Revisiting Border Effect: Evidence from Taobao.com in China

Inherent home bias and trade barriers (particularly local protectionism in China), which are difficult to separate, are two main explanations of border effect. We attempt to solve this problem by analyzing online trade. Different from offline trade, inherent home bias is the only cause of online border effect because local governments are usually unable to restrict online trade. Thus, the difference between the border effect in online and offline trade can be reasonably interpreted as the existence of government protectionism in the offline market. We find a statistically significant difference between online and offline border effects in China, which can be interpreted as strong evidence that policy barriers remain significant and hinder interregional trade.