The Impact of International Trade on Intra-regional Income Inequality in China

• In Event: Research in Five (Graduate Students) Session II

Abstract

Research question:

In this paper, I explore if the variations in trade structure across Chinese regions would contribute to the heterogeneities of intra-regional income inequality.

Research motives:

After three decades of massive expansion, globalization has encountered a backlash in recent years. However, an interesting phenomenon under this context is China’s emergence as a vocal proponent of globalization. Despite being viewed as the largest beneficiary of globalization, China has experienced many “side effects” of globalization as those developed countries. The distributional effect of trade has contributed to a widening income gap across different social groups, posing huge risks for the country’s social stability and sustainability of economic growth. Hence, in order to better understand the motives and sustainability for China’s “Going-Global” endeavor, it would be meaningful to examine how international trade creates winners and losers within the country.

Contributions:

Building on the classical trade theories and recent studies, this paper seeks to make contributions in two aspects. First, compared to most existing studies using the total trade in their empirical investigations, I disaggregated trade into export and import based on Heckscher-Ohlin Model and Stolper-Samuelson Theorem’s argument that they could have differential effects on income inequality. Second, given China’s large regional variations in economic openness and trade structure, I surmised that there could exist heterogeneous effects of trade on income inequality across regions. Hence, I divided the sample into east, northeast and central, and west regions to explore those effects. This research would enrich the discussions on the impact of international trade on income inequality through the lens of trade structure.

Data and methodology:

Due to the issue that many Chinese provinces have not published income quintile data since 2011, the preliminary sample in this study covers 27 provinces during 1995-2010. I recently found a few other data sources for income inequality in more recent years including China Household Finance Survey (2011-13) and Chinese Family Panel Studies (2011-16). I will complete the extension of my empirical analysis before the 2020 APSA Annual Meeting. The major estimation strategy of this empirical study is based on the fixed-effect regression model.

Main findings:

The preliminary results using the 1995-2010 sample showed that export would reduce the income inequality in the west region because of a broader market for its large proportion of less-skilled workers under trade liberalization. Regarding the northeast and central region, import demonstrated a positive effect on income inequality. As the manufacturing inputs took a substantial proportion in the region’s imports, this positive coefficient suggested a substantial skill-premium effect of those capital-and-technology-intensive imported items. For the east region, neither export nor import were statistically significant. Overall, this empirical investigation demonstrated the heterogeneous effect of trade on intra-regional income inequality across the three regions in China.

Implications:

From the perspective of the “Two Images”, the preliminary analysis and extensions would enhance our understanding on how the trade structure would affect the variations of intra-regional income inequality in China. It would also suggest the necessity for policy makers to take local conditions into consideration in order to strike a balance between promoting the “Going-Global” strategy and mitigating income disparity.

Author

• Zhijun Gao, Claremont Graduate University