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Trade Liberalization and the Great Labor Reallocation

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Abstract

The extent to which a country can benefit from trade openness crucially depends on its ease of reallocating resources. However, we know little about the role of domestic frictions in shapingthe effects of trade policies. I address this question by analyzing the impact of tariff reductions on the spatial allocation of labor in China, and how this impact depends on migration frictions that stem from China's household registration system (hukou). I first provide reduced-form evidence that input trade liberalization has induced significant spatial labor reallocation in China, with a stronger effect in regions with less hukou frictions. Then, I construct and estimate a quantitative spatial model with input-output linkages and hukou frictions to examine the general equilibrium effects of tariff reductions and perform counterfactuals. The quantitative exercise shows that trade liberalization increases China's welfare by 0.63%. Abolishing the hukou system leads to a direct welfare improvement of 1.51%. Additionally, it increases gains from tariff reductions by 2% and alleviates its negative distributional consequences. In this process, I develop a novel measure of migration frictions associated with the hukou system.

Suggested Citation

  • Yuan Zi, 2016. "Trade Liberalization and the Great Labor Reallocation," IHEID Working Papers 18-2016, Economics Section, The Graduate Institute of International Studies.
  • Handle: RePEc:gii:giihei:heidwp18-2016
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    2. Yuan Tian & Junjie Xia & Rudai Yang, 2020. "Trade-induced urbanization and the making of modern agriculture," Discussion Papers 2020-16, University of Nottingham, GEP.
    3. Hao, Tongtong & Sun, Ruiqi & Tombe, Trevor & Zhu, Xiaodong, 2020. "The effect of migration policy on growth, structural change, and regional inequality in China," Journal of Monetary Economics, Elsevier, vol. 113(C), pages 112-134.
    4. Jakob Engel & Deeksha Kokas & Gladys Lopez-Acevedo & Maryla Maliszewska, 2021. "The Distributional Impacts of Trade," World Bank Publications - Books, The World Bank Group, number 35552, December.
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    More about this item

    Keywords

    input trade liberalization; spatial labor reallocation; hukou frictions; migration;
    All these keywords.

    JEL classification:

    • F11 - International Economics - - Trade - - - Neoclassical Models of Trade
    • F13 - International Economics - - Trade - - - Trade Policy; International Trade Organizations
    • F16 - International Economics - - Trade - - - Trade and Labor Market Interactions
    • R23 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Household Analysis - - - Regional Migration; Regional Labor Markets; Population
    • O15 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Economic Development: Human Resources; Human Development; Income Distribution; Migration

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