Working Paper: CEPR ID: DP14490
Authors: Yuan Zi
Abstract: What is the role of migration frictions in shaping the effects of trade policy? 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 trade liberalization has induced significant spatial labor reallocation in China, with a stronger effect in regions with less hukou frictions. I show that the standard quantitative spatial models, by design, would imply that the gains from trade are largely irrelevant to factor market reforms. A more realistic calibration suggests that trade liberalization increases China’s welfare by 0.72%, a sizable share of which comes from mitigating the cost of domestic frictions: if China first abolishes the hukou system, the gains from tariff reductions decrease by 18%, and its negative distributional consequences are greatly amplified. In contrast, a standard spatial model suggests that hukou abolition increases the gains from tariff reductions by 2% and alleviates its negative distributional consequences.
Keywords: trade liberalization; spatial labor reallocation; hukou frictions
JEL Codes: F14; F15; F16
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| trade liberalization (F13) | spatial labor reallocation (J69) |
| tariff reductions (F13) | spatial labor reallocation (J69) |
| hukou system (R28) | trade liberalization gains (F69) |
| hukou abolition (R28) | trade liberalization gains (F69) |
| trade liberalization (F13) | regional variation in employment changes (R11) |