Trade liberalization and structural changes: Prefecture-level evidence from China

• There exists a nonlinear, hump-shaped pattern between prefecture-level trade openness and manufacture labor share in China. • Internal geography is critical in shaping patterns of trade-induced structural change. • Internal reallocations of resources across regions and sectors within one country are central to the economic development. • Place-based policies based on regional stage of structural transformation are needed. Notable heterogeneity regarding international trade openness and level of development across different regions with significant inter-provincial migration has been a prominent feature in contemporary China. This paper studies the particular role of international trade in the structural transformation across each region in China. Combining several data, we document that there exhibits a non-monotone, hump-shaped relationship between international trade freeness and prefecture-level manufacture labor share in China. We rationalize this stylized fact in a spatial equilibrium model with multi-region, multi-sector, costly trade and endogenous allocation of labor, capital, and land. The analysis highlights the role of internal geography in shaping patterns of trade-induced structural change.