Trade liberalisation, imperfect pass-through and cost of living: evidence from Chinese cities

Abstract

This article investigates the consumption effect of trade liberalisation through changes in the cost of living in Chinese cities. We use fixed effects model and dynamic panel model based on household survey data from 2002 to 2009. We identify the imperfect pass-through mechanism of tariffs and non-tariff measures at city level. The main findings show that the aggregate cost of living in Chinese cities is an inverted-V trend. Tariffs reduction and the high incidence of non-tariff measures can decrease cost of living in Chinese cities, which improves the overall consumption welfare and narrows down the regional disparities. The consumption effects are heterogenous due to the diverse spatial effects, demand effects and competition effects across Chinese cities. Cities with a high expenditure share of manufactured goods have a larger effect on the reduction of cost of living. Tariffs have a larger marginal effect in small cities and cities with high level of privatisation. While the incidence of non-tariff measures has a larger marginal effect in small cities and cities with low level of privatisation.