The effects of free trade agreements on regional wages in China

Abstract

We empirically study the effects of free trade agreements on regional wages in China using Redding and Venables’ (2004) extended model and manufacturing firm-level data in China from 2000 to 2007. We show that although free trade agreements can, in general, increase firms’ average wage level, they also contribute to increasing the wage gap in China. We also find that free trade agreements can have different effects on firms’ wages across China. In particular, they have stronger effects on average wage levels in land border regions than in coastal regions. Moreover, although firms in land border regions may be located closer to the partner countries of free trade agreements, they may still prefer to use shipping to transport goods. Our findings have important policy implications. In particular, we suggest that free trade agreements with China’s western neighbors should be accompanied by the development of appropriate land transportation networks. Moreover, income tax policy regimes should be differentiated across regions in China.