Research on the relationship between trade openness and financial development can be broadly divided into three types: the mutual influence between trade openness and financial development, the influence of financial development on trade openness, and the influence of trade openness on financial development. Research on the relationship between the two can be traced back to as early as the 14th century, but there has been no specialized and systematic research after that. It was only after the emergence of financial development theory in the 1970s that the relationship between trade opening and financial development began to be analyzed systematically and deeply. From the end of the 20th century to the present, the research on the relationship between trade openness and financial development has become more specific and refined, and scholars have increasingly begun to focus on the impact of the unidirectional role between trade openness and financial development. In this paper, on the basis of briefly defining the basic concepts of the two, we review and comment on the domestic and foreign research on the relationship between trade opening and financial development.
1 Definition of basic concepts
Financial development refers to the expansion of the relative scale of financial assets or the rise of the share of GDP, accompanied by the improvement of the efficiency of financial institutions and financial markets and the improvement of the function of the financial system, which is a dynamic concept. From a historical perspective, financial development should include:
(1) the unity of quantitative growth and qualitative improvement;
(2) including the innovation of transaction technologies, transaction mechanisms and transaction models used to acquire financial aggregates;
(3) increasing the degree of financial penetration into the economy and promoting economic development by strengthening the degree of coincidence between the financial development model and the economic development model. The higher the degree of financial development, the higher the efficiency of finance will be. Generally speaking, the degree of financial development is a combination of the number, type and sophistication of financial instruments and the number, type and efficiency of financial institutions.
Trade openness refers to the degree of international participation in the flow of production factors, international division of labor and trade exchange when a country engages in foreign trade, and this degree of participation includes various aspects such as the scope of participation, scale of participation and level of participation. Specifically, trade openness includes three aspects: first, the opening of the domestic market at the stage of international division of labor, such as the use of foreign factors of production and products (including manufactured and semi-manufactured goods), the use of foreign capital, technology and R&D; second, the degree of participation of domestic trade in foreign markets, including exports (including both goods and services), foreign investment and technology transfer; third, the opening of trade policies and convergence with regulations of international economic organizations, such as exchange rate policy, convertibility of current account and capital account, restrictions of investment policy, relaxation and elimination of trade barriers, etc.
2 Status of foreign research
In the 1970s, McKinnon (1973) and Shaw (1973) put forward the theories of “financial inhibition” and “financial deepening” by studying the relationship between the financial sector and economic development. They argued that the existence of widespread “financial repression” in developing countries hinders financial development and thus constrains economic growth. Therefore, developing countries should make financial liberalization and financial deepening the core of their development policies. In his study of financial deepening in an open economy, Xiao (1973) specifically addresses the relationship between trade policy and financial development. He argues that financial suppression and trade distortion are mutually influencing and constraining, and both together create a chain of restrictions on economic development. In the case of financial repression, distortions in deposit and loan interest rates and exchange rates cause distortions in the structure of trade and in the allocation of resources between the traded and non-traded sectors; and distorted trade policies in turn impede financial deepening, creating a feedback effect. The instability and unrealism of trade policy can reduce the level of investment in real and financial assets, and financial instruments such as loan rates and credit quotas involved in subsidies in trade policy can also hold back financial development.
The 1990s saw another huge breakthrough in the study of the relationship between trade openness and financial development. With the increasing interdisciplinary cross-sectional research, economists increasingly recognized the role of the financial system in positively influencing trade. kletzer and Bardhan (1987) were the first to note that a country’s financial system can be an advantage for the country to trade, and they introduced financial factors based on the Olin-Heckscher model, confirming that countries with developed credit markets specialize in external Rajan and Zingales (1998) propose the theory of comparative advantage in financial development on this basis: in countries with highly developed financial markets, those industries that are highly dependent on external financing have higher growth rates. beck (2003) argues that if a country is financial development is well developed, it has comparative advantage in sectors with high economies of scale, and these sectors will export products. He uses data for 36 industries in 56 countries to demonstrate that manufactured goods industries that depend on external financing have higher export shares and trade surpluses in countries with higher levels of financial development, and that there is a diversification of trade structures across countries.
While most economists have studied how financial development affects foreign trade, some scholars have focused their research on the one-way impact of trade openness on financial development. Specific studies can be divided into two aspects: the supply perspective and the demand perspective. The main one that explains the trade and finance linkage from the supply perspective is Rajan and Zingales (2003). They argue that existing interests within an economy will try to prevent financial development in order to preserve their own interests, but this willingness is weakened with trade openness and the inflow of international capital. Svaleryd and Vlachos (2002), on the other hand, explain the pathway linking trade to finance from a demand perspective and emphasize the role of trade in risk diversification. They point out that trade openness is inevitably accompanied by various risks, such as international competition and external shocks, which create a new demand for external financing by firms and thus financial markets have evolved as an important tool for risk diversification. Aizenman (2008) develops a theoretical model to study the impact of trade openness on financial liberalization for developing countries that use financial disincentives as an indirect taxation tool, arguing that trade openness increases the cost of implementing financial disincentives and thus reduces the effectiveness of using financial disincentives as an indirect taxation tool. This in turn implies that trade liberalization makes the cost of financial control increase, which will eventually lead to financial reform.Kim, Lin, and Suen (2010) estimate PMG on a panel error correction model based on panel data for 88 countries from 1960-2005, and the results show that trade openness has a positive effect on financial development in the long run, while the effect is negative in the short run; in This finding is confirmed only in the high inflation and low per capita income groups when estimating countries in groups based on inflation and per capita income.
