On the Heterogeneous Welfare Gains and Losses from Trade

Carroll, Daniel R.; Hur, Sewon

doi:10.26509/frbc-wp-201906r

“…21 The aggregate effects of trade liberalization in the financially developed economy are similar to those found by Alessandria and Choi (2014) and Carroll and Hur (2020b) who also study quantitatively the effects of trade liberalization albeit in models without financial frictions. Brooks and Dovis (2019) find stronger effects in the context of a larger bilateral liberalization.…”

Section: Transitional Dynamicssupporting

confidence: 65%

“…In order to quantify the strength of these channels, we perform a series of partial equilibrium computations. In particular, we follow Carroll and Hur (2020b) and introduce measurezero agents: Agents that optimize in response to prices and aggregate quantities that are different from the ones observed in equilibrium, but do not affect equilibrium prices and aggregate quantities. Thus, to compute the "tariffs income" channel, we assume that along the transition and in the final steady state our zero-measure agents face the initial-steadystate prices and aggregate quantities but receive reduced tariff revenue as observed along the equilibrium path following a trade liberalization.…”

Section: Decomposition Of Welfare Gainsmentioning

confidence: 99%

No Credit, No Gain: Trade Liberalization Dynamics, Production Inputs, and Financial Development

Kohn¹,

Leibovici²,

Szkup³

2020

1

0

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We study the role of financial development on the aggregate and welfare implications of reducing trade barriers on imports of physical capital and intermediate inputs. We document that financially underdeveloped economies feature a slower response of real GDP, consumption, and investment following trade liberalization episodes that improve access to imported production inputs. To quantify the role of financial development, we set up a quantitative general equilibrium model with heterogeneous firms subject to financial constraints and estimate it to match salient features from Colombian plantlevel data. We find that the adjustment to a decline of import tariffs on physical capital and intermediate inputs is significantly slower in financially underdeveloped economies in line with the empirical evidence. These effects reduce the welfare gains from trade liberalization and make them more unequal across agents.

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“…These results indicate that distributional effects can arise because of differences in the price responses to trade shocks. This channel appears to be quantitatively important and is novel relative to other mechanisms investigated in prior work (e.g., Fajgelbaum and Khandelwal (2016), Borusyak and Jaravel (2018) and Carroll and Hur (2019) examine differences in spending shares on imports, and Hottman and Monarch (2018) document differences in import price inflation across income groups).…”

Section: Indistinguishablementioning

confidence: 84%

What Are the Price Effects of Trade? Evidence From the U.S. and Implications for Quantitative Trade Models

Jaravel

¹

,

Sager

²

2018

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This paper finds that U.S. consumer prices fell substantially due to increased trade with China. With comprehensive price micro-data and two complementary identification strategies, we estimate that a 1pp increase in import penetration from China causes a 1.91% decline in consumer prices. This price response is driven by declining markups for domestically-produced goods, and is one order of magnitude larger than in standard trade models that abstract from strategic price-setting. The estimates imply that trade with China increased U.S. consumer surplus by about $400,000 per displaced job, and that product categories catering to low-income consumers experienced larger price declines. potential omitted variable biases and reverse causality. For example, China has a comparative advantage in specific product categories that may be on different inflation trends, such as consumer electronics or apparel. To overcome this challenge we use two complementary research designs borrowed from recent work by Pierce and Schott (2016a) and Autor et al. (2014), who study the consequences of trade with China on employment across U.S. industries. 2 Pierce and Schott (2016a) leverage a change in U.S. trade policy passed by Congress in October 2000, which eliminated potential tariff increases on Chinese imports. This research design uses transparent policy variation and lends itself to sharp tests for pretrends, but the effects of changes in policy uncertainty may differ from those of more common permanent changes in tariffs (e.g., Handley and Limão (2017)). To gauge the stability and generalizability of our main estimates, we also use the empirical strategy of Autor et al. (2014), who instrument for changes in import penetration from China across U.S. industries with contemporaneous changes observed in eight comparable economies. 3To assess the plausibility of a causal interpretation of our estimates, we implement several falsification and robustness tests. The results all support the validity of the exclusion restrictions. First, for each of the two instruments, we implement pre-trend tests and consider alternative specification choices, with different sets of fixed effects, time-varying controls and sample restrictions. There are no pre-trends and the estimated price effect is stable across specifications. Second, we study the sensitivity of our baseline estimate to aggregation choices by aggregating our data to the level of broader industries (as defined by the BEA's input-output table), and we use alternative measures of changes in import penetration from China (including or excluding retail margins, and accounting for changes in trade with trading partners of the U.S. other than China). We find that the estimated price response remains stable. Third, with the instrument from Pierce and Schott (2016a), we implement a stringent triple-difference test using price data from France. We find that there is no similar reaction of prices in France, where there was no policy change. Finally, using both instruments jointly, we run the tes...

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“…These results indicate that distributional effects can arise because of differences in the price responses to trade shocks. This channel appears to be quantitatively important and is novel relative to other mechanisms investigated in prior work (e.g., Fajgelbaum and Khandelwal (2016), Borusyak and Jaravel (2018) and Carroll and Hur (2019) examine differences in spending shares on imports, and Hottman and Monarch (2018) document differences in import price inflation across income groups).…”

Section: Indistinguishablementioning

confidence: 84%

What are the Price Effects of Trade? Evidence from the U.S. and Implications for Quantitative Trade Models

Jaravel

¹

,

Sager

²

2019

FEDS

View full text Add to dashboard Cite

This paper finds that U.S. consumer prices fell substantially due to increased trade with China. With comprehensive price micro-data and two complementary identification strategies, we estimate that a 1pp increase in import penetration from China causes a 1.91% decline in consumer prices. This price response is driven by declining markups for domestically-produced goods, and is one order of magnitude larger than in standard trade models that abstract from strategic price-setting. The estimates imply that trade with China increased U.S. consumer surplus by about $400,000 per displaced job, and that product categories catering to low-income consumers experienced larger price declines.

show abstract

On the Heterogeneous Welfare Gains and Losses from Trade

Cited by 7 publications

References 40 publications

No Credit, No Gain: Trade Liberalization Dynamics, Production Inputs, and Financial Development

No Credit, No Gain: Trade Liberalization Dynamics, Production Inputs, and Financial Development

What Are the Price Effects of Trade? Evidence From the U.S. and Implications for Quantitative Trade Models

What are the Price Effects of Trade? Evidence from the U.S. and Implications for Quantitative Trade Models

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