The consumption side of trade shocks: Inequality dynamics and luxury imports

We study how a large, exogenous trade shock — triggered by China’s accession to the WTO in 2001 — reshaped income, inequality, and import behavior across Brazilian regions. Using a shift-share instrument based on pre-shock export structures, we show that regions more exposed to China’s demand boom experienced faster growth in per capita income and larger increases in within-region inequality relative to less exposed areas. These changes, in turn, led to rising import values and shifts in composition, especially toward consumption and medium- to high-tech manufactured goods. To analyze these shifts, we classify goods by necessity and luxury status using Brazilian household data and introduce a complementary classification based on the spending patterns of high-income households in the United States. Luxury imports rose most in regions that were initially more unequal or experienced sharper post-shock inequality growth, consistent with non-homothetic preferences and broader theories of stratified consumption. Our findings highlight inequality as a key channel through which trade shocks shape regional import demand in developing economies.