How Large is the Border Effect between the United States and China?

Abstract

This study examines the border effect on price variation between the United States and China. A unique data set consisting of exchange rate, four different annual consumer price index series, and geographical position data was obtained for 14 metropolitan areas in the United States and 31 regions in China over the period 2004-2015. Three different regression models were employed to examine the border effect between the United States and China, which was shown to be statistically significant by all three. The distance needed to level the cross-border price dispersion was also estimated and revealed a substantial border effect. Further, to exclude the effect of the nominal exchange rate on cross-border price variation, the border effect was tested using the relative-relative price, but a large border effect remained. Finally, China's reform of its exchange rate regime in 2005, its entrance into the World Trade Organization in 2001, and both it and the United States' direct and indirect government interventions during the 2008 financial crisis proved to be possible influences on the border effect between the two countries during the sample period. Contribution/Originality:This study is one of very few studies to investigate the border effect between the United States and China. It reports a statistically significant border effect between these countries. INTRODUCTIONOver the last few decades, there have been numerous studies on whether, and why, different prices for the same product exist in different locations, contrary to the important theory of Law of One Price (LOP). One area on price dispersion that has grown in significance is that of border effect.The reasoning behind border effect is based on the observation that LOP fails when products are traded across borders. LOP suggests that the same product should be charged the same price regardless of where it is sold, which implies that factors such as distance and border play no significant role in the process of product pricing. However, Engel and Rogers' (1996) groundbreaking study found strong evidence of systematic price dispersion between the United States and Canada, while Parsley and Wei (2001) later discovered evidence of the border effect between the United States and Japan.Most border effect studies have depended heavily on data from developed countries to compare the variation in prices between them, and only a few have attempted the same between developing countries. Morshed (2003) Asian Economic and Financial Review

Trade Barriers Between Chinese Regions and Russia

“…Another important factor in the economic development of China's regions is trade and economic interactions with the domestic market (Hong et al, 2019). The critical importance of transnational and interregional interactions for economic dynamics presupposes clarification of the issue of the presence and comparative value of trade barriers in foreign and domestic markets that appear in Chinese regions (Ke, 2015;Wang et al, 2019).…”