Trade Openness, Economic Growth and the Vicissitude of Labor-intensive Industries: The Case of China

Abstract In this paper, we use China’s 1986-2008 data to make an empirical analysis on the interrelationship between trade openness, economic growth and the structural change of labor-intensive industries by using simultaneous equation models and a VAR model. Our empirical study leads to the three conclusions. First, trade openness has accelerated economic growth, though with some negative impact on the development of labor-intensive industries; Second, economic growth has had a positive effect on trade openness, but again negatively impacted the development of labor-intensive industries. Third, the expansion of labor-intensive industries has had negative effects on both trade openness and economic growth. Methodologically we rely on the transformation theory of industrial structure as an analytical framework to empirically study these three paradoxical outcomes. We introduce the three variables: trade openness, economic growth and the change of labor-intensive industries, as dependent as well as independent variables into our empirical models. And then we use technological progress, the share of secondary industries to GDP, total employment and investment ratio as control variables in order to test the robustness of the empirical results. In addition to explaining the factors responsible for changes in labor-intensive export industries we also provide two policy implications: First, labor-intensive industries should be scaled down to improve the efficiency of resources allocation. Second, China should timely transform its industrial structure of the export sectors from the one that is dominated by labor-intensive industries to the one that is dominated by capital (technology)-intensive industries so as to induce the export sectors to move in the direction favorable to the transformation of China’s present outward pattern of economic development.