Essays on Trade Liberalization and Inequality

Among the defining events of globalization, China’s accession to the World Trade Organization in 2001 stands out as a transformative milestone with far-reaching economic consequences. This dissertation investigates how China’s integration into the global economy has shaped inequality along multiple dimensions, including income inequality between high- and low-skilled workers, regional disparities, and differences in educational attainment. A key focus is on a relatively underexplored demand-side mechanism arising from non-homothetic preferences: as incomes rise, consumption shifts away from agriculture toward more skill-intensive sectors. On the supply side, I document that services are the most skill-intensive sector in China. Together, these patterns indicate that trade-induced income growth contributes to the expansion of skill-intensive sectors, thereby increasing the skill premium. This mechanism offers a complementary perspective to existing studies on trade and inequality, which have largely focused on supply-side adjustments.

In the first chapter, I document a structural shift in China’s economy following WTO accession, characterized by a reallocation of labor away from agriculture and toward manufacturing and services. The shift coincides with rising trade activity, income growth, and widening income inequality. I show that sectoral skill intensity increases monotonically from agriculture to manufacturing to services, implying that this transformation favors high-skilled labor. To examine the relationship between trade liberalization and inequality more systematically, I construct a region-level measure of trade exposure using detailed trade flow data and micro-level labor market data. The results reveal that regions more exposed to trade shocks experienced larger increases in the skill premium, suggesting that trade integration contributed to growing within-region inequality through differential returns to skill.

The second chapter develops a spatial general equilibrium trade model that incorporates non-homothetic preferences to capture the demand-side mechanism highlighted in the first chapter. Leveraging detailed interregional and international trade flow data, I estimate both domestic and international trade costs before and after China’s WTO accession. This allows me to model the trade shock as a reduction in the international component of trade costs to their post-accession levels. I then use the calibrated model to quantify the impact of trade liberalization on real incomes of high- and low-skilled workers across regions. The model successfully replicates key patterns in the data and explains approximately half of the observed increase in income inequality following WTO accession, highlighting the importance of demand-side forces in mediating the distributional effects of trade.

The third chapter extends the analysis of trade liberalization and skill premia by examining whether individuals respond to regional trade shocks through changes in educational attainment. Using repeated cross-sectional data from the Urban Household Survey and a shift-share measure of export exposure, I estimate a difference-in-differences model to assess the impact of WTO accession on high school enrollment. Results show a modest but significant increase in high school attendance in more exposed regions, driven both by individuals making enrollment decisions during the shock period and by selective in-migration of already-educated individuals. These findings highlight two key margins through which trade shocks influence regional skill composition: schooling decisions and population mobility.