Income Inequality in Mexico and Import Exposure: Estimating the Impacts from the Expenditure Channel

A rise in import competition can put downward pressure on local prices, increasing consumer welfare, but these gains might be unequal across households depending on the basket of goods they consume. Using a consumer price index for Mexico that varies at the product and city level, this paper analyzes the impact of import competition from low-wage countries, particularly China, on price growth between 2002 and 2017. I find that the trade shock impacted prices. Had import competition remained unchanged, the 15-year change in the consumer price index would have been 7 percentage points higher, on average across all goods, with a much larger impact on products that are highly exposed to import competition. Second, using microdata from a household expenditure survey, I find that all households benefited from this access to cheaper goods, but low-income households benefited more. Finally, I look at these results in the context of income inequality in Mexico, noting that overall income inequality in the country declined during the period of analysis. I show that the pro-poor bias of the China shock contributed to this decline in inequality but only slightly, suggesting that additional factors might have been behind this trend.