Welfare Effects of Trade and Factor Market Reforms in China

Abstract

AbstractBenefits of the multi-faceted liberalization of the Chinese economy can be found in the high rate of economic growth, increased inflow of foreign investment, improved overall quality of life, and some other forms. While the role of trade reform in the Chinese economy received strong attention in the past studies, labor and capital reforms are equally important issues, but were understudied. Inter-industrial wage and capital differentials and restricted labor mobility from rural to urban sector still persist. In this paper, we analyze the economic effects of labor and capital market liberalization on China using a computable general equilibrium (CGE) model. As a signatory to the WTO agreement, China is required to reform its trade sector by eliminating tariffs.We explicitly model wage differentials in Chinese economy, and experiment the effect of removing factor market differentials in the presence and then absence of tariffs and non-tariff barriers. Our results indicate that factor market reforms are essential to the realization of full gains from accession to the WTO agreement.