Trade Liberalization, Market Access, and Firm Productivity

ABSTRACT This study investigates the complementary relationship between trade liberalization, road infrastructure, and firm productivity in China. Leveraging China's unique context—characterized by vast geography and complex supply chains—we examine whether improved domestic market access amplifies the gains from input tariff reductions. To address endogeneity, we construct a novel time‐varying instrument based on historical courier stations from the Ming Dynasty. Our empirical results provide robust evidence that the expansion of expressway networks significantly enhances the positive effects of tariff cuts on firm productivity. Crucially, we uncover a distinct “threshold effect” through spatial heterogeneity analysis: the complementarity is predominantly driven by the Eastern region, consistent with the hypothesis that industrial agglomeration amplifies policy benefits; conversely, insignificant effects in the Western region suggest that a critical mass of industrialization is requisite for infrastructure to unlock trade gains. Mechanistically, unlike findings in smaller economies where cost pass‐through dominates, we show that in China, better roads enable firms to upgrade the variety and quality of intermediate inputs and increase markups. Furthermore, at the aggregate level, this trade‐infrastructure interaction reduces the dispersion of both TFP and markups, thereby improving resource allocation efficiency. These findings underscore that the benefits of global integration are conditional on local structural foundations, highlighting the need for coordinated trade and infrastructure policies.