Product Quality, Wage Inequality, and Trade Liberalization

This paper constructs what we call a quality-differentiation model of Chinese trade. This model captures some salient features of Chinese trade and allows us to analyze the impact of trade liberalization on wage inequality. At present, Chinese trade displays the following features: high-quality cars are imported and low-quality cars are produced and consumed domestically, for which some parts are imported. These features lead us to consider trade liberalization as two types of tariff reduction: namely, a tariff reduction on final quality-differentiated goods and a tariff reduction on intermediate goods. This study shows that the two types of tariff reduction have completely different effects on wage inequality. Moreover, the results show that welfare inequality and wage inequality change in opposite directions when the tariff on final quality-differentiated goods is reduced. Copyright 2009 The Authors. Journal compilation 2009 Blackwell Publishing Ltd.