneity concern of corruption, we also use the mean value of corruption to split the full sample into two groups (i.e., “high” corruption versus “low” corruption) and re-estimate specification (1) separately for both subsamples with the use of both OLS and 2SLS estimators. The results are consistent with the extant interaction analysis, where we find a negative and statistically significant coefficient for competition policy in the “low” corruption group and a negative but statistically insignificant coefficient for the same variable in the “high” corruption group. These results are not reported in the text, but they are available upon request.

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Acknowledgements

The authors thank Svetlana Avdasheva, Boris Begovic, Svetlana Golovaneva, Frederic Jenny, William E. Kovacic, Hairong Mu, Eduardo Pontual Ribeiro, Thomas W. Ross, Lawrence J. White, and participants in the Second World Congress on Comparative Economics. The authors are especially grateful to Yannis Katsoulacos and the anonymous referee for many helpful comments and suggestions that have substantially improved the paper. Financial support is acknowledged from the National Natural Science Foundation of China (Nos. 71773129; 71773128; 71533006; 71403276; 71273270), Chang Jiang Scholars Program (No. Q2016037), National Program for Support of Top-notch Young Professionals (No.W02070290), the Fundamental Research Fund for Central Universities and the Research Fund of Renmin University (No. 14XNI006).

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Authors and Affiliations

  1. School of Finance, China Financial Policy Research Center, Renmin University of China, 59 Zhongguancun Street, Beijing, 100872, China

    Yongzheng Liu

  2. Antitrust and Competition Policy Center, Hanqing Institute, National Academy of Development and Strategy, Renmin University of China, 59 Zhongguancun Street, Beijing, 100872, China

    Guangliang Ye

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  1. Yongzheng Liu
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Correspondence to Guangliang Ye.

Appendix

Appendix

See Tables 8 and 9.

Table 8 Composition of the competition policy index
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Table 9 Description of variables and sources
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Liu, Y., Ye, G. Competition Policy and Trade Barriers: Empirical Evidence from China. Rev Ind Organ 54, 193–219 (2019). https://doi.org/10.1007/s11151-018-9634-z

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