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To the Happy Many:Reflections on the Welfare Effect and Upgrading of Processing Trade
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TitleTo the Happy Many:Reflections on the Welfare Effect and Upgrading of Processing Trade  
AuthorLiu Qing and Xu Lei  
OrganizationSchool of International Business Administration, SHUFE;School of Economics, Fudan University; 
Key WordsProcessing Trade; Dual Economy; Trade Costs Sharing; Welfare Effect; Transformation Decision  
AbstractDid the Welfare effect of trade indicated by the theory of heterogeneous firms happen in China? How do the foreign demand shock and the wage gap affect the transformation behavior of processing traders? To address these questions, we propose a simple heterogeneous firms sorting model in which the stylized facts of economic structure and export trade in China have been incorporated. The results of the model indicate that trade liberalization exerts the welfare effect on the developing countries through a very different channel from that on the developed countries. The processing trade may lower the average level of industrial productivity and reduce the available varieties of the consumers. However, the processing trade still improves the social welfare by absorbing the surplus labor in the dual economy. The model in the paper not only gives a theoretical foundation for the processing trade policy which has been implemented since the reform and opening, but offers some policy implications on promoting the upgrading of processing trade. 
Serial NumberWP451 
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