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Trade, Migration and Regional Income Differences: Evidence from China

Xiaodong Zhu () and Trevor Tombe ()

No 1534, 2015 Meeting Papers from Society for Economic Dynamics

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.

New Economics Papers: this item is included in nep-cna, nep-int, nep-mig and nep-tra
Date: 2015
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