International Trade And China’s Structural Change

In this paper, I explored how international trade will facilitate China’s structuralchange. A word, slow, can exactly describe China’s structural transformation during1952-1977, it’s employment share of agriculture came down by only0.09from0.835to0.745, and the employment share of services also declined with a minor magnitude of0.02, from0.09to0.11. In stark contrast is the post-period of “The Reform AndOpening-up Policy”,1978-2007, China’s agriculture employment share decreased from0.71to0.41during30years, which is3.4times of previous change, and servicesemployment share increased from0.12to0.32, which is12.5times of earlier period.Meanwhile, the employment share of industry also went up greatly compared to thechange between1952and1977. I build a very simple general equilibrium model of twocountries and three sectors to analyze the exact channel through which internationaltrade can influence one country’s structural change. I calibrate the model to the data ofChina and its main trade partners, including OECD countries and Singapore. Further, Iconstruct the labor productivity series as input data by using the related real value addeddata and employment data by sector from WDI and GGDC databases. Fortunately, themodel results are well matched to data of China’s structural change. I further makesome counterfactuals, including closed economy case and equal productivity case (i.e.let foreign country’s labor productivity equal China’s). Compared with the basic openeconomy model, their results deteriorate a lot: the speed of structural transformationbecomes very slow, almost the same as that before opening up, and the SSEs are verylarge. Such results enhance the model’s basic prediction that international trade hasimportant effects on China’s structural change. Besides, this paper provides another twopredictions:1) at the initial stage of trade, non-homothetic preference will promote poorcountries’ export and import;2) the subsistence requirement helps understand the“hump-shaped” trend of industry employment share in a closed economy.