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

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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.

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  • Xavier Jaravel & Erick Sager, 2019. "What are the Price Effects of Trade? Evidence from the U.S. and Implications for Quantitative Trade Models," Finance and Economics Discussion Series 2019-068, Board of Governors of the Federal Reserve System (U.S.).
  • Handle: RePEc:fip:fedgfe:2019-68
    DOI: 10.17016/FEDS.2019.068
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    Cited by:

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    3. Kleinman, Benny & Liu, Ernest & Redding, Stephen, 2020. "International friends and enemies," LSE Research Online Documents on Economics 108480, London School of Economics and Political Science, LSE Library.
    4. Dorn, David & Levell, Peter, 2021. "Trade and Inequality in Europe and the US," CEPR Discussion Papers 16780, C.E.P.R. Discussion Papers.
    5. Jon R. Neill, 2021. "Comparing Some Benefits and Costs from Eliminating the U.S. Trade Deficit with Low Wage Countries," International Advances in Economic Research, Springer;International Atlantic Economic Society, vol. 27(2), pages 91-103, May.
    6. César, Andrés & Falcone, Guillermo & Gasparini, Leonardo, 2021. "Costs and benefits of trade shocks: Evidence from Chilean local labor markets," Labour Economics, Elsevier, vol. 73(C).
    7. Holger Breinlich & Elsa Leromain & Dennis Novy & Thomas Sampson, 2021. "Import liberalization as export destruction? Evidence from the United States," CEP Discussion Papers dp1779, Centre for Economic Performance, LSE.
    8. Andrés César & Guillermo Falcone & Leonardo Gasparini, 2022. "Costs and Benefits of Trade Shocks: Evidence from Chilean Local Labor Markets," CEDLAS, Working Papers 0300, CEDLAS, Universidad Nacional de La Plata.
    9. William Jefferies, 2021. "China’s Accession to the WTO and the Collapse That Never Was," Review of Radical Political Economics, Union for Radical Political Economics, vol. 53(2), pages 300-319, June.
    10. Davenport, Alex & Dorn, David & Levell, Peter, 2021. "Import Competition and Public Attitudes towards Trade," CEPR Discussion Papers 16339, C.E.P.R. Discussion Papers.
    11. Jan De Loecker & Tim Obermeier & John Van Reenen, 2022. "Firms and Inequality," CEP Discussion Papers dp1838, Centre for Economic Performance, LSE.
    12. Benedikt Heid & Frank Stähler, 2020. "Structural Gravity and the Gains from Trade under Imperfect Competition," CESifo Working Paper Series 8121, CESifo.
    13. Juan Blyde, 2021. "Import exposure and welfare effects from the expenditure channel: The case of Mexico," The World Economy, Wiley Blackwell, vol. 44(10), pages 2998-3024, October.
    14. Sébastien Houde & Wenjun Wang, 2022. "The Incidence of the U.S.-China Solar Trade War," CER-ETH Economics working paper series 22/372, CER-ETH - Center of Economic Research (CER-ETH) at ETH Zurich.

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    More about this item

    Keywords

    China; Inequality; Markups; Prices; Trade;
    All these keywords.

    JEL classification:

    • F10 - International Economics - - Trade - - - General
    • F13 - International Economics - - Trade - - - Trade Policy; International Trade Organizations
    • F14 - International Economics - - Trade - - - Empirical Studies of Trade

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