Trade Costs, Entry Costs, and Regional Economic Growth in China

Zeyi Qian, Kensuke Suzuki and Junfu Zhang ()
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Zeyi Qian: Clark University
Kensuke Suzuki: Clark University
Junfu Zhang: Clark University

No 18507, IZA Discussion Papers from IZA Network @ LISER

Abstract: This paper examines sectoral growth patterns across Chinese provinces during the country's economic takeoff in the early 2000s, following major policy reforms including trade liberalization, infrastructure expansion, business climate improvements, and relaxed rural-to-urban migration restrictions. We develop a multi-sector, multi-region spatial general equilibrium model with heterogeneous firms á la Melitz-Chaney to analyze how these reforms interacted to shape regional economic growth. We quantify the model for the Chinese economy and conduct counterfactuals to identify the key mechanisms driving regional development. We find that reductions in trade costs and lowered entry barriers facilitate firm entry and intensify competition. Together, these factors shape regional specialization and China's overall economic growth. Our decomposition exercises reveal that lowered business entry costs played a larger role than the reduction in trade costs in promoting the growth of real wages, especially in inland provinces. This operates through a selection effect, where more productive firms expand and force the least productive ones to exit, and through increased variety, which effectively lowers the price index.

Keywords: regional economic growth; trade costs; entry costs; Melitz-Chaney model; China's manufacturing (search for similar items in EconPapers)
JEL-codes: F12 L60 R12 (search for similar items in EconPapers)
Date: 2026-03
New Economics Papers: this item is included in nep-cna, nep-geo, nep-sea and nep-uep
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