A Study Of The Impact Of China's Foreign Trade On The Country's Income Inequality

Since the implementing of reform and opening up in 1978, China's foreign trade has experienced a sustainable expansion and boosted the country's economy. The country has been the third largest one in the total amount of the world trade in 2003. However, with the rapid growth of foreign trade, China's income inequality between individuals and between regions has been being increasing since 1978. Does the foreign trade have any influence on the country's income inequality level? If it does, how does the foreign trade influence the inequality? How much is the influence? This dissertation attempts to answer these questions.On the basis of reviewing the theories of trade on income distribution thoroughly, the dissertation demonstrates the impacts of China's foreign trade on income inequality with much empirical analysis. With its growth, China's foreign trade presents some peculiar characteristics, such as foreign-funded enterprises becoming the most important contributors, the processing trade becoming the overwhelming trade pattern, different regions (or provinces) with different openness and trade amounts, which suggests that foreign trade may be the most important factor influencing the country's inequality. Based on the peculiar characteristics of China's foreign trade and the dynamic benefits of trade, this dissertation argues how foreign trade affects different kinds of inequality level respectively through the analysis of trade promoting industry agglomeration and endogenous technological progress as well as the political decision-making process of trade policy.The new economic geography explains the impact of trade on industry location and agglomeration. From the perspective of trade pushing industry agglomeration and economic growth in regions and provinces, the dissertation concludes that foreign trade has a strong effect on the inequality of income distribution within regions and provinces in China. The advantages of low cost and specialization as well as comparative advantages from foreign trade are proved to be helpful to push industry agglomeration. The positive feedback effect of industry agglomeration, such as technologic spillovers and employment enlarging, plays a more profound role in promoting economic growth and higher income level.The imbalance of openness between the east region and the center and west regions means that it is favorable for the enterprises to agglomerate in the east region. The simulation of spatial agglomeration model demonstrates that the imbalance of industry agglomeration between regions itself is the exhibition of the regional income inequality. The econometric test with the cross-sector data on enterprise numbers and the degree of openness in 29 provinces shows a distinct correlation between trade and industry agglomeration.Foreign trade brings into endogenous technological progress under the background of production globalization and labor distribution globalization, which increases the demand of skilled workers and the wage income inequality in many countries. The dissertation concludes that foreign trade increases China's wage inequality by promoting technological progress. Referring to the theoretical analysis of foreign scholars, the author builds an innovation-imitation model to describe the endogenous relationship between the three variables in the south-north trade system. The model shows that technological progress means increasing the varieties of exports for the South in south-north trade. Supposing the manufacture industry as the skilled workers intensive industry with higher openness, the author uses the data from the manufacture industry and tests the impact of trade on wage inequality. The estimation reports a positive correlation between trade and wage inequality, which suggests increased exports of manufacturing products expand the demand of skilled workers in manufacture industry, and raise the level of wage.On the benchmark of empirical analysis, the political economics of trade policy argues that the effect of income distribution is the beginning of the political decision-making process of trade policy. The formation of China's trade policy offers a powerful explanation to the country's rising income inequality. Although the state benefit and government target is the core of the decision-making of trade policy in China, the local government, enterprises, international organizations and foreign governments are playing growing important roles in the decision-making process. The dissertation builds the benefit functions of individual decision-makers and the target functions of government on the basis of utility function, and makes an econometric test using the cross-sector/time series data from agriculture and industry. The estimated results show that industry plays a more important role in the formation of trade policies, and gets more benefits from the reduction of tariff, such as the higher salary level. Agriculture has a minor effect on trade policies. Foreign-funded enterprises and state-ownership enterprises play special roles in the form of trade policies, too.In summary, the dissertation provides a powerful argument about the impacts of foreign trade on China's rising income inequality through different mechanisms. Such conclusion is based on China's political and economic environment. To some extent, the rising inequality between regions is the result of practising an imbalanced development strategy with foreign trade as one of the essential strategic measures since 1978. The wage income inequality is related to the present trade pattern with foreign-funded enterprises and the manufacture industry being the most contributors. The effect of income distribution of trade policies is based on China's political system. Therefore, it is necessary that China's development strategy and trade policies pay more attention to the center and west regions to reduce the regional inequality. Some industry policies and open policies should be implemented to encourage less-developed industries such as agriculture to enter the international market and to form a multi-participant trade mode in order to reduce wage income inequality. Meanwhile, a more democratic decision-making process of trade policy is desirable.