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Environmental regulation (ER) and local protectionism (LP) are important policy tools for Chinese local governments to improve the environment and promote growth, respectively, but we know little about their interplay in dealing with pollution-intensive industries and enterprises. Using spatial correlation analysis and spatial panel simultaneous equations models, we investigated the spatial characteristics and interactions of the ER and LP in China’s 285 prefectural cities. We found that the high-ER-intensity areas were spreading from the eastern to the central and western regions, and the patterns of LP transited from high in the north and low in the south to high in the west and low in the east. There was a negative correlation spatially between ER and LP. LP could inhibit the increase in ER intensity, while the continuously increasing ER intensity could restrict LP through the competitive behavior from the “race to the bottom” to the “race to the top” among local governments. The effect of ER restricting LP was significant from 2008 to 2013 and prominent in the east, which was dominated by “race to the top” competition, while LP had a greater inhibitory effect on ER in the central and western regions, which preferred to obtain tax revenues from pollution-intensive industries. The results imply that removing the roots of local protectionism, improving the environmental governance system, and formulating differentiated regional environmental regulatory measures will help local governments balance economic growth and environmental protection.