Trade Liberalisation and Industrial Agglomeration: Evidence From China

ABSTRACT China's manufacturing industries were rather scattered geographically, largely due to the nonmarket forces within its economy. This paper, employing a difference‐in‐difference estimation framework, finds that after China's accession to WTO in 2001, trade liberalisation, that is, import tariff cuts, significantly contributes to the increase in the geographical agglomeration of China's manufacturing industries in the 2000s. This underlying mechanism is well illustrated in a new economic geography model in which trade liberalisation weakens ‘centrifugal’ forces and agglomerates the manufacturing industries. The result passes a battery of robustness checks and is supported by further explorations which find trade liberalisation increases import competition, reduces local protectionism and improves the efficiency of resource allocation. This study provides evidence contrary to the views that protectionist policy is responsible for geographic concentration and that trade liberalisation should lead to a more even distribution of industries. Furthermore, this paper provides another explanation for China's increasing industrial agglomeration and another dimension (i.e., the spatial dimension) via which trade liberalisation affects the country.