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THE CHINESE CITIES THAT TRADE BUILT: Export boom to the US after China joined the WTO ignited growth in urban areas

  • Published Date: April 2017

When China joined the World Trade Organisation (WTO) in 2001, the certainty that tariff barriers had come down rather than any change in tariffs themselves created a population and manufacturing explosion in many of its cities. That is the central finding of research by Wenya Cheng and Andrei Potlogea, to be presented at the Royal Economic Society's annual conference at the University of Bristol in April 2017.

The study uses the evidence of China's accession to the WTO in 2001 to demonstrate the effects of a reduction in uncertainty, rather than any change in trade barriers themselves, on economic development. Before accession, China's exporters to the United States faced the possibility that their favourable tariffs might rise at any time: WTO membership locked in those tariffs.

By combining data on the benefits to each sector, and the amount of manufacturing in each sector, the authors find that US trade liberalisation accounts for up to half of the population growth and three quarters of the manufacturing employment growth recorded by the average Chinese city between 1998 and 2007.

All in all, this research indicates that reducing market access uncertainty can have important trade-creating effects, with material knock-on benefits in terms of growth. But, the authors warn, their results should raise additional concerns about Brexit and the election of President Trump, which have arguably generated increased uncertainty regarding future international trading arrangements: ‘Our findings show that these events don’t need to produce any actual shifts in policy in order to generate substantial economic costs.’

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Easy access to foreign markets, unimpeded by tariffs and quotas, is considered to be an important contributor to economic growth and development, particularly for emerging economies. Less well understood is the role of market access uncertainty (that is, uncertainty about tariffs and quotas that may be applied in the future by trade partners) in driving economic outcomes.

In recent research, we aim to improve our understanding of the implications of trade policy uncertainty by studying an episode featuring a sharp reduction in uncertainty: China’s accession to the WTO.

This event is particularly informative because it caused a substantial reduction in uncertainty for Chinese firms looking to access the US market, while keeping the tariffs applied to Chinese exporters by China’s major trading partners unchanged.

Before its WTO accession, Chinese firms benefited from low tariffs when exporting to the United States, but were exposed to the risk that this favourable trading regime would be suspended by the US Congress, which voted on it annually. An unfavourable vote in Congress would have automatically switched Chinese exporters to an alternative, much less favourable tariff schedule.

After China’s accession to the WTO, this risk was eliminated as, in line with US policy, WTO membership guarantees continued access to the more favourable tariff schedule.

The reduction in uncertainty surrounding US tariffs that accompanied China’s WTO accession was different across manufacturing sectors. ‘Worst-case scenario’ tariffs that Chinese exporters would have faced if the favourable trading regime was terminated varied widely across products. Consequently, sectors that experienced the removal of more severe tariff threats stood to benefit more from WTO accession.

We combine variation in uncertainty reduction across sectors with variation in sectoral composition across Chinese cities to develop a measure of the reduction in market access uncertainty across major Chinese cities. We then proceed to relate improvements in US market access to economic outcomes at the city level after 2001, the year of China’s WTO accession.

We find that improved trading conditions with the United States brought large economic benefits to Chinese local economies. Moving a city from the 25th to the 75th percentile of exposure to reductions in US market access uncertainty is associated with an 11% increase in city population, a 12% gain in city GDP and a 23% increase in employment between 1998 and 2007.

Our estimates indicate that US trade liberalisation can account for up to half of the population growth and three quarters of the manufacturing employment growth recorded by the average Chinese city between 1998 and 2007. As expected, increased domestic and foreign investments are important contributors to the growth of the most affected cities.

By exploring the channels through which improvements in market access affect local economies, we make sense of the surprisingly large effects we find. The effect of uncertainty reductions is augmented by the presence of inter-sectoral spillovers that operate both within the tradable sector, and from the tradable sector to the non-tradable sector.

Manufacturing industries are found to benefit not only from uncertainty reductions affecting their own products, but also from growth in co-located sectors that experience reduced uncertainty, particularly when those sectors employ similar workers. Moreover, growth in the overall tradable sector has a multiplier effect on local non-tradable activities, such as retail, finance and construction.

All in all, our research indicates that reducing market access uncertainty can have important trade-creating effects, with material knock-on benefits in terms of growth. Our results should raise additional concern about recent political events, such as Britain’s exit from the EU or the election of President Trump in the US, that have arguably generated increased uncertainty regarding future international trading arrangements.

Our findings show that these events don’t need to produce any actual shifts in policy in order to generate substantial economic costs.

ENDS


‘Trade Liberalization and Economic Development: Evidence from China’s WTO Accession’ by Wenya Cheng (University of Manchester) and Andrei Potlogea (University of Edinburgh)

Contact:

Andrei Potlogea
University of Edinburgh
Email: Andrei.Potlogea@ed.ac.uk