Trade liberalization, wages, and specialization in China

This paper studies the evolution of regional specialization in China in response to trade liberalization. Using a panel of Chinese export data at the detailed commodity level over the period of 1988-2006, we show that China's regional specialization follows a U-shaped pattern: both the interior and coastal regions diversify from 1988 to 1994 but specialize during the later reform period of 1994-2006. A theory of tariff reductions is proposed by constructing the Dornbusch-Fischer-Samuelson (1977) continuum of goods Ricardian model in a setup of two countries and three regions. The U-shaped pattern of specialization can be obtained from foreign tariff reductions followed by Chinese tariff reductions. This finding is supported by simulations, US-China trade policy review, and the pattern of China's coast-inland wage ratio.