XI’AN JIAOTONG-LIVERPOOL UNIVERSITY
西交利物浦大学
COURSEWORK SUBMISSION COVER ShEET
How does trade liberalization affect china’s urban-rural
Title income inequality:evidencebased on 30 provinces from 2000
to 2023
Group number Team 6
BSc Actuarial Science / BSC ECONOMICS / BSC ECONOMICS AND
Programme FINANCE
Module Title International Trade
Module Code ECO304
Assignment Title Group Essay
Submission Deadline 23:59 on MAY 11th, 2025 (Sunday)
Module Leader Wenting Zhou
By uploading or submitting this coursework submission cover sheet, I certify the following:
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FABRICATION Of DATA, as outlined in the Undergraduate Student Handbook of
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· This work is my own, original work produced specifically for this assignment. It
does not misrepresent the work of another person or institution as my own.
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Signature .............................................................Date 2025/5/5.................................
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Office use:
Student name Student ID number
Zhiwei Zhuang 2141437
Xian Zhang 2142527
Manxin Xu 2144951
Yifan Hu 2145211
Yiying Lin 2145846
Marking
The statement of the problem you address (20%)
The data (10%)
The theoretical analysis (25%)
The empirical analysis (20%)
An interpretation of the result and your own insights (25%)
Final group mark
Marker Date _ ____________
Students: Please start your assignment on the next page.
How does trade liberalization affect China's urban-rural income inequality:
Evidence based on 30 Provinces from 2000 to 2023
1. Introduction and Motivation
China’s economic miracle is often told as a triumph---trade liberalization has propelled exports
from 5% to 20% of GDP and slashed tariffs on primary products from 32.1% to 6.7% (World
Bank, 2023, 2024). However, its benefits have not flowed evenly across the urban-rural divide.
That stubborn divide between cities and countryside hasn’t closed. In some places, it becomes
wider after trade liberalization (Kanbur, Zhang, 2005). The East, full of capital-intensive exports,
races ahead; the West, rooted in labor-intensive growth, lags. This study will show that while
trade liberalization exacerbates the urban-rural divide in China’s East and Middle, it reduces the
same gap in the West.
Figure 1: Tariff rate on primary product---China, 1992-2022
Source: World Bank, 2023
Figure 2: Exports as a percentage of GDP---China, 1960-2023
Source: World Bank, 2024
Figure 3: This figure shows the Urban-to-Rural Income Gap and Ratio in China from 1978-2024.
Source: National Bureau of Statistics of China, 2025
This discrepancy is where this study steps in. This paper analyze China’s provincial panel data
(2000-2023) through a regional lens (East, Middle and West) instead of aggregate trends,
exposing trade liberalization’s uneven nature in the interpretation of the result. In the theoretical
analysis, the Heckscher-Ohlin model provides a framework for analyzing how regional factor
endowments shape specialization patterns, while the Stolper-Samuelson theorem offers insights
into how trade affects returns to scarce factors. However, China’s complex regional realities
where institutional factors like the hukou system ( 户 口 制 度 ） may trap rural labor in low-return
sectors even as trade reshapes the economy (Lu, Chen, 2006).
Figure 4: Heckscher-Ohlin model
Source: English Wikipedia: Heckscher-Ohlin model
This study isn’t just whether trade affects inequality, but where and why. The empirical analysis
provides foundation for policy consideration. If trade’s gains flow only to coastal elites while
inland rural residents shoulder the costs, then China’s “miracle” is an unfair game. This paper will
show the problem, in which the numbers will tell a brutal truth---our “miracle” has a hukou-
shaped divide running through it. What happens next depends on whether those left outside the
city get keys, which will be elaborated in the parts of theoretical and empirical analysis.
2. Theoretical Analysis
The Heckscher-Ohlin (H-O) model suggests that regions should specialize in industries that
intensively use their abundant factors of production. In China, rural areas possess abundant labor
resources, making them naturally inclined toward labor-intensive industries (e.g., agricultural
processing, textiles). Meanwhile, urban areas, with their concentration of capital and technology,
tend to focus on capital- and skill-intensive sectors (e.g., machinery, electronics). This industrial
specialization may widen the urban-rural income gap, as capital-intensive industries typically
generate higher value-added and profit margins.
The Stolper-Samuelson theorem states that trade openness raises returns to abundant factors while
reducing returns to scarce factors. In China’s context, for rural areas, as labor-abundant regions,
trade liberalization could boost wages for rural workers, such as rising demand for labor-intensive
exports. Nevertheless, for urban areas, the expansion of capital-intensive industries may increase
incomes for skilled workers, but low-skilled urban workers could face heightened competitions.
However, this effect depends on factor mobility. Due to restrictions like the ‘hukou’ system, rural
laborers often struggle to transition into higher-paying sectors, limiting the income-equalizing
potential of trade and potentially exacerbating urban-rural disparities.
Furthermore, government policies play a critical role, in terms of the compensatory measures,
which subsidies for agriculture and rural e-commerce can enhance rural competitiveness. And
institutional reforms, relaxing ‘hukou’ rules and integrating social security systems help allocate
labor more efficiently, allowing rural populations to share trade benefits more equitably.
3. Data and Methodology
This research utilizes panel data from 30 Chinese provinces (excluding Hong Kong, Macau,
Taiwan and Tibet) spanning 2000-2023 to construct a comprehensive provincial-level data set.
Primary data sources come from the China Statistical Yearbook. This study regresses between
income gap and trade dependence with fixed effects, the specific model is constructed as follows:
Where denotes individual provinces, while represents the year of observation. The coefficient
is particular significant as it quantifies the marginal effect of trade liberalization income
inequality.
Table 1: Definition of variables
Variables Explanation Unit
Urban-rural The ratio of disposable income per capita Ratio
income gap for urban residents to disposable income
(Income_gap) per capita for rural residents reflects the
degree of income inequality between
urban and rural areas.
Degree of trade Total import and export trade as a share %
liberalisation of GDP measures an economy's
(trade_dependence dependence on international trade and its
) level of openness.
Government Government fiscal expenditure as a share %
intervention (gov) of GDP reflects the government's efforts
to regulate the economy through
redistributive policies.
Real GDP per The ratio of real GDP to population, CYN
capita (gdppc) usually used to measure the level of
economic development of a region.
Level of education Average number of years of schooling for Years
(edu) the population aged 15 and over,
measuring the potential impact of human
capital accumulation on income
distribution.
We obtained a total of 720 samples, and the descriptive statistics for each variable are listed in
Table 2.
Table 2: Descriptive statistics
VarName Obs Mean SD Min Median Max
income_gap 720 2.700 0.503 1.718 2.615 4.459
trade_dependenc
720 0.302 0.358 0.000 0.138 1.721
e
gov 720 0.211 0.097 0.069 0.193 0.643
gdppc 720 41090.717 33433.812 2759.000 33985.440 2.00e+05
edu 720 8.735 1.138 5.438 8.709 12.782
Table 3: Regression Results
Variables Income_gap
Trade_dependence 0.146***
(3.15)
gov 1.647 ***
(10.85)
gdppc -1.75e-06**
(7.02e-07)
edu -0.254***
( 0.022 )
_cons 4.602***
(0.165)
Observations 620
R-square 0.2663
Adj R-square 0.2627
F-statistic 74.52
t-statistics in parentheses.
*** p<0.01, **p<0.05, *p<0.1
3.1 The impact of the trade liberalization on the urban-rural income gap
The regression results reveal that the coefficient of the trade dependency rate is positive and
significant at the 5% level. This finding indicates that trade liberalization has a significant
positive influence on the urban-rural income gap. Based on the H-O model, trade liberalization
typically implies increased international trade and more open markets. While this may drive
economic growth, it can also lead to job losses in specific industries or regions, affecting income
distribution. In China, with its accession to the WTO and further market opening, some labor-
intensive industries might relocate to lower-cost regions, which may lead to widening
employment and income gaps between urban and rural areas.
3.2 The impact of government intervention on the urban-rural income gap
The government intervention coefficient is 1.65, and the p-value presented in the table is less than
0.05, indicating that government intervention has a significant positive effect on the urban-rural
income gap. Government interventions, including fiscal spending and redistributive policies, aim
to reduce income inequality through taxes, subsidies, and social benefits. However, if these
policies are not implemented properly, they may exacerbate the urban-rural income gap due to
uneven or inefficient resource allocation.
3.3 Control Variables
In this table, GDP per capita and average years of education are included as control variables.
Both coefficients are negative, -1.75 and -0.25, respectively, and both are significant at the 5%
level. Higher per capita GDP, associated with enhanced economic development, can reduce the
gap through job opportunities and wage levels. However, this gap could widen if economic
growth is concentrated in urban areas and rural areas fail to fully benefit. The longer the average
years of education can improve workforce skills and productivity, which can lead to higher
incomes. Yet, unequal distribution of education resources, where urban residents have greater
access to education than rural residents, may exacerbate the urban-rural income gap.
4. Heterogeneity Analysis
Given the varying levels of openness and economic development across regions in China, a
heterogeneity analysis was conducted across the Eastern, Middle, and Western regions.
Table 4: Heterogeneity Analysis
East Middle West
VARIABLES income_gap income_gap income_gap
trade_dependence 0.238** 0.255 -0.430
(0.095) (0.446) (0.627)
gov -1.151** -1.236* -0.741
(0.402) (0.537) (0.409)
gdppc -0.000** -0.000*** -0.000***
(0.000) (0.000) (0.000)
edu 0.081 0.174** 0.026
(0.058) (0.070) (0.103)
_cons 1.820*** 1.595** 3.635***
(0.443) (0.503) (0.674)
N 264.000 192.000 264.000
r2_a 0.374 0.728 0.762
Standard errors in parentheses * p < 0.1, ** p < 0.05, *** p < 0.01
4.1 Eastern Region
In the Eastern region, for every one-unit increase in trade dependence, the urban-rural income gap
will expand by approximately 23.8%, exerting a significant positive impact. These provinces
occupy crucial positions in the global trade landscape due to their coastal locations. To be more
specifically, their export-oriented economies likely prioritize benefiting urban areas. However
rural areas gain limited benefits, thus leading to the widening of the income gap. Moreover,
government intervention can effectively offset the widening of the gap. This situation may be due
to the fact that the governments in the eastern region have effectively alleviated the urban-rural
gap through redistribution policies such as transfer payments and rural infrastructure construction.
4.2 Middle Region
In the Middle region, although the moderating effect of trade dependence on the urban-rural
income gap shows a positive trend, it is not statistically significant. Compared with the Eastern
region, the trade openness of Middle provinces is lower, and their economic growth relies more
on domestic demand-driven factors and resource-based industries. Therefore, the impact of trade
liberalization on the urban-rural income distribution is limited in the middle area. The government
intervention in the middle region may alleviate the gap through rural subsidies or infrastructure
investment, but the effect is weaker than that in the Eastern region.
4.3 Western Region
In the Western region, trade dependence has a negative impact on the urban-rural income gap, but
the effect is not obvious. Compared with the East or Middle regions, these provinces are restricted
by their remote geographical locations and backward infrastructure. In this way, Western regions
have long been on the periphery of the global economic system, resulting in a relatively low level
of economic openness. Consequently, the direct impact of their trade activities on the urban-rural
income distribution is limited. Moreover, there may be other more significant local factors that
dominate the changes in the income gap. The government intervention in this region can alleviate
the urban-rural gap through infrastructure construction or poverty alleviation policies. However,
the policy implementation efficiency or resource allocation may not be as efficient as that in the
Eastern region.
5. Conclusion
This essay uses the provincial panel data of China from 2000 to 2023, combining the Heckscher-
Ohlin (H-O) model and the Stolper-Samuelson theorem to analyze the impact of trade
liberalization on the urban-rural income gap in China. This essay also finds that the impact of
trade liberalization has significant regional heterogeneity. In the Eastern region, where capital is
abundant, trade liberalization strengthens the comparative advantage of capital-intensive
industries and promotes the growth of urban income. On the contrary, in the Middle and Western
regions, where labor is abundant, the urban-rural gap should be narrowed through labor-intensive
industries. However, the household registration system and barriers to factor mobility hinder the
transfer of rural labor force to high-income sectors, weakening the equilibrium effect of trade.
Word account: 1486
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