Cultural Differences and Interprovincial Trade in China: Effect of Surname Distance and its Mechanisms

Abstract

Since the implementation of the ‘reform and open’ policy, China has quickly integrated itself with the world economy. Foreign trade dependence grew from 7.8% at the beginning of the reforms to more than 45% in 2013. 1 However, while China`s international trade has grown continuously since the initiation of the reforms, its domestic trade has remained relatively stagnant. The existence of extensive market segmentation and regional protection has seriously hindered the development of interprovincial trade (Young, 2000; Xing and Li, 2010, 2012). Some studies have even documented the possibility that the current transportation costs of interprovincial Chinese trade are actually higher than the costs of trade between countries within the European Union (Poncet, 2003; Zhang, 2009). It is plausible that the stagnation of interprovincial trade severely limits China`s potential for economic development or at least contributes to unbalanced growth. This is particularly true in circumstances where financial crises in developed countries and other international fluctuations shocks result in weak demand for Chinese products. As a consequence, promoting the integration of China`s domestic markets and encouraging internal trade is of particular importance in the current depressed situation of the world economy. Our research makes a contribution towards understanding the obstacles faced in this endeavor.