3 Status of domestic research
Domestic research on the relationship between trade openness and financial development has started late, and the depth and breadth of research needs to be further expanded. In line with the international research direction, most of the domestic studies start from the theory of comparative advantage of financial development and study the influence of financial development on trade opening, and there are fewer studies involving the influence of trade opening on financial development and the mutual influence between trade opening and financial development. Moreover, the existing domestic research results are mostly macro-level empirical tests using relevant economic data in China, while theoretical studies and empirical tests combining commodity markets and capital markets at the micro-vendor level are fewer.
On the study of financial development affecting trade opening, Hu Yan (2003) explores the association between banking and stock market development and the structure of export commodities based on the current situation of structural change of comparative advantage in China, and argues that, considering only the difference in the level of financial sector, the increase in the level of financial development will lead to the increase in the level of exports of capital-intensive industries, so that the comparative advantage on labor-intensive industries will gradually shift, which can This will lead to the optimization and upgrading of trade structure. Sun Zhaobin (2004) analyzes the characteristics of China’s low export commodity structure and examines its relationship with the real financial development, arguing that financial development will promote a country’s capital accumulation and technological progress, which will provide the material basis and technological support for the structural change of a country’s comparative advantage and lead to the optimization of the export commodity structure. Qi (2005) argues that countries with higher levels of financial development can more effectively convert capital into investment and promote technological progress, increasing the share of capital- and technology-intensive products in total exports and improving the export trade structure. Li, Bin, and Li (2008) argue that financial development contributes to the optimization of export trade structure in terms of scale, structure, and efficiency. It proves the positive effect of financial development on the optimization of export trade structure. Lin, Ling and Li, Jiangbing (2009) focus on the role of financial reform in promoting export structure optimization and argue that financial development can improve the comparative advantage of exports of capital-intensive and high-tech products and thus contribute to the upgrading of export trade structure.
On the study of trade openness affecting financial development, Liang and Li (2005) conducted cointegration analysis and Granger causality test using China’s quarterly time series data from 1993-2004 and found that trade openness has cointegration relationship with financial intermediation and stock market size indicators, while trade openness is the Granger cause of financial intermediation and stock market size indicators, and the opposite is not hold. Based on cross-provincial panel data from 1981-2004, Xu, Xiong, Deping, and Wang, Haohan (2008) use Granger causality tests with a panel error correction model to confirm the existence of both long- and short-term bi-directional causality between financial development and foreign trade. Shen Neng (2006) similarly investigates the interrelationship between financial development and international trade in China using Geweke decomposition method, and the results show that there is a two-way causality between them. By testing the Geweke decomposition of China’s trade opening and financial development from 1978 to 2007, Zhong Jingjing (2009) points out that among the two-way causality between trade opening and financial development, the effect of trade opening on financial development is dominant, which is consistent with the current situation that China’s financial development lags behind trade. Based on the inter-provincial panel data of China from 1990 to 2007, Yeyue Feng (2009) estimated a fixed-effects model of foreign trade affecting financial development and found that foreign trade can significantly promote the expansion of financial scale, but generally cannot effectively enhance the operational efficiency of the financial sector, while the impact of foreign trade on financial development of each region is different based on the local financial comparative advantage, with the eastern The impact of foreign trade on the financial development of each region is different based on the comparative advantage of local finance, with the eastern coastal region being more significant than the central and western regions.
Throughout the above research literature, we find that there are not many theoretical innovations in China, and the results are highlighted in the empirical aspect. In studying the interrelationship between financial development and foreign trade in China, domestic scholars mainly analyze the long-run equilibrium and short-run dynamics between financial development and international trade based on national time series data, but the time sample data in China is small, which makes the conclusions less credible. At the same time, we also find that previous studies on the interrelationship between the two have mainly started from the perspective of how financial development affects international trade, and few have focused on the impact of trade opening on financial development.
China’s economic and social development has its own characteristics, and the current situation of trade first and finance lagging behind is different from other countries, which requires us to re-examine the interrelationship between financial development and trade opening on the basis of China’s national conditions. Therefore, whether the interaction between China’s financial development and trade opening has been formed, or how to make the two form a positive interaction, will be the focus of future research.