Internal Geography, Labor Mobility, and the Distributional Impacts of Trade

This paper develops a spatial equilibrium model to quantify the distributional impacts of international trade in an economy with intra-national trade and migration costs. Focusing on China, I find that international trade increases both the between-region inequality among workers with similar skills and the within-region inequality between skilled and unskilled workers, with the former accounting for 75% of the overall inequality increase. Ignoring domestic spatial frictions will significantly underestimate trade's impact on the overall inequality and overestimate its impact on the aggregate skill premium. Domestic trade and Hukou reforms can improve welfare and alleviate trade-induced inequality, while at the same time reduce the share of international trade in the economy