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

Abstract

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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