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Trade, Migration and Regional Income Differences: Evidence from China

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  • Xiaodong Zhu

    (University of Toronto)

  • Trevor Tombe

    (University of Calgary)

Abstract

International trade is closely related to within-country trade and migration. To study these interrelationships, we develop a novel general equilibrium model of internal and external trade with migration, featuring both trade and migration frictions. We estimate these frictions using unique data on China's trade and migration; the costs are high, but declined after 2000. We quantify the consequences of lower trade costs (international and internal) and migration costs on welfare, internal migration, and regional income differences. External trade liberalization increases China's trade, but only modestly increases welfare while increasing regional income differences. Internal trade liberalization has large welfare gains and reduces regional income differences. Migration cost reductions dramatically increase migration and lower regional income differences but -- surprisingly -- only modestly increase trade and aggregate welfare, mainly because the migration costs remain very high. In a counterfactual exercise in which we lower the migration costs in China to the levels similar to those in the US, we find very large increases in both trade and aggregate welfare. Our results suggest internal reforms dominate external trade liberalization as a source of aggregate welfare gains and improvements in regional income inequality.

Suggested Citation

  • Xiaodong Zhu & Trevor Tombe, 2015. "Trade, Migration and Regional Income Differences: Evidence from China," 2015 Meeting Papers 1534, Society for Economic Dynamics.
    • Handle: RePEc:red:sed015:1534
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    References listed on IDEAS

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    1. Lorenzo Caliendo & Fernando Parro & Esteban Rossi-Hansberg & Pierre-Daniel Sarte, 2018. "The Impact of Regional and Sectoral Productivity Changes on the U.S. Economy," Review of Economic Studies, Oxford University Press, vol. 85(4), pages 2042-2096.
    2. Lin, Justin Y & Wang, Gewei & Zhao, Yaohui, 2004. "Regional Inequality and Labor Transfers in China," Economic Development and Cultural Change, University of Chicago Press, vol. 52(3), pages 587-603, April.
    3. Dennis Novy, 2013. "Gravity Redux: Measuring International Trade Costs With Panel Data," Economic Inquiry, Western Economic Association International, vol. 51(1), pages 101-121, January.
    4. Fernando Parro, 2013. "Capital-Skill Complementarity and the Skill Premium in a Quantitative Model of Trade," American Economic Journal: Macroeconomics, American Economic Association, vol. 5(2), pages 72-117, April.
    5. Aguayo-Téllez, Ernesto & Muendler, Marc-Andreas & Poole, Jennifer P., 2010. "Globalization and Formal Sector Migration in Brazil," World Development, Elsevier, vol. 38(6), pages 840-856, June.
    6. Brian McCaig & Nina Pavcnik, 2018. "Export Markets and Labor Allocation in a Low-Income Country," American Economic Review, American Economic Association, vol. 108(7), pages 1899-1941, July.
    7. Miroudot, Sébastien & Sauvage, Jehan & Shepherd, Ben, 2012. "Trade costs and productivity in services sectors," Economics Letters, Elsevier, vol. 114(1), pages 36-38.
    8. Guido Matias Cortes & Giovanni Gallipoli, 2014. "The Costs of Occupational Mobility: An Aggregate Analysis," Working Papers 2014-015, Human Capital and Economic Opportunity Working Group.
    9. Pablo Fajgelbaum & A. Kerem Cosar, 2013. "Internal Geography, International Trade, and Regional Outcomes," 2013 Meeting Papers 63, Society for Economic Dynamics.
    10. Ejaz Ghani & Arti Grover Goswami & William R. Kerr, 2016. "Highway to Success: The Impact of the Golden Quadrilateral Project for the Location and Performance of Indian Manufacturing," Economic Journal, Royal Economic Society, vol. 126(591), pages 317-357, March.
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    Cited by:

    1. Pei-Ju Liao & Ping Wang & Yin-Chi Wang & Chong Kee Yip, 2017. "Educational Choice, Rural-urban Migration and Economic Development," NBER Working Papers 23939, National Bureau of Economic Research, Inc.
    2. Maximiliano Dvorkin & Fernando Parro & Lorenzo Caliendo, 2015. "The Impact of Trade on Labor Market Dynamics," 2015 Meeting Papers 1532, Society for Economic Dynamics.
    3. Li, Baoxi & Cheng, Shixiong & Xiao, De, 2020. "The impacts of environmental pollution and brain drain on income inequality," China Economic Review, Elsevier, vol. 62(C).
    4. Li, Bingjing, 2018. "Export expansion, skill acquisition and industry specialization: evidence from china," Journal of International Economics, Elsevier, vol. 114(C), pages 346-361.
    5. Lorenzo Caliendo & Maximiliano Dvorkin & Fernando Parro, 2019. "Trade and Labor Market Dynamics: General Equilibrium Analysis of the China Trade Shock," Econometrica, Econometric Society, vol. 87(3), pages 741-835, May.

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