The Effect of Trade Liberalization on Income Inequality in the Case of China

Abstract

Since China adopted the reform and opening up policy in 1978, it has been accelerating its process of trade liberalization. After the accession into the WTO in 2001, China has been more active in integrating into the world economy. But the income gap between the rich and the poor is widening in the background of trade globalization. We can see it from the fact that Chinas Gini coefficient has been above 0.4 since 2000, an international warning level for inequality. Under the circumstances of deteriorating income distribution, it is meaningful to study the relationship between trade liberalization and disparity of income distribution in China and provide suggestions on how to improve it. With Gini coefficient as measurement of income inequality, and trade dependence ratio as measurement of trade liberalization, this paper runs OLS regression using the time series data of China. It turns out that overall, trade liberalization has worsened the income inequality in China since the reform and opening up policy was adopted in 1978. Nevertheless, it is also proved that there is an inverted U shaped relation between trade liberalization and income inequality, which implies that as trade becomes more and more liberalized, income inequality gets worse at first and then gets ameliorated. There is no doubt that trade openness has provided great impetus for economic growth despite the fact that it has enlarged the income gap. But we should have the confidence that the negative effect on income distribution is temporary. With the further deepening of reform and the improvement of market economy, trade liberalization will gradually ameliorate the income inequality in the long run.