The hidden benefit of global trade

Under President Trump, the United States is likely to retrench away from global market integration. The public has become wary of trade, as many believe that the rich have disproportionately benefited from trade, while the poor have borne the costs. Recent academic studies have confirmed causal relationships between trade with low-income countries and job loss in U.S. manufacturing.

Yet what seems lost in the public discourse is that trade lowers the prices of products that we consume. These price changes have important distributional effects because different households consume different things. For example, a policy that levies high tariffs on food will especially hurt low-income households, who typically have larger food expenditure shares than richer households.

In a recent study published in the Quarterly Journal of Economics, we analyze the distributional impact of trade on consumers’ expenditure patterns. Our analysis answers the question: how would protectionism change the cost of living for households across the income distribution?

When viewed from this angle, our analysis has a surprising result: international trade benefits poorer households more than richer households.

Why is this case? The answer lies in the heterogeneity in consumption bundles across households. Low-income households spend a disproportionate share of their income on products that cross borders. This includes products ranging from phone chargers, plastic products, jeans, toys and televisions.

Richer households, on the other hand, tend to concentrate their expenditures on services that are less traded. Since tariffs affect tradeable products, lower barriers to trade deliver consumption gains to lower-income households.

{mosads}The gains can be large. In a hypothetical scenario in which the United States moved from complete autonomy to the level of openness we experience today, our simulations predict that households at the 10th percentile of the income distribution would experience a much larger gain relative to the 90th percentile.

Of course, the new administration will not completely shut off from international trade. But the threat of 45 percent tariffs on Chinese and Mexican imports looms. Our analysis suggests tariffs will act as a regressive tax and the poor will bear the brunt of this policy.

Our analysis does not include the impact of trade on labor markets. It also leaves aside the potential negative consequences on firms, including U.S. exporters, who rely critically on imported components. Instead, the purpose of the exercise is to remind us that international trade affects households through two channels: income and expenditure. While lower prices may do little to soften the blow to households who have experienced job loss from offshoring, international trade has raised our standard of living by lowering prices of consumption goods.

This should provide caution against the blanket use of tariffs to blunt the negative consequences of trade. Policymakers who want to compensate those losing from trade should explore other policies, such as providing a more robust safety net or easing labor mobility, rather than imposing tariffs that end up taxing the poor.

Pablo Fajgelbaum is an assistant professor of economics at the University of California in Los Angeles (UCLA). Amit Khandelwal is director of the Chazen Institute for Global Business at Columbia Business School. Both are affiliates at the National Bureau of Economic Research.

The views of contributors are their own and are not the views of The Hill.