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Open Access Publications from the University of California

Essays on International Trade and Economic Development

  • Author(s): Li, Zhimin
  • Advisor(s): Gourinchas, Pierre-Olivier
  • Fally, Thibault
  • et al.

This dissertation consists of three chapters regarding international trade and economic development. In the first two chapters I explore how China’s economic rise to the global stage affects resource allocations inside and outside the country, and in the third chapter I present a new method to infer risk sharing regimes pertinent to studying consumption behavior in developing countries.

The first chapter studies how the "China shock"---the remarkable growth in China's productivity and trade activities since its accession to the World Trade Organization (WTO)---affects China's labor market and real exchange rate dynamics. I apply a dynamic trade and spatial equilibrium model to jointly explain two distinctive features of China's economic growth: the structural transformation, as characterized by the reallocation of labor from agriculture to manufacturing and services, and the sluggish appreciation of the real exchange rate, a puzzle from the perspective of a standard international economics model. The model highlights the role of the subsistence sector in shaping the patterns of the structural transformation and real exchange rate dynamics. Using inter-regional trade and migration data, I calibrate the model to decompose the ``China shock" into productivity shocks and trade shocks and show that the two features above arise naturally from the interaction between the labor market and observed shocks to productivity and trade costs. I find that while productivity growth is the primary source of the structural transformation, the accession to the WTO explains about 35% of the rise in the employment share and 20% of the increase in the real wage in the manufacturing sector. Welfare gains from the "WTO entry" are 27% on average and would be larger if complemented by relaxing labor restrictions further. By accounting for trade costs, the subsistence sector, and labor market frictions, the model generates dynamics for China's real exchange rate consistent with the data.

The second chapter studies the effects of real estate investments by foreign Chinese on local economies in the United States. This chapter is co-authored with Leslie S. Shen and Calving Zhang. We document an unprecedented surge in housing purchases by foreign Chinese in the US over the past decade and analyzes their effects on US local economies. Using transaction-level data on housing purchases, we find that the share of purchases by foreign Chinese in the California real estate market increased more than tenfold during the period of 2007-2013 relative to earlier years. In particular, these purchases have been concentrated in zip codes that are historically populated by ethnic Chinese, making up for more than 10\% of the total real estate transactions in these neighborhoods in 2013. We exploit the cross-sectional variation in the concentration of Chinese population settlement across zip codes during the pre-sample period to instrument for the volume of housing purchases by foreign Chinese. Our results show that housing purchases by foreign Chinese significantly increased local housing prices as well as local employment. Our evidence highlights the role of foreign investments in local employment, especially in times of economic downturns.

The third chapter proposes a novel approach to test alternative theories of risk sharing---full insurance, self-insurance, and private information---in a unified framework. Given the prevalence of informal insurance in developing countries to share consumption risks, studying risk sharing regimes is important. A distinguishing feature of the framework presented in this chapter is that it accounts for aggregate shocks and does not require data on interest rates, an important advantage for studying rural economies. Applying the approach to a longitudinal dataset from Tanzania, I reject models of full insurance and private information and find evidence of self-insurance. An incorrect inference on the insurance regime could underestimate the welfare loss from risk by as much as ten times.

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