Abstract: Considering the differences of regional trade openness, this paper constructs a provincial panel threshold model and conducts an empirical test of the nonlinear comovement relation between China’s fiscal expenditure and trade balance. The results show that the impact of China’s fiscal expenditure on trade balance could present significant threshold characteristics due to the differences of regional trade openness. For such provinces with low trade openness, the impact of fiscal expenditure on trade balance is not significant, and then the Ricardian equivalence hypothesis is established. As for provinces with medium trade openness, fiscal expenditure and trade balance present the“double divergence”effect; the fiscal expenditure expansion could improve trade balance effectively. However, for provinces with higher trade openness, fiscal expenditure and trade balance have a“twin deficits”relation; the fiscal expenditure expansion would lead to worsening trade balance. It also shows that the threshold effects at each region are subject to the fiscal expenditure structure, the impact of transfer expenditure on trade balance is higher than purchase expenditure.

Key words: trade openness; fiscal expenditure; trade balance; threshold effect