This paper constructs what we call a quality-differentiation model of Chinese trade. This model captures some salient features of Chinese trade and allows us to analyze the impact of trade liberalization on wage inequality. At present, Chinese trade displays the following features: high-quality cars are imported and low-quality cars are produced and consumed domestically, for which some parts are imported. These features lead us to consider trade liberalization as two types of tariff reduction: namely, a tariff reduction on final quality-differentiated goods and a tariff reduction on intermediate goods. This study shows that the two types of tariff reduction have completely different effects on wage inequality. Moreover, the results show that welfare inequality and wage inequality change in opposite directions when the tariff on final qualitydifferentiated goods is reduced.

We investigate why the South is hardly involved in the global supply chain for the Boeing 787. We demonstrate that if the production process is supermodular, the South is excluded from global supply chains.

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We analyse the competitive equilibrium and socially optimal allocation of production fragments in a two‐country model where there is learning by doing with spillovers between fragments in the home country. We distinguish between forward and backward knowledge linkages, where learning results from producing products that are less (more) complex than the current knowledge frontier with forward (backward) linkages. We compare the pattern of comparative advantage in the competitive and socially optimal cases, and compare the intensive and extensive margins of fragments produced at home in the two cases. We establish a sufficient condition for the range of fragments produced at home to be non‐decreasing with forward linkages. We also show that with backward linkages, the home country will produce some fragments in the neighbourhood of the steady state that are more complex than those produced in the steady state.