Distributional Effects of Trade Shocks: Evidence from China's Tea Trade in the Early Twentieth-Century

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How do negative trade shocks affect regional welfare? This paper examines the impact of declining tea export on input prices and civil conflicts in early twentieth-century China. I conduct a difference-in-differences analysis and find that the change in prices of two major inputs, land and labor, led to different regional responses. When a negative shock on the tea trade took place, land owners in areas suitable for tea production were worse off. This finding is in accord with theoretical predictions for immobile factors. Surprisingly, farm laborers were worse off only if they were far from ports, probably due to the fact that being closer to ports meant more job opportunities. This finding suggests that farm laborers could arbitrage within areas that had similar distance to ports, although they cannot fully migrate between areas with different access to ports. This fact might have caused higher income volatility for wage earners who lived further from ports. I also find that places that experienced a relatively higher decrease in income had more conflicts. These results suggest that the decline in tea export was followed by heterogeneous welfare responses by different regions in China. It might have had a more destructive impact by stimulating more civil conflicts in areas that were relatively worse off.