Trade shocks and urbanization: evidence from county-level data in China

Recent research has concluded that foreign trade is a key factor shaping the urbanization process in developing countries. Yet the empirical evidence is still in its infancy. This paper seeks to fill this gap by using the Financial Crisis of 2008 as a quasi-experiment to examine how trade shocks have affected urbanization in China. We find that such shocks have reduced the change in the urbanization rate by 0.4%. These results are robust after controlling for other factors that affect urbanization. We explore the underlying mechanisms and find that trade shocks reduce the urban – rural income gap by lowering the income of urban residents and slowing down the urbanization process.