Does better regulatory institutions always enhance the productivity effects of services trade liberalization ?

The majority of previous studies have asserted that the high quality of local institutions can improve the productivity effects of trade policies; yet, only a few studies have acknowledged the heterogeneous impact of these institutions. Using data from Chinese manufacturing plants, we examine the moderating effects of regional-level regulations on the effectiveness of national services trade policy. The key findings are threefold: First, as the initial degree of service liberalization advances, the productivity effect of trade liberalization diminishes. Second, opening access to foreign enterprises can substitute for pro-competitive regulatory reform. Regardless of whether the regulatory institutions related to administrative processes, law enforcement, and commercial service have improved, services trade liberalization can have significant productivity effects. Third, in contrast, when regulations to protect for local incumbents impose prohibitive costs for new entrants, the impact of services trade liberalization is highly contingent on local regulatory improvement. The confirmation that trade liberalization can potentially serve as an alternative measure for local regulation reform in Chinese context distinguishes this study from others.