Trade Liberalization and Wages: Evidence from the Closer Economic Partnership Arrangement between Mainland China and Hong Kong

Abstract

This study investigates a causal relationship between the adoption of the Closer Economic Partnership Arrangement (CEPA) trade liberalization policy and the average wage by exploiting long-term Hong Kong census data from 2001 to 2016. The individual-level analysis shows that the one-sided tariff concession leads to a 9.66% increase in the average wage in the treated industries. The results are robust to various specifications of treatment and consider the impact of financial crisis and contemporary institutional changes. Moreover, we explore the possibility that the effects of exposure to CEPA may be heterogeneous along the dimensions of language skill, age group, educational level, and job skills. We find that the ability to speak Mandarin, a high level of education, and higher-level skills increase the wages of workers after trade liberalization. Therefore, whether trade liberalization increases wage inequality largely depends on the structure and composition of the local labor market.