Abstract
This paper considers the distributional effects of trade liberalization and government tax replacement policies during foreign trade reform. The analysis uses a 22-sector, 12-representative-household computable general equilibrium (CGE) model for China. The simulation results show that trade liberalization can enhance both economic efficiency and income equality in China. However, the extent of the efficiency gains from trade liberalization depends on which tax instrument the government chooses to balance its budget. Imposing a progressive household income tax reduces the Gini coefficient while retaining most of the efficiency gains. Hence, this is likely to be one of the appropriate tax policies for China's government to choose to replace lost tariff revenue during trade liberalization.J. Comp. Econom., June 1998,26(2), pp. 358–387. Purdue University and United States Department of Agriculture, Economic Research Services, Room 5141, 1800 M Street, NW, Washington DC 20036-5831; and Development Research Center, the State Council, Beijing 10017, People's Republic of China.
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