Why do some regions and workers benefit more from trade and infrastructure expansion than others? ACI’s research finds that the answer lies not only in market access or transport connectivity, but also in how firms invest and how workers upgrade their skills.

Using China’s accession to the World Trade Organisation and its large-scale infrastructure investment as empirical settings, the study finds that capital investment and worker upskilling can amplify economic gains while also reshaping inequality across workers and regions.

China’s trade liberalisation generated economic gains and raised wages for both skilled and unskilled workers, but the gains were uneven. Without factoring in capital and skill adjustment mechanisms, ACI’s model estimates a 1.73% increase in GDP, while skilled workers’ real wages rose by 1.69% and unskilled workers’ real wages increased by 1.29%.

Once capital accumulation is included, the gains become larger. ACI’s model estimates a 2.27% increase in GDP, while skilled real wages rise by 3.17% and unskilled real wages increase by 2.09%. This amplification comes from investment. Lower trade costs make it cheaper for firms to invest, encouraging capital accumulation and raising production.

However, capital investment also widens the wage gap between skilled and unskilled labour, as it raises skilled workers’ productivity more and increases demand for them relative to unskilled workers. Investment, therefore, expands the overall gains from trade, but also concentrates more of those gains among skilled workers.

Worker upskilling moderates this capital-driven rise in wage inequality. When workers are allowed to acquire skills, they contribute to the supply of skilled labour, reducing some of the upward pressure on skilled wages. In ACI’s full model, which includes both capital accumulation and worker upskilling, unskilled real wages rise by 1.61%, skilled real wages rise by 2.72%, and GDP increases by 1.33%. The gains remain positive, but capital accumulation and skill upgrading partly offset each other’s effect on trade liberalisation.

The study further finds that trade liberalisation widens regional gaps. Coastal cities benefit more because of their proximity to international markets. Once capital and skill adjustment mechanisms are included, coastal cities’ geographic advantages are further reinforced, enabling them to accumulate more capital at lower cost. In other words, trade liberalisation in China raises national gains, but the accompanying capital accumulation and skill upgrading mechanisms also sharpen the divide between regional winners and laggards.

Infrastructure expansion produces a similar aggregate outcome but a different spatial one. Like trade liberalisation, infrastructure investment also generates larger and unequal gains when firms are allowed to accumulate capital. However, unlike trade liberalisation, which mainly benefits coastal cities closer to international markets, infrastructure improvements benefit the inland and undeveloped cities the most, as they experience relatively greater improvements in connectivity and market access.

The broader lesson is that trade and infrastructure policies should not be assessed only by their direct effects on market access or transport costs. Their long-term impact depends on whether regions can attract investment, build skills, and retain workers. Connectivity creates opportunities, but complementary investment and workforce upgrading determine how widely those opportunities translate into higher welfare and more balanced development.

By MA, Qi Xiang

Researchers: MA, Lin, SONG, Yunlong and TANG, Yang