In China, trade is a major disruption in regional，urban-rural and industrial inequality in the beginning years for obvious reasons — trade happens in costal cities, and in labor-intensive sector first. But with the dynamic gain from trade and the boosting of domestic economic activities, the effect trade brought on inequality is diminishing gradually with the regional inequality as an exception. Instead, automation and technological advancement became the main causes.
As figure 1-4 suggests, four things happened after China joined the WTO in 2001, i) a rapid increase in trade happened, especially exports. ii) Followed by a significant economy boost benefit from the dynamic gain of trade, peaking at 2007. iii) The percentage of trade in GDP climbed max and decrease around 2006. iv) GINI index climbed max and decrease around 2009.
Notably, figure 2-4 show an obvious pattern of co-relation between GDP growth rate, TGR(the percentage of trade in GDP) and GINI Index. We know trade happened first，but did trade cause inequality? Or GDP growth cause inequality? Even both?
In figure 5-8, major activities of three main contributions(trade consumption and investment) to GDP growth were examined in term of their relationship with inequality.
The result shows strong positive co-relations exists between trade and GINI index, especial for export, with R^2 of 0.612. While retail have little influence on GINI index. Fixed-asset Investment even contributed to the decrease of inequality. Does this mean trade cause inequality directly? To find the answer, we should look into what had happened during the last 20 years.
There are a consensus among Chinese scholars that regional, urban-rural and industrial inequality paint the main picture of income inequality.
- Regional inequality:
Trade mainly happens along the costal line, where transportation through sea is much available. In China, there are 14 provinces[1] in the costal area spread in south and east China. In 2023, 77% percent of trade was happened in costal area. In the citied research, the author use Theil index(similar function with GINI index) to evaluate the inequality between and with within costal and inland area. The result shows a strong co-relation and major contribution to overall inequality between costal and inland area, but little inequality within both area. This supports the casuality between trade and inequality.
[1] Liaoning Province, Hebei Province, Tianjin City, Shandong Province, Jiangsu Province, Shanghai City, Zhejiang Province, Fujian Province, Taiwan Province, Guangdong Province, Hong Kong Special Administrative Region, Macao Special Administrative Region, Hainan Province and Guangxi Zhuang Autonomous Region.
Figure 12-13 shows, urbanization is happening in an unprecedented speed, in 2000 there are twice much rural populations, but in 2023, the situation completely reversed. In the cited article, the co-relation between rural is so strong that R^2 is most 0.9. It can be argued that it is the single most important reason for inequality between 2015 and 2010. It is hardly to relate to trade. So it is against the casuality between trade and inequality.
- Industrial inequality:
Automation(technological advancement) and high return of capital have been commonly recognized by scholars as causes of inequality. Figure 16 shows service,mechanical and electronic product contributed 50%-60% percent of inequality, which means the labor-intensive sector does not contribute that much of inequality where trade tends to rely on between 2003-2013, when the income inequality is the most severe.
This is against the casuality between trade and inequality. In terms of Wealth GINI Index, there is few data available. The China Social Science Survey at Peking University found the wealth GINI Index in 1995, 2002 and 2012 to be 0.45, 0.55 and 0.73. And using China International Capital Corporation’s report released in 2023, we can estimate the Wealth GINI has rose to 0.83 in 2023. It is in line with income GINI, which means relatively reliable.
By now, we can try to describe the story of inequality of China. Trade is the beginning of economic boost and a major disruption in regional，urban-rural and industrial inequality in the beginning years for obvious reasons — trade happens in costal cities, and in labor-intensive sector first. But with the dynamic gain from trade and the boosting of domestic economic activities, the effect trade brought on inequality is diminishing gradually with the regional inequality as an exception. Instead, automation and technological advancement became the main causes. During the process, domestic counter-balance policies is necessary and effective to alleviate the inequality brought by trade, which China still have large room to improve.
Today, another urgent problem in China is the huge difference in wealth distribution. The wealth Gini index is likely higher than 0.8. Can trade play a positive role to help those in need? I believe the answer is yes, even in China.
International trade first promoted the development of coastal cities, which in turn led to inland cities, and urbanization led to rural areas. In other words, for developing countries, free trade has exacerbated inequality by bringing economic growth, rather than leading to uneven distribution in a zero-sum manner. In this process, the government can regulate the negative impact it brings through policies.
From the perspective of developed countries, for example, the free trade between China and the United States has brought a large number of high-quality and low-cost goods to the United States. This has greatly relieved the pressure on the lower-class American people, and provided a buffer space for adjusting the governance policy of inequality in the United States, as early as 2000 when the Gini coefficient exceeded the “4.0” warning line.
At the same time, the income and wealth GINI coefficients of China and the United States are at a relatively high level in the international community. How to improve this situation through domestic policies requires further study.
Finally, regarding the inequality in development and benefits mentioned at the beginning, combined with previous studies on international economic law and international trade governance, the existing “inequality” can be improved by improving unreasonable rule construction, and the concept of free trade also plays a key role in the formation of international rules.