Trade Efficiency, Cross-Border Integration, and Regional Barriers in Northeast China

Abstract

The Northeast region has struggled to restructure and modernize its economy during China’s transformation into a global power, missing the opportunity to benefit from foreign trade and investment. This paper explores the trade patterns of the region’s three provinces vis-à-vis their main trading partners over the period 1992-2018. In particular, we quantify the barriers to trade employing a gravity model specification and trace changes across time and regions. Furthermore, we use a stochastic frontier approach to calculate a measure of the trade potential that serves as a benchmark in assessing the trade performance of Northeast China’s provinces. The results show that the region exhibits high trade costs that amount to ad-valorem tariffs ranging between 75% and 100%. The analysis also indicates that the region’s trade performance is only 40% to 55% of its potential level. The relatively high levels of inefficiency extend even to trade with the rest of China and have increased over time.

KEYWORDS:

• Trade
• trade inefficiency
• border effects
• regional integration
• China

Acknowledgments

The author would like to thank Mary-Françoise Renard and the participants of the 12^th International Conference on the Chinese Economy organized by CERDI-IDREC in Clermont-Ferrand for their helpful comments and suggestions.

Disclosure statement

No potential competing interest was reported by the authors.

Data sharing statement

The data that support the findings of this study are available from the corresponding author upon reasonable request.

Notes

1 An added advantage of PPML is that it can handle zero trade flows, unlike the log-linearized model.

2 For robustness purposes, we also estimate a specification where the error term follows an exponential distribution.

3 Data on trade by country for Jilin is available only from 2006 onwards.

4 The gross value of output includes agriculture, mining and quarrying, manufacturing, and construction but excludes any services. GDP is not suitable in this case because it is based on value added and contains services.

5 For North Korea, we use total GDP as a proxy due to lack of data. Moreover, when calculating the border effects using Eq. (4), we drop Hong Kong and Singapore from the sample because their values for intranational trade are negative, which is expected given their small size and their position as entrepot and major trading hub, respectively.

6 South Korea is for all trading purposes a quasi-island due to the lack of transportation links across the north of the Korean peninsula.