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Model Structure and the Combined Welfare and Trade Effects of China's Trade Related Policies


  • Dong Yan

    () (Chinese Academy of Social Sciences)

  • Whalley John

    () (University of Western Ontario)


Because Chinas economic structure is different from that in OECD countries, using conventional neo-classical competitive trade models to analyze the welfare and trade impacts of trade related policy change can be misleading. In particular, both the exchange rate regime and output and pricing policies of state owned enterprises (SOEs) will have effects on trade and welfare which differ from a classical competitive model. This paper present a numerical model that captures the combined and interactive effects of three policy elements in prototype form of tariffs, policy towards SOEs in the industrial sector, and an exchange rate regime supporting large trade surpluses and additions to foreign reserves. The model has non neutral monetary features, endogenous trade imbalances and average product pricing of labor in goods. We do not claim it to be fully representative of modern China, but it does go some way beyond simple competitive models used elsewhere and points to different conclusions of policy impact. We calibrate our model to 2006 data, and then evaluate the impacts both singly and in combination of: tariff liberalization, a move to more freely floating exchange rates, and SOE enterprise reform. Results show that large differences in policy have a different impact relative to a classical competitive model. SOE reform and a freely floating Chinese exchange rate have more impact on Chinas welfare than tariff liberalization. Policies of RMB appreciation and increasing Chinas money stock reduce Chinas trade surplus. In the traditional competitive model, trade liberalization impacts both imports and exports, while in our central case model, with endogenously determined trade surplus, trade liberalization has little effect on exports. Most of the policy impact is on imports and the trade surplus. SOE reform of Chinas manufacturing sector significantly decreases production of Chinas manufacturing sector and increases production in Chinas other sectors.

Suggested Citation

  • Dong Yan & Whalley John, 2011. "Model Structure and the Combined Welfare and Trade Effects of China's Trade Related Policies," Global Economy Journal, De Gruyter, vol. 10(4), pages 1-21, January.
  • Handle: RePEc:bpj:glecon:v:10:y:2011:i:4:n:1

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    References listed on IDEAS

    1. Cull, Robert & Xu, Lixin Colin, 2000. "Bureaucrats, State Banks, and the Efficiency of Credit Allocation: The Experience of Chinese State-Owned Enterprises," Journal of Comparative Economics, Elsevier, vol. 28(1), pages 1-31, March.
    2. Koichiro Kamada & Izumi Takagawa, 2005. "Policy coordination in East Asia and across the Pacific," International Economics and Economic Policy, Springer, vol. 2(4), pages 275-306, December.
    3. Thorbecke Willem, 2006. "How Would an Appreciation of the Renminbi Affect the U.S. Trade Deficit with China?," The B.E. Journal of Macroeconomics, De Gruyter, vol. 6(3), pages 1-17, December.
    4. Dirk Willenbockel, "undated". "Structural Effects of a Real Exchange Rate Revaluation in China: a CGE Assessment," EcoMod2006 272100102, EcoMod.
    5. Zheng, Jinghai & Liu, Xiaoxuan & Bigsten, Arne, 2003. "Efficiency, technical progress, and best practice in Chinese state enterprises (1980-1994)," Journal of Comparative Economics, Elsevier, vol. 31(1), pages 134-152, March.
    6. John Whalley & Shunming Zhang, 2011. "State-Owned Enterprise Behavioural Responses To Trade Reforms: Some Analytics And Numerical Simulation Results Using Chinese Data," World Scientific Book Chapters, in: John Whalley (ed.), China's Integration Into The World Economy, chapter 13, pages 361-389, World Scientific Publishing Co. Pte. Ltd..
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    Cited by:

    1. LI, Chunding & WHALLEY, John, 2012. "Rebalancing and the Chinese VAT: Some numerical simulation results," China Economic Review, Elsevier, vol. 23(2), pages 316-324.
    2. Li, Chunding & Whalley, John, 2014. "China's potential future growth and gains from trade policy bargaining: Some numerical simulation results," Economic Modelling, Elsevier, vol. 37(C), pages 65-78.

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    JEL classification:

    • F1 - International Economics - - Trade


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