Who wins, who loses? Understanding the spatially differentiated effects of the belt and road initiative

Abstract

This paper examines how cities and regions within countries adjust to trade openness and improved connectivity driven by large transport investments from China’s Belt and Road Initiative. The paper presents a general equilibrium model alongside spatially detailed information on the location of people, economic activity, and transport costs in Central Asia and China. The model builds on Fajgelbaum and Redding (2018) adding restrictions on internal mobility. We use this framework to identify which places are likely to gain and which places are likely to lose. The findings are that BRI transport investments favor development in larger urban districts near trade hubs, while people in more distant regions tend to lose out. Investments in trade facilitation are complementary policies that bring large additional welfare gains and can help in spatially spreading the benefits. However, barriers to internal labor mobility are likely to exacerbate wage inequalities while dampening overall welfare